The Reserve Bank of India has issued a notification dated July 4, 2022, directing non-bank Payment System Operators (“PSOs”) to obtain prior approval in case of takeover/ acquisition of control of non-bank PSOs and sale/ transfer of payment system activity of non-bank PSOs. The directive was issued under Section 10(2) read with Section 18 of Payment and Settlement Systems Act, 2007. The directive makes it mandatory for non-bank PSOs to obtain prior approval in the following cases:
Background:
The Payment and Settlement Systems Act, 2007 (“the Act”) is the standalone legislation that regulates and supervises payment system in India and designates the Reserve Bank of India (“RBI”) as the authority to exercise such powers. The Act defines “payment system” to mean a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange. Therefore, credit card operations, debit card operations, smart card operations, money transfer operations or similar operations would come under the ambit of “payment system”. A PSO is a person who operates an authorized payment system. The Act, supplemented by the Payment and Settlement Systems Regulations, 2008, mandate that every applicant desirous of commencing or carrying on a payment system shall submit an RBI for grant of authorization. The RBI is empowered to issue guidelines necessary for the proper and efficient management of the payment systems generally or with reference to any payment system. Further, no PSO is allowed to cause any change in change in the system which would affect the structure or the payment operation of the payment system without the prior approval of the RBI.
The directive requires non-bank PSOs to obtain prior approval in the following cases:
1. Takeover/ Acquisition of control by a non-bank PSO, which may or may not result in change of management in transferor non-bank PSO
The transferor non-bank PSO must submit an application to the Department of Payment and Settlement Systems (“DPSS”), Central Office (“CO”) and RBI with the following documents:
i) Information about the proposed directors;
ii) Complete details about the new shareholders, etc.
2. Sale/ Transfer of payment activity to an entitiy not authorised for undertaking similar activity
The seller/ transferor non-bank PSO must apply to the DPSS, CO and RBI for obtaining prior approval in case of sale/ transfer of payment activity to an entity not authorized for undertaking similar activity, i.e., entities other than authorized PSOs. The directive mandates that the buyer/ transferee entity shall apply for authorization in Form A under Regulation 3(2) of the Payment and Settlement Systems Regulations, 2008 along-with the requisite application fee. This shall be akin to a new authorization.
If in case the acquiring entity is a bank, the acquirer-bank shall apply to DPSS, CO and RBI for approval.
The sale/ transfer can be proceeded with only after the Certificate of Authorization (CoA) approval is obtained. The seller/ transferor non- bank PSO shall voluntarily surrender its CoA (as per the process mentioned in RBI circular DPSS.CO.AD.No.2627/02.27.005/2015-16 dated May 12, 2016) and the buyer/ transferee bank/ non-bank shall be liable for complying with any regulatory/ supervisory action taken by RBI for periods prior to the sale/ transfer.
The notification stipulates that the RBI shall endeavor to respond within 45 calendar days after receipt of complete details from both the entities.
The directive mandates the requirement of a prior public notice as well. A public notice, either separately by the authorized non-bank PSO and the buyer/ acquirer bank/ non-bank, or jointly by them, of at least 15 calendar days shall be given before effecting the changes. The notice must be published in at least one leading national and local vernacular newspaper (covering the place of the registered office of the respective entities). Further, the authorized non-bank PSO is mandated to inform DPSS, CO and RBI within 15 calendar days in the following cases:
In conclusion, the directive requires non-bank PSOs to obtain prior approval of the RBI in case of either a takeover/ acquisition, sale/ transfer of payment activity or change in management. The net effect is that in case the transferee/ acquirer is an entity/ bank/ non-bank not authorized by the RBI for undertaking similar activity, the application process would be akin to that of a new authorization, whereas, in case the transferee entity/ bank/ non-bank is authorized by the RBI, it would only require the prior approval of the RBI before such takeover/ transfer is effected.
Please find a copy of the notification, here.
This update has been contributed by Prashanth Sabeshan (Partner) and Neena Varghese (Associate).
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