Delhi High Court
Lotuspay Solutions Private ... vs Union Of India & Ors. on 15 September, 2022
$~1
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Judgement reserved on: 06.07.2022
% Judgement pronounced on: 15.09.2022
+ W.P (C) 8215/2020, CM APPLs. 26623/2020& 34346/2021
LOTUS PAY SOLUTIONS PVT LTD. & ANR. .....Petitioners
Through Ms Abiha Zaidi and Ms Nishtha
Kumar, Advs.
versus
UNION OF INDIA & ORS. ...Respondents
Through Mr Rajesh Gogna, CGSC with Mr
Abhishek Khanna and Mr Akhilesh
Suresh, Advocates for R-1.
Mr Gopal Jain, Sr. Adv. with Mr
Ramesh Babu and Ms Manisha Singh
and Mr Nisha Sharma, Advs. for R-2.
Ms Anshu Singh, Advocate for R-3.
CORAM:
HON'BLE MR JUSTICE RAJIV SHAKDHER
HON'BLE MS JUSTICE TARA VITASTA GANJU
[Physical Hearing/Hybrid Hearing (as per request)]
RAJIV SHAKDHER, J.:
TABLE OF CONTENTS
Preface....................................................................................2
Background...............................................................................3
Submissions of the petitioners.........................................................4
Submissions of the respondent no.2/RBI...........................................11
Analysis and reasons....................................................................16
Conclusion ..............................................................................26
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Preface:
1. This writ petition seeks to assail three clauses of the circular dated
17.03.2020 issued by respondent no.2 i.e., the Reserve Bank of India
[hereafter referred to as "RBI"], titled "Guidelines on Regulation of
Payment Aggregators and Payment Gateways"[hereafter referred to as "the
2020 Guidelines"].
1.1 The three clauses, to which, challenge is laid by the petitioners are
Clause 3, Clause 4 and Clause 8.
2. Briefly, Clause 3mandates,that insofar as non-banking entities which
offer payment aggregation services are concerned, they would have to obtain
"authorisation" from RBI to continue their operations. The criteria fixed for
obtaining the authorisation are outlined in various sub-clauses i.e., sub-
clause 3.1 to 3.6.
3. Clause 4, inter alia requires Payment Aggregators [hereafter referred
to as "PAs"] that were existing on the date of issuance of the 2020
Guidelines, to achieve a net worth of Rs. 15 crores by 31.03.2021, and to
have the same scaled up to Rs. 25 crores by the end of the third Financial
Year ("FY") i.e., on or before 31.03.2023.The PAs are required to maintain
a net worth of Rs. 25 crores at all times after 31.03.2023. Pertinently, the
timeline for applying for authorization and complying with the minimum
positive net worth requirement of Rs. 15 crores for the FY ending on March
31, 2020, was extended till 30.09.2021 because of the RBI circular dated
21.05.2021.
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3.1 Insofar as new PAs are concerned, they are also required to have a
minimum net worth of Rs. 15 crores to be eligible for obtaining
authorisation, which is required to be enhanced to Rs. 25 crores by the end
of the third FY of grant of authorisation. Such PAs are obliged to maintain a
net worth of Rs. 25 crores from that point onwards.
4. Clause 8 of the 2020 Guidelines, amongst others, mandates that all
non-bank PAs shall ensure that the amount collected by them is placed in an
escrow account, maintained with a scheduled commercial bank.
Furthermore, 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 [hereafter the "2007 Act"].
5. Importantly, Payment Gateways [hereafter referred to as "PGs"]
which are considered as "technology providers" or "outsourcing partners" of
banks or non-banks are neither required to seek authorisation nor comply
with the capital requirements stipulated in Clause 3 and 4 of the 2020
Guidelines.
Background:
6. Petitioner no.1 is a company which is engaged in the business of
providing "recurring payment solutions" for businesses in India via an
authorised payment system known as the National Automated Clearing
House ("NACH"). Petitioner no.2 is the founder and Chief Executive
Officer (CEO) of petitioner no.1 company. Therefore, unless the context
requires otherwise, they shall be collectively referred to as "petitioners".
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7. The petitioners have, as noticed above, assailed the aforementioned
three clauses of the 2020 Guidelines, which essentially concern PAs.
However, the stated position of the petitioners before us, is that petitioner
no.1 is largely functioning as a PG, but because one of its ten NACH
sponsor banks i.e., ICICI Bank does not have an internal NACH system, it
would have to function as a PA for ICICI Bank. Thus, the challenge to the
aforementioned clauses of the 2020 Guidelines has to be seen in that
backdrop.
8. Notice in this writ petition was issued on 05.11.2020, whereupon
counter-affidavits were filed on behalf of RBI, as well as respondent no.3
i.e., National Payments Corporation of India ("NPCI"). The writ action has
been defended by RBI, as its guidelines i.e., the 2020 Guidelines are under
challenge.
8.1 Insofar as NPCI is concerned, it has filed a brief affidavit, the thrust
of which is that it should be deleted from the array of parties, for the reason
that it is neither a regulator, nor is it responsible for the issuance and/or
amendment of the 2020 Guidelines. NPCI, however, has taken the position
that it is instrumental in developing NACH, and its role is confined to
providing electronic infrastructure for processing, transmitting and clearing
transactions concerning participating member banks.
9. Thus, before we proceed further, it would be relevant to capture the
submissions advanced on behalf of the petitioners and the RBI, which is, in
effect, the contesting respondent.
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Submissions of the petitioners:
10. On behalf of the petitioners, the arguments were advanced by Ms
Abiha Zaidi, while submissions on behalf of RBI were made by Mr Gopal
Jain, Senior Advocate, instructed by Mr Ramesh Babu, Advocate.
11. The arguments advanced by Ms Zaidi can be broadly paraphrased as
follows:
11.1 The petitioners perform the role of an intermediary, and in doing so,
carry out the following functions:
(a) Petitioner no.1 collects funds from customers on behalf of its clients
i.e., merchant clients/e-commerce marketing companies. These funds are
then placed in a special bank account, known as the "nodal bank account."
The nodal bank account is maintained in a designated Nodal Bank.
(b) The funds are remitted from the nodal bank account to petitioner
no.1‟s merchant clients/e-commerce marketing companies, as per pre-agreed
terms and conditions contained in the Nodal Account Agreement. In effect, a
three-day settlement period is provided for transmission of funds from the
nodal bank account to petitioner no.1‟smerchant clients/e-commerce
marketing companies.
11.2 Petitioner no.1 has been carrying on the business of facilitating safe
and secure online recurring transactions since 2016,in consonance with the
instructions contained in the document dated 24.11.2009, titled "Directions
for opening and operation of Accounts and settlement of payments for
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electronic payment transactions involving intermediaries." [hereafter
referred to as "2009 Directions"].
11.3 The 2009Directions were issued by the RBI in the exercise of powers
under Section 18 of the 2007 Act.
11.4 The 2020 Guidelines, which have been issued by RBI, purportedly
while exercising powers under Section 18read with Section 10(2) of the
2007 Act travel beyond the powers conferred upon it.
11.5 The prescription contained in Clause 3 of the 2020 Guidelines,
requiring PAs to acquire authorisation from RBI to conduct their business is
beyond the powers conferred upon RBI, under Section 18 and Section 10(2)
of the 2007 Act.
11.6 Section 18 is limited to conferring power on the RBI to issue
directions. Section 10(2) invests powers in the RBI to issue guidelines for
proper and efficient management of payment systems. Neither of the
provisions invest power in the RBI to mandate the requirement for PAs to
secure authorisation from RBI to carry on their business and/or lay down
criteria for issuance of such authorisation.
11.7 Section 4 of the 2007 Act, which inter alia provides that no person,
other than RBI, shall commence or operate a payment system except under
and in accordance with an authorisation issued by RBI does not apply to
petitioner no.1, as it operates as an intermediary, in its functionality as a PA.
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11.8 Section 4 of the 2007 Act, which empowers the RBI to issue
authorisation is confined to those persons/entities which seek to commence
or operate a payment system. PAs, PGs or intermediaries do not operate a
payment system. Clause 3 of the 2020 Guidelines seeks to go beyond the
provisions of Section 4 of the 2007 Act. The clause, thus, seeks to regulate
entities which do not fall within the ambit of Section 4 of the 2007 Act.
11.9 The 2007 Act makes a clear distinction between "payment system"1,
"system participant"2 and "system provider"3. Petitioner no.1 only provides
an intermediary tool, which is used by the payment system to facilitate the
remittance of payments received from the customers to the merchant
clients/e-commerce marketing companies. The intermediary, thus, cannot be
treated as a "payment system". The RBI, which is invested with the
authority to regulate and supervise payment systems in the country, cannot
regulate PAs, which act as intermediaries between merchant clients/e-
commerce companies and banks. The PAs are, in effect, "system
participants", as defined in Section 2(1)(p) of the 2007 Act.
12. That petitioner no.1 acts as an intermediary is recognised by the 2009
Directions. The petitioner no.1 and similarly circumstanced intermediaries
are thus required to comply with not only the 2009 Directions, but also the
2020 Guidelines.
1
See section 2(1)(i) of the 2007 Act.
2
See section 2(1)(p) of the 2007 Act.
3
See section 2(1)(q) of the 2007 Act.
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12.1 The RBI, in its counter-affidavit, has accepted the fact that PAs and
PGs act as third-party interfaces, which facilitate e-commerce sites and
merchants in accepting various payment instruments issued by their
customers, and thus do away with the need to create an independent system
for themselves. Therefore, the RBI via the 2020 Guidelines cannot bring the
PAs/intermediaries, which are, at best, system participants, within the
definition of the payment systems.
12.2 Clause 4 of the 2020Guidelines, which requires that for an entity to
act as a PA, it should have a minimum net worth of Rs. 15 crores to begin
with, and to have it scaled up to Rs. 25 crores by the end of the third FY, is a
condition, which is manifestly unreasonable and arbitrary, and hence
violative of Article 14 of the Constitution of India. Furthermore, it is not
prudent to treat all kinds of PAs and PGs similarly. Such classification is
unreasonable and is also violative of Article 14 of the Constitution. The
stipulation contained in Clause 4 of the 2020 Guidelines concerning net
worth does not conform to the object and purpose provided in the 2007 Act-
which is, the regulation and supervision of payment systems in India.
12.3 Clause 4 of the 2020 Guidelines would stifle innovation and drive out
competition, by imposing a monetary condition which has no bearing on the
functions carried out by a system participant.
12.4 This requirement fails to take into account, that most innovative and
progressive financial solutions have their origins in small businesses or start-
ups. There is no evidence, that a high net worth requirement will improve
the efficiency of the payments industry. Petitioner no.1 has been operating
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as a payment intermediary since 2016, with a capital of approximately Rs. 2
crores, without a single blemish.
12.5 In no jurisdiction across the world, have intermediaries been asked to
abide by such burdensome monetary conditions. A case in point is "Go
Cardless", a company based out of the United Kingdom, which commenced
its business as a small tech-based start-up, and over the years has grown into
a mega-corporate.
12.6 Clause 4 of the 2020 Guidelines seems to duplicate provisions of
various regulations provided by the Security and Exchange Board of India
(SEBI). SEBI, as a regulator, has prescribed minimum capital requirements
vis-a-vis intermediaries, which deal with securities. These stipulations were
provided, bearing in mind the specific nature of market infrastructure
institutions. The stipulations were preceded by detailed deliberations carried
out by the Bimal Jalan Committee. RBI has, it appears, erroneously applied
the same yardstick to digital platforms i.e., entities such as petitioner no.1,
which act as intermediaries between the customers and its merchant clients.
12.7 RBI's discussion paper, which was posted on its website on
17.09.2019, has accepted the position that it has not faced any major
complaints regarding indirect regulation of intermediaries for at least ten
years before the issuance of the 2020 Guidelines. Clause 4 of the2020
Guidelines would lead to the closure of a large number of small business
enterprises, as it unnecessarily creates a trade barrier. The clause i.e.,
Clause 4 would be beneficial to, existing big businesses, albeit at the
expense of small enterprises.
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12.8 Clause 8 of the 2020 Guidelines, which obliges non-bank PAs to
place the amount collected by them in an escrow account, disregards the fact
that the PAs are presently functioning smoothly, by remitting the monies
collected from the customers to the nodal accounts.
12.9 This condition ignores the fact, that the core function of PAs is
limited to providing a technical interface, and therefore does not need to
have a beneficial interest in the money held on behalf of their merchant
clients.
12.10 Furthermore, the impugned clause i.e., Clause 8has a myopic
approach. At present, every PA operates multiple nodal accounts, and thus
spreads the risk. If nodal accounts are done away with, it will expose the
PAs to operational risks, which shall be detrimental to their business
interests, as it has the potential of causing financial instability.
13. RBI‟s stand, that by opening an escrow account, the amount credited
to the said account remains safe from the vagaries of liquidation and acts of
fraud is untenable, for the reason that the PAs have no direct access to funds,
which are retained in the nodal accounts. At present, banks which maintain
nodal accounts are mandated to make pay-outs to merchant clients
automatically, within three days of the conclusion of the transaction in issue,
thereby eliminating any security risk concerning monies that are available in
the nodal accounts.
13.1 The 2020 Guidelines fail the test of proportionality, as they mandate
restrictive conditions for the operation of PAs, even though less invasive
measures are available. The 2020Guidelines fail to take into account,
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recommendations and suggestions made by various stakeholders on net
worth requirements.
13.2 The 2020Guidelines also do not conform to the suggestions set forth
in the "2019 Report on Digitization of Payments" published by the RBI.
Inter alia, the said report requires the regulator i.e., RBI to evaluate the risk
of a player or product or scheme and then ensure that the regulatory
overhead is proportional to the risk, leaving other decisions to the market.
The report also requires the regulator/RBI to promote innovation, by
encouraging tech-based non-banking companies to enter the market and
expand the range of payment services available in the market. The impugned
Clauses of the 2020 Guidelines have no bearing on data protection or good
governance practices. RBI is needlessly conflating issues raised in the
instant petition concerning the impugned clauses with the aforementioned
aspects.
13.3 The 2020 Guidelines will act as a disincentive for creating a digital
payment environment in the country, as it fails to set up a regulatory
framework which promotes competition and innovation, and at the same
time protects the interests of the consumers.
13.4 The Courts are empowered to intervene even in policy matters when
the same violates Fundamental Rights. The impugned Clauses of the 2020
Guidelines violate Article 14 and Article 19(1)(g) of the Constitution of
India. In support of the aforesaid pleas, reference was made to the following
judgments:
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1. State of T.N vs. P. Krishnamurthy (2006) 4 SCC 517 (paras 15,16)
2. Union of India & Ors. vs. S. Srinivasan (2012) 7 SCC 683 (paras
21,32)
3. Global Energy Ltd. vs. Central Electricity Regulatory Commission
(2009) 15 SCC 570 (paras 36, 39)
4. N.K. Bajpai vs. Union of India & Anr. (2012) 4 SCC 653 (paras 14
and 20)
5. Ramana Dayaram Shetty vs. The International Airport (1979) 3 SCC
489 (paras 10 and 21)
6. Elloy de Freitas vs. Permanent Secretary of Ministry of Agriculture,
Fisheries, Land and Housing & Ors.[1983] 3 WLR 675 (page 9)
7. Global Energy Ltd. vs. Central Electricity Regulatory Commission
(2009) 15 SCC 570 (paras 36, 39)
8. U.P. Stock Exchange Brokers' vs. Security and Exchange Board of
India 2014 (6) AWC 5697 (para 53)
9. Modern Dental College & Research Centre vs. State of M.P. (2016)
7 SCC 353 (para 60)
10. Mohd. Faruk vs. State of Madhya Pradesh 1970 SCR (1) 156 (para
10)
11. Mohd. Yasinvs. Town Area Committee AIR 1952 SC 115 (para 5)
12. Om Kumar vs. Union of India, (2001) 2 SCC 386 (paras 28,30)
13. Chintaman Rao vs. State of M.P. 1950 SCR 759 (para 6)
14. Union of India vs. Dinesh Engineering Corpn. (2001) 8 SCC 491
(para 12)
15. State of Rajasthan vs. Basant Nahata (2005) 12 SCC 77 (para 66)
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Submissions of respondent no.2/RBI:
14. Mr Gopal Jain, on the other hand, in response to and in opposition to
the relief sought in the writ action, broadly made the following submissions:
14.1 Petitioner no.1, while acting as a PA provides services of aggregation
in the online payment space, which inter alia involves collecting, netting
and making payments. The term "payment system" as defined in Section
2(1)(i) of the 2007 Act captures the aforesaid activity. The provision defines
a payment system as 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. Thus, the role of the
PA, which, in effect, requires it to collect money from the payer, and
facilitate its remittance to the beneficiary, is covered by the definition of the
term payment system, as provided in section 2(1)(i) of the 2007 Act.
14.2 Under Section 3 of the 2007 Act, RBI has been declared as the
"designated authority" for regulating and supervising payment systems, as
envisaged under the 2007 Act.
14.3 Since Section 4 of the 2007 Act provides, in no certain terms, that no
person, other than RBI, can commence or operate a payment system, except
under and in accordance with an authorisation issued by RBI, the non-bank
PAs, such as petitioner no.1, can continue their operations only if they
obtain authorisation, and adhere to the 2020 Guidelines.
14.4 The argument advanced on behalf of the petitioners, concerning
Clause 4 of the 2020 Guidelines, is completely baseless. The net worth
requirements contained in the said clause fulfil the twin objectives of
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providing safety to the customer and protecting the merchant client‟s
interest. These two objectives can only be fulfilled by ensuring that the PAs
are financially sound, and that their operations are viable.
14.5 The PAs collect funds on behalf of the customers. They are obliged to
pool the money and transfer the funds to the merchant clients, after the
stipulated timeframe. Thus, the requirement to have a baseline net worth
provides insurance against breach of such obligations undertaken by PAs,
and shores up the confidence of the customers.
14.6 The provision in the 2020 Guidelines for a baseline net worth was put
in after RBI had received feedback from various stakeholders vis-a-vis the
Discussion paper uploaded on its website on 17.09.2019.
14.7 Likewise, the provision made in Clause 8 of the 2020 Guidelines,
which requires PAs to place the amount collected from customers in an
escrow account was taken after a comprehensive and detailed discussion and
examination of the issue by the Board for Regulation and Supervision of
Payment and Settlement Systems [in short, "the Board"].
14.8 Under the 2009 Directions, PAs were allowed to open a nodal
account, which was an internal account of the concerned bank. The nodal
account was shown as a liability of the concerned bank and was not included
in the balance sheet of the PAs. The PAs and/or merchant clients had no
beneficial interest in the amount retained in the nodal account. Therefore, it
was considered prudent to manage the funds collected by the PAs on behalf
of the customers through an escrow account, while providing a return on the
core portion of the money retained therein. The PAs not only have a
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beneficial interest in the escrow account but are also entitled to interest on
the core portion of the money retained in the escrow account. The purpose
behind requiring PAs to retain money in an escrow account, albeit with a
scheduled commercial bank, is to ensure that the funds collected by the PAs
are put to proper use and effectively regulated.
14.9 It is submitted, that upon a review, PAs have now been allowed to
maintain one additional escrow account in a different scheduled commercial
bank, with the issuance of the circular dated 17.11.2020. Therefore, the
argument advanced on behalf of the petitioners, that maintaining nodal
accounts in different banks diversifies risks, and addresses business
continuity concerns is answered by the issuance of the circular dated
17.11.2020.
15. Besides this, Section 23A of the 2007 Act empowers the RBI in
public interest or, in the interest of the customers of designated payment
systems or, to prevent the affairs of the such designated payment system
from being conducted in a manner prejudicial to the interests of its
customers: to require the system provider of such payment system to either
deposit and keep deposited, the money so collected, in a separate account,or
accounts held in a scheduled commercial bank, or maintain liquid assets in
such manner and form as it may specify from time to time, of an amount
equal to such percentage of amounts collected by the system provider of the
designated payment system from its customers and remaining outstanding,
as may be specified by the RBI from time to time.
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15.1 Furthermore, sub-section (2) of Section 23A of the 2007 Act provides
that the balance amount held in the account or accounts referred to in sub-
section (1) of the very same provision shall not be utilised for any purpose
other than for discharging the liabilities arising on account of the usage of
the payment service by the customers or for repaying to the customers or for
such other purpose as may be specified by the RBI from time to time.
15.2 The explanation to Section 23A of the 2007 Act defines "designated
payment system" to mean a payment system or a class of payment system,
as may be specified by the RBI from time to time, which is engaged in the
collection of funds from their customers for rendering payment service. The
PAs, while rendering aggregation services, are directly involved in the
collection of funds, which are, after a particular time gap, transferred or
remitted to their merchant clients.
15.3 It is important to bear in mind, that the intention behind treating PAs
as designated payment systems under Section 23A of the 2007 Act is to
protect the funds collected, which is in the interest of the customers. Sub-
section (2) of Section 23A, as submitted above, mandates the utilisation of
the amount held in the escrow account, only for discharging the liability of
the customers, or for repaying the customers. Thus, even if a PA, such as
petitioner no.1, were to undergo liquidation, the funds collected from its
customers would remain protected and can be utilised only for discharging
their liability or for repaying monies to them.
15.4 Likewise, sub-section (3) of Section 23A makes it clear, that the
persons entitled to receive payment under sub-section (2) of the said
provision shall have a first and paramount charge on the balance held in that
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account, and the liquidator or receiver or assignee (by whatever name
called) of the system provider of the designated payment system or the
scheduled commercial bank concerned, whether appointed as provisional or
otherwise, shall not utilise the said balance amount for any other purpose
until all such persons are paid in full or adequate provision is made thereof.
Pertinently, this sub-section opens with a non-obstante clause, and thus
operates notwithstanding anything contained in the Banking Regulation Act,
1949 or the Companies Act, 1956 or the Companies Act, 2013, or even the
Insolvency and Bankruptcy Code, 2016, or any other law for the time being
in force.
15.5 Therefore, the contention advanced on behalf of the petitioners, that
the RBI had arbitrarily declared PAs as designated payment systems in
terms of Section 23A of the 2007 Act, is misconceived. This submission
conveniently ignores the bona fide intentions of the RBI, which are to
protect both the funds of the customers and ensure timely payments to the
merchant clients. The impugned clause is necessary for ensuring effective
regulation of PAs, which work in the online space.
15.6 The 2020Guidelines have been framed in public interest, which ought
not to be interdicted unless found to be arbitrary or unreasonable. As
submitted above, under the 2009 Directions, the regulation of operations
carried out by PAs was indirect. Since in the recent past, the payment
systems in India have undergone a massive change with the expansion of e-
commerce activities, the regulator i.e., RBI had to step in and thus put in
place, the 2020 Guidelines, so that the roles of PAs in the online space are
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directly regulated in the interest of customers, merchant clients and the
overall payment eco-system.
15.7 The 2020 Guidelines fall in the realm of economic policy decisions,
and therefore the scope of judicial review is narrow. It is well established,
that the fundamental right under Article 19(1)(g)of the Constitution of India
i.e., the right to carry on trade, business or profession can be regulated, by
putting in place, reasonable restrictions. Such restrictions cannot be held to
be illegal, as they only regulate the operations of the PAs in the interest of
other stakeholders, such as customers and merchant clients. The Courts,
ordinarily, do not interfere with functions which fall within the realm of
economic policy, as these are functions which are best left to the wisdom of
the domain experts. [See : R.K Garg & Ors. v. Union of India & Ors.(1981)
4 SCC 675;Peerless General Finance and Investment Co. Limited v.
Reserve Bank of India(1992) 2 SCC 343]
Analysis and reasons:
16. Having heard the learned counsel for the parties, it is apparent, that the
main plank of the petitioners‟ case rests on the argument, that PAs who
perform the work of intermediaries do not fall within the scope and ambit of
the definition of "payment system" incorporated in the 2007 Act.
16.1 To deal with this argument, one would have to examine the contours
of the definition of the term payment system, outlined in Section 2(1)(i) of
the 2007 Act. For the sake of convenience, the same is extracted hereafter-
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"2. Definitions. - (1) In this Act, unless the context otherwise requires,
-
....................................................................................
..
(i) "payment system" means 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;
Explanation. - For the purposes of this clause, "payment system"
includes the systems enabling credit card operations, debit card
operations, smart card operations, money transfer operations or
similar operations;"
16.2 Besides this, one will also have to set down what is the accepted work
function of a PA.
16.3 Both parties in this regard have relied upon the RBI's Discussion
paper, published on its website on 17.09.2019. The glossary section of the
said Discussion paper defines a PA as "an intermediary in an online
payment transaction accepting payments on behalf of the merchant from the
customers and then transferring the money to the merchant‟s account."
16.4 Therefore, in any digital payment transaction, there is a payer and a
beneficiary. The interface is the PA, which ensures that the money is
transferred to the designated nodal account, and after a gap of a stipulated
timeframe, which the petitioners say is three days, a settlement takes place
and funds are transmitted to the merchant‟s account.
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16.5 However, under Clause 8 of the 2020 Guidelines, the PAs are
required to maintain an escrow account with a scheduled commercial bank,
and thus the funds received from customers get placed in the escrow account
and upon settlement, get transferred to the merchant‟s account.
16.6 The PAs, thus, not only provide, an integration system but also handle
the funds of the customer. The definition of a PA, according to us, would
include this work function. A close perusal of the definition of payment
system would show, that it is meant to include a system, that enables, firstly,
payment to be effected between a payer and a beneficiary and secondly,
concerns clearing, payment or settlement service or all of them, but does not
include a stock exchange.
16.7 While the term 'settlement' has been defined in section 2(1)(n) of the
2007 Act, there is no definition of the terms 'payment' and 'clearing'. The
term settlement, as defined, means, settlement of payment instructions and
includes the settlement of securities, foreign exchange or derivatives or other
transactions which involve payment obligations.
16.8 Although there is no definition of „payment service‟, in our opinion,
the "updating principle" ought to apply, and services offered by PAs to the
payer and beneficiary via the use of technology should fall within the ambit
of the payment system. The principle referred to hereinabove, has been
explained by this Court in the case of Rama Pandey v. Union of India &
Ors. 2015 (221) DLT 756. The relevant paragraphs of the aforesaid
judgement are extracted hereunder: -
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"9.1 It is not unknown, and there are several such examples that
legislatures, usually, in most situations, act ex-post facto.
Advancement in science and change in societal attitudes, often raise
issues, which require courts to infuse fresh insight into existing law.
This legal technique, if you like, is often alluded to as the "updating
principle". Simply put, the court by using this principle, updates the
construction of a statute bearing in mind, inter alia, the current
norms, changes in social attitudes or, even advancement in science
and technology. The principle of updating resembles another
principle which the courts have referred to as the "dynamic
processing of an enactment". The former is described in Bennion on
Statutory Interpretation at page 890 in the following manner: -
"..An updating construction of an enactment may be defined as a
construction which takes account of relevant changes which have
occurred since the enactment was originally framed but does not alter
the meaning of its wording in ways which do not fall within the
principles originally envisaged by that wording.
Updating construction resembles so-called dynamic interpretation,
but insists that the updating is structured rather than at large. This
structuring is directed to ascertaining the legal meaning of the
enactment at the time with respect to which it falls to be applied. The
structuring is framed by reference to specific factors developed by the
courts which are related to changes which have occurred (1) in the
mischief to which the enactment is directed, (2) in the surrounding
law, (3) in social conditions,(4) in technology and medical science, or
(5) in the meaning of words..."
9.2 The updating principle on account of development of medical
science and technique was applied in the following case: R v. Ireland,
[1998] AC 147.
9.3 Similarly, change in social conditions have persuaded courts to
apply the updating construction principle to inject contemporary
meaning to the words and expressions used in the existing statute.
See: Williams and Glyn's Bank v. Boland,[1981] AC 487 at page 511
placetum „D‟ and R v. D, [1984] AC 778.
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9.4 In respect of dynamic processing, the following observations in
Bennnion on Statutory Interpretation, 5 Edition, at page 502, being
apposite, are extracted hereinafter:-
"..Few Acts remain for very long in pristine condition. They are
quickly subjected to a host of processes. Learned commentators
dissect them. Officials in administering them develop their meaning in
practical terms. Courts pronounce on them. Donaldson J described
the role of the courts thus:
„The duty of the Courts is to ascertain and give effect to the will of
Parliament as expressed in its enactments. In the performance of this
duty the Judges do not act as computers into which are fed the
statutes and the rules for the construction of statutes and from whom
issue forth the mathematically correct answer. The interpretation of
statutes is a craft as much as a science and the judges as craftsmen,
select and apply the appropriate rules as the tools of their trade. They
are not legislators, but finishers, refiners and polishers of legislation
which comes to them in a state requiring varying degrees of further
processing.
When practitioners come to advise upon the legal meaning, they need
to take account of all this. The Act is no longer as Parliament enacted
it; it has been processed." (emphasis is mine)
9.5 The fact that this is a legitimate interpretative tool, available to
courts, is quite evident upon perusal of the ratio of the following
judgements.
9.6 A classic example of application of the updating of construction
principle, is the judgement, in the case of Fitzpatrick v. Sterling
Housing Association Ltd, 1999 (4) All E.R. 705, where the word
„family‟ was read to include two persons of same sex who were
cohabitating and living together for a long period of time with a
mutual degree of inter-dependence."
(Also see : State (through CBI) v. S.J. Choudhary (1996) 2 SCC
428, paragraph 10)
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16.9 Technology is changing at a rapid pace, and Courts have to keep that
in mind at times, while examining the scope and ambit of legislation, such as
the 2007 Act. There can be no dispute, that RBI, being the Central bank of
our country, is inter alia responsible for regulating and supervising payment
systems in India. As a matter of fact, a plain reading of the Statement of
Objects and Reasons of the 2007 Act states so in so many words.
17. Importantly, the Statement of Objects and Reasons of the 2007 Act, as
amended on 13.05.2015 ["The Payment and Settlements (Amendment) Act,
2015"] brings forth this aspect of the matter, and the rationale for making
the amendments (i.e., to secure the interests of the customers to fore). The
relevant part of the Statement of Objects and Reasons of The Payment and
Settlements (Amendment) Act, 2015 are extracted hereafter-
"Prefatory Note Statement of Objects and Reasons. The Payment
and Settlement Systems Act, 2007 (the said Act) was enacted for the
regulation and supervision of payment systems in India and to
designate the Reserve Bank of India as the authority for that purpose
and for matters connected therewith.
2. Subsequent to the enactment of the said Act, the country has
witnessed orderly growth of payment systems, and these payments
systems are granted authorisation on the principles of safety, security,
soundness, efficiency and accessibility. After the global financial
crisis in 2007-08, several developments took place, driven primarily
by the G20, for reforming the Over the Counter derivatives markets.
Some of these new initiatives include setting-up of Trade Repositories
and Legal Entity Identification System.
...........
6. Further, there are some legal difficulties in securing the customers
interest held in escrowed accounts in the event of insolvency or
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bankruptcy of prepaid instruments, operators, which are required to
be addressed.
7. The amendments to the said Act have been proposed to increase
transparency and stability of Indian Financial markets in line with
globally accepted norms. The Payment and Settlement Systems
(Amendment) Bill, 2014, inter alia, proposes
(a) to substitute sub-section (4) of Section 23 of the said Act so as to
provide that where by an order of the court, Tribunal or authority, the
system participant is declared as insolvent or is dissolved or wound-
up, such order shall not affect any settlement that has become final
and irrevocable prior to such order or immediately thereafter;
(b) to insert a new sub-section (5) in Section 23 of the said Act so as
to provide that where an order under sub-section (4) of Section 23 is
made with respect to a central counter party , the payment obligations
and settlement instructions between the central counter party in
accordance with the gross or netting procedure, as the case may be,
approved by the Reserve Bank of India;
(c) to insert a new sub-section (6) in Section 23 of the said Act so as
to provide that the liquidator or receiver of the central counter party
shall not re-open the determination which has become final and
irrevocable and after appropriating the collateral provided by system
participants towards their settlement obligations, return the excess
collaterals to system participants;
(d) to insert a new Section 23-A relating to protection of funds
collected from the customers by the payment system providers;..."
17.1 It is pertinent to note, 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 impugned
clauses of the 2020 Guidelines i.e., Clauses 3, 4 and 8 are not made
applicable to them. The scope of the work function of a PG in the RBI‟s
discussion paper reads thus:
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"A technology infrastructure provider to route and facilitate
processing of an online payment transaction, without any involvement
in the actual handling of funds..."
17.2 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 in that behalf.
17.3 Thus, the argument advanced on behalf of the petitioners, that the
2020 Guidelines, in particular, the impugned clauses are beyond the purview
of the parent statute, is not tenable. Once it is accepted, that the work
function performed by PAs comes within the definition of a payment
system, then, as contended on behalf of RBI, it was well within its powers to
frame the 2020 Guidelines, the source for which can be traced to Section
10(2) and Section 18 of the 2007 Act. These two provisions read as follows-
"10. Power to determine standards.-
........
(2) Without prejudice to the provisions of sub-section (1), the Reserve
Bank may, from time to time, issue such guidelines, as it may consider
necessary for the proper and efficient management of the payment
systems generally or with reference to any particular payment
system."
"18. Power of Reserve Bank to give directions generally.--Without
prejudice to the provisions of the foregoing, the Reserve Bank may, if
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it is satisfied that for the purpose of enabling it to regulate the
payment systems or in the interest of management or operation of any
of the payment systems or in public interest, it is necessary so to do,
lay down policies relating to the regulation of payment systems
including electronic, non-electronic, domestic and international
payment systems affecting domestic transactions and give such
directions in writing as it may consider necessary to system providers
or the system participants or any other person either generally or to
any such agency and in particular, pertaining to the conduct of
business relating to payment systems."
17.4 Furthermore, once it is held, that the work function of the PAs comes
within the definition of a payment system, then axiomatically, the power to
have them seek authorization from the RBI for operating as PAs gets traced
to section 4 of the 2007 Act.
17.5 Therefore, we see no merit in the argument, that petitioner no. 1, if it
chooses to function as a PA, should not be called upon to seek authorization
from RBI, as per the criteria laid down in Clause 3 of the 2020 Guidelines.
17.6 Likewise, we find no merit in the submissions advanced on behalf of
the petitioners concerning Clause 4 of the 2020 Guidelines, which obliges an
applicant, who wishes to function as a PA, to have a minimum net worth of
Rs.15 crores and have the same scaled up to Rs. 25 crores by the end of the
third FY.
17.7 This requirement is stipulated in Clause 4, both for existing PAs and
new PAs. In this context, the argument advanced on behalf of the
petitioners, that the requirement to have a minimum net worth of Rs.15
crores would drive out small entrepreneurs and start-ups also, does not find
resonance with us, the reason being that from a proposed net worth of
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Rs.100 crores, the RBI has brought it down to Rs.15 crores, which, as
indicated above, would have to be scaled up to Rs.25 crores by the end of
third FY. This step modulation was brought about based on the responses
received by RBI to the Discussion paper published on its website.
17.8 Contextually, 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 Rs 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 Rs.100 crores, it was deemed fit to reduce the minimum
threshold to Rs 15 crores. This stand of the RBI clearly emerges upon a
perusal of paragraph 18 of its counter-affidavit.
17.9 It needs to be emphasised, that when such eligibility criteria are fixed,
or applicants who wish to venture into business are regulated by the State
and/or its instrumentalities, there is an element of approximation. If such
criteria are to be questioned, the only area, perhaps open for scrutiny would
be: whether or not there was some application of mind and/or deliberation,
before framing the impugned criteria. Once the State and/or its
instrumentalities are able to show that a process was followed, and the issue
was deliberated upon, it would leave very little scope for the Court to
interfere in an Article 226 action.
18. In this case, RBI has demonstrated, that before the 2020 Guidelines
were issued, the same was put up in the public domain in the form of a
Discussion paper. The responses received were duly analysed, and as a
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matter of fact, the criteria contained therein were sculpted and moderated.
Thus, in our view, the argument advanced qua fixing of a threshold limit vis-
à-vis minimum net worth seems untenable.
18.1 Furthermore, there is merit in RBI's stand, that since PAs will handle
funds provided by customers, RBI would require such applicants to enter the
industry who have some amount of financial wherewithal.
19. This brings us to the challenge laid to Clause 8 of the 2020
Guidelines. The petitioners seem to have a grave objection to the PAs being
asked to switch from nodal bank accounts to escrow accounts. The objection
is predicated on the argument, that PAs presently maintain multiple nodal
accounts to spread the risk of the funds being lost, in case the bank
concerned were to collapse on account of financial insolvency or otherwise.
This submission, in our view, has some weight. That said, the alternative put
in place by the RBI, in our opinion, is a more robust mechanism which
protects the interests of all stakeholders i.e., the customers, merchant clients
and PAs. As noted above, [while recording the submissions advanced on
behalf of RBI] under section 23A of the 2007 Act, the RBI, in public interest
or in the interest of customers of designated payment systems, or to prevent
the affairs of such designated payment system from being conducted in a
manner prejudicial to the interests of the customers, may require a system
provider of such payment system to inter alia deposit and keep deposited
monies in a separate account or accounts held in a scheduled commercial
bank.
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19.1 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.
19.2 As alluded to hereinabove, as a matter of fact, the RBI has issued a
circular dated 17.11.2020 whereby PAs can maintain one additional escrow
account. Therefore, the argument advanced on behalf of petitioners
concerning the spreading of financial risk has been taken care of, to some
extent, with the issuance of the said circular.
19.3 Besides this, since the operations of PAs are treated as designated
payment systems, they would have the benefit of the firewall provided by
sub-sections (2) and (3) of Section 23A. Sub-section (2) of section 23A, in
no uncertain terms, provides that the balance held in the account or accounts
referred to in sub-section (1) i.e., escrow accounts shall not be utilized for
any purpose other than discharging the liabilities arising on account of the
usage of payment service by the customers or for repaying to the customers
or for such other purpose as may be specified by the RBI from time to time.
19.4 Likewise, subsection (3) of Section 23A, which opens with a non-
obstante clause, provides that persons entitled to receive payment under
subsection (2) of the very same section shall have a first and paramount
charge on the balance held in that account and the liquidator or receiver or
assignee (by whatever name called) of the system provider of the designated
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system or the scheduled commercial bank concerned, whether appointed
provisionally or otherwise, shall not utilize the said balances for any other
purposes until all such persons are paid in full or adequate provision is made
in that regard. This provision, thus, sanitizes the monies available in the
escrow accounts, and in consonance with the well-established principle of
law, overrides the provisions of all other laws for the time in force, including
the Banking Regulation Act, 1949, Companies Act 1956, or Companies Act,
2013 or the Insolvency and Bankruptcy Code, 2016.
19.5 In our opinion, this protection is vital for securing fully, the interests
of the customers and the merchant clients of the PAs. Added to that, the PAs
can now get interest on the core funds available in the escrow accounts.
19.6 Therefore, we find nothing legally untenable, in the incorporation of
Clause 8 in the 2020 Guidelines.
20. In the course of the submissions, one of the arguments proferred on
behalf of the petitioners was, that they would now have to comply with not
only the 2009 Directions but also 2020 Guidelines, making it difficult for
the PAs to function smoothly. This argument, in our opinion, is
misconceived. The 2009 Directions involved an indirect regulation and
supervision of PAs. However, after RBI had put its Discussion paper in the
public domain, the responses received by it were examined internally by the
Board. The result of such deliberation convinced the RBI, that it should
work on the third option outlined in the Discussion paper i.e., that which
involved RBI's direct regulation and supervision of PAs since they were
handling funds of customers. The difficulties put forth on behalf of PAs,
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perhaps are a small wrinkle, which cannot be the reason for striking down
the impugned clauses of the 2020 Guidelines.
21. In our view, the public interest element, which is imbued in the
framing of the Guidelines, trumps the concerns raised by the petitioners.
Conclusion:
22. We find no merit in the writ petition.
23. The writ petition is, accordingly, dismissed.
24. Pending applications shall stand closed.
25. Parties will, however, bear their respective costs.
(RAJIV SHAKDHER)
JUDGE
(TARA VITASTA GANJU)
JUDGE
SEPTEMBER 15, 2022/tr
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