Read Time: 13 minutes

Synopsis

A division bench of Justice Rajiv Shakdher and Justice Tara Vitasta Ganju of the Delhi High Court has recently held that the payment aggregators (PA) fall within the ambit of the definition of designated payment system defined in the explanation of Section 23A of Payment and Settlement Systems Act (PSSA), 2007 and Section 10(2) delegated authority to RBI to issue guidelines for the proper and efficient management of payment systems.

The division bench also stated that Section 23A sanitizes the funds in the escrow accounts and, is a well-established legal principle, supersedes the provisions of all other laws in effect at the time, including the Banking Regulation Act of 1949, the Companies Act of 1956, the Companies Act of 2013, and the Insolvency and Bankruptcy Code of 2016.

The bench opined that this safeguard is necessary for fully protecting the interests of the PAs' customers and merchant clients, and PAs can now earn interest on the core funds held in escrow accounts. “Therefore, there is nothing legally objectionable in including Clause 8 in the 2020 Guidelines”, the court added.

The court was hearing a petition filed by Lotus Pay Solutions Pvt. Ltd., a company that provides "recurring payment solutions" for businesses in India through an authorized payment system known as the National Automated Clearing House (NACH), challenging Clauses 3, 4 and 8 of the Reserve Bank of India (RBI) circular titled "Guidelines on Regulation of Payment Aggregators and Payment Gateways" dated March 17, 2020.

The description of the clauses challenged:

• Clause 3 mandates that non-banking entities that provide payment aggregation services obtain "authorization" from the RBI to continue operations.
• Clause 4 requires PAs that existed on the date of the 2020 Guidelines to achieve a net worth of Rs. 15 crores by March 31, 2021, and to have this scaled up to Rs. 25 crores by the end of the third Financial Year (FY), i.e., on or before March 31, 2023.
• Clause 8 of the 2020 Guidelines, among other things, requires that all non-bank PAs place the money they collect in an escrow account with a scheduled commercial bank. Furthermore, under Section 23A of the PSSA, 2007, the operations of the PAs are deemed to be "designated payment systems" to maintain the escrow account.

The petitioner company contends that it only serves as an intermediary tool used by the payment system to facilitate the remittance of payments received from customers to merchant clients/e-commerce marketing companies. Thus, the intermediary cannot be considered a "payment system."

It is also argued that the RBI, which has the authority to regulate and supervise payment systems in the country, cannot regulate PAs, which act as middlemen between merchant clients/e-commerce companies, and banks.

Both parties have relied on the RBI's Discussion paper, which was published on its website on September 17, 2019. According to the glossary section of the aforementioned Discussion paper, a PA is "an intermediary in an online payment transaction accepting payments from customers on behalf of the merchant and then transferring the money to the merchant's account."

Court noted, that there is a payer and a beneficiary in any digital payment transaction and the PA serves as the interface, ensuring that funds are transferred to the designated nodal account and that after a specified timeframe, which the petitioners claim is three days, a settlement occurs and funds are transferred to the merchant's account.

Court further noted that, however, as per Clause 8 of the 2020 Guidelines, PAs are required to maintain an escrow account with a scheduled commercial bank, and thus funds received from customers are placed in the escrow account and transferred to the merchant's account upon settlement.

The court opined that Technology is rapidly changing, and courts must keep this in mind when examining the scope and ambit of legislation such as the 2007 Act and stated that, “there is no doubt that the RBI, being our country's central bank, is responsible for regulating and supervising payment systems in India.”

The bench further stated that, thus, the PAs not only provides an integrated system but also manage the customer's funds and this work function would be included in the definition of a PA. A close examination of the definition of a payment system reveals that it is intended to include a system that enables payment to be made between a payer and a beneficiary, as well as a clearing, payment, or settlement service, or all of them, but does not include a stock exchange.

The bench noted that because PGs do not handle funds and are only concerned with providing technology infrastructure to route and/or facilitate the processing of online payment transactions, the contested clauses of the 2020 Guidelines, namely Clauses 3, 4, and 8, do not apply to them.

Court observed, “Therefore, in our view, the answer to the poser, as to whether PAs fall within the ambit of the definition of payment system can only be in the affirmative, for the reasons given above. That being said, as alluded to above, there is, perhaps, merit in the responses received by the RBI to its Discussion paper that separate legislation may have to be enacted for payment services. This aspect, however, falls in the domain of the legislators. The executive could consider this suggestion, and initiate necessary steps on that behalf.”

“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 court added.

Noting that, “The difficulties put forth on behalf of PAs, perhaps are a small wrinkle, which cannot be the reason for striking down the impugned clauses of the 2020 Guidelines,” the court dismissed the plea and stated that, “the public interest element, which is imbued in the framing of the Guidelines, trumps the concerns raised by the petitioners.”

Case Title: Lotus Pay Solutions Pvt. Ltd. & Anr. v. Union of India & Ors.