Payment aggregators fall within the definition of Payment Systems - Delhi HC

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

Bench: A division bench of Justice Rajiv Shakdher and Tara Vitasta Ganju

The Delhi High Court held that Payment Aggregators (PAs) fall within the definition of Payment Systems and, therefore, the Reserve Bank of India (RBI) can frame guidelines for them.

The bench said that the PAs have to seek authorization from the central bank to operate.

The term "Payment System" refers to a system that allows payments to be made between payers and beneficiaries. The service involves clearing, payment, or settlement, but does not involve a stock exchange. This also includes any systems enabling credit and debit card operations, money transfer operations, or any other similar operation.

It stated in its judgment that PAs not only provides an integrated system but also handle customer funds. Therefore, their services offered to payers and beneficiaries using technology should be considered payment system services. The bench made the observations while dismissing a petition by Lotuspay Solutions Private Limited.

Lotuspay challenged three clauses of March 17, 2020, RBI circular titled Guidelines on Regulation of Payment Aggregators and Payment Gateways before the Court. The guidelines mandated that the non-banking entities, offering PA services would have to obtain authorization from RBI to continue their operations. Further, existing PAs will have to achieve a net worth of ₹15 crores by March 2021 and ₹25 crores by March 2023.

The guideline further directs the non-bank PAs to ensure that the amount collected is placed in an escrow account, instead of a nodal account, with a scheduled commercial bank.

The court rejected the petitioner's argument that the minimum net worth requirement will drive out entrepreneurs and start-ups as well. It noted that from a proposed net worth of ₹100 crores, the RBI brought it down to ₹15 crores based on the responses received by RBI to the discussion paper published on the RBI website.

The court said that the RBI's alternative to nodal bank accounts, escrow accounts, is a more robust mechanism that protects all stakeholders' interests. The judges ruled that the RBI can require that a system provider of payment systems deposit and keep deposited monies in a separate account or accounts in a scheduled bank, as provided in section 23A of the Payment and Settlement Systems Act 2007.

A circular issued by the RBI on November 17, 2020, allows PAs to maintain one additional escrow account, so the argument on behalf of petitioners concerning financial risk spreading has been addressed to some extent.

According to the court, the public interest element inherent in the guidelines trumps the petitioner's concerns.