The Delhi High Court has held that Payment Aggregators (PAs) fall within the ambit of definition of Payment Systems and, therefore, the Reserve Bank of India (RBI) can frame guidelines to regulate them [Lotus Pay Solutions Pvt Ltd & Anr v Union of India & Ors].

A division bench of Justice Rajiv Shakdher and Tara Vitasta Ganju said that the PAs have to seek authorisation from the central bank to operate.

A PA effectively collects funds from customers on behalf of its clients which can be merchants or e-commerce companies. These funds are then placed in a special bank account known as ‘nodal bank account’ which is maintained in a designated nodal bank and funds are remitted from the bank to its clients per pre-agreed terms and conditions.

In effect, a three-day settlement period is provided for transmission of funds from the nodal bank account to the client's accounts.

Payment Systems means a system that enables payment to be effected between a payer and a beneficiary. It involves clearing, payment or settlement service or all of them, but does not include a stock exchange.

This includes any systems enabling credit card operations, debit card operations, smart card operations, money transfer operations or any other similar operation.

In its judgment, the Court said that the PAs not only provide an integration system but also handle funds of customers and, therefore, their services offered to the payer and beneficiary via the use of technology would fall within the ambit of the payment system.

The observations come as the Court dismissed a petition by Lotuspay Solutions Private Limited, one of the PAs functioning in the country and its founder.

Lotuspay had approached the court challenging three clauses of the March 17, 2020 RBI circular titled Guidelines on Regulation of Payment Aggregators and Payment Gateways.

The circular mandated that the non-banking entities which offer payment aggregation services would have to obtain authorisation from RBI to continue their operations. It said that existing PAs will have to achieve a net worth of ₹15 crore by end of March 2021 and scale up the same to ₹25 crore by end of March 2023.

The circular further said that non-bank PAs shall ensure that the amount collected by them is placed in an escrow account, instead of a nodal account, maintained with a scheduled commercial bank.

This clause also provides that for maintenance of the escrow account, the operations of the PAs shall be deemed to be “designated payment systems” under Section 23A of the Payment and Settlement Systems Act, 2007.

The Court rejected the argument that the requirement to have a minimum net worth of ₹15 crores would drive out small entrepreneurs and start-ups also.

It noted that from a proposed net worth of ₹100 crores, the RBI has brought it down to ₹15 crores and this step modulation was brought about based on the responses received by RBI to the discussion paper published on its website.

The bench also found merit in RBI’s stand that since PAs will handle funds provided by customers, it would require only such applicants to enter the industry which have some amount of financial wherewithal.

“…it is relevant to note that RBI has taken an emphatic stand in its counter-affidavit, that it had received 57 responses to its Discussion paper, and that out of the 57 respondents, only 19 objected to a minimum net worth requirement of ₹100 crores proposed in the Discussion paper. On behalf of the RBI, it has been conveyed to us, that despite a vast majority of respondents not objecting to a minimum net worth requirement of ₹100 crores, it was deemed fit to reduce the minimum threshold to ₹15 crores,” the Court said.

On the issue of switching from nodal bank accounts to escrow accounts, the Court said that the alternative put in place by the RBI is a more robust mechanism which protects the interests of all stakeholders.

The judges said that RBI has the power under section 23A of the Payment and Settlement Systems Act 2007 to require a system provider of payment system to deposit and then keep deposited monies in a separate account or accounts in a scheduled bank.

“The RBI, thus, in consonance with the provisions of section 23A of the 2007 Act has provided, via clause 8 of the 2020 Guidelines, that PAs would deposit payments received from customers in an escrow account maintained with a scheduled commercial bank. There can be no doubt about RBI being invested with such power. There is also no doubt, that PAs would be operating a designated payment system, as defined in explanation (a) to section 23A of the 2007 Act.”

The bench added that the RBI has issued a circular dated November 17, 2020 whereby PAs can maintain one additional escrow account and, therefore, the argument advanced on behalf of petitioners concerning the spreading of financial risk has been taken care of, to some extent.

It finally concluded the public interest element imbued in the framing of the guidelines trumps the concerns raised by the petitioner.

Advocate Abiha Zaidi and Nishtha Kumar appeared for the petitioners.

Senior Advocate Gopal Jain, CGSC Rajesh Gogna and advocates Abhishek Khanna and Akhilesh Suresh, Ramesh Babu, Manisha Singh, Nisha Sharma and Anshu Singh appeared for the respondents. 

[Read Judgment]