EY Regulatory Alert. RBI issues Master Directions on issuance and operation of PPIs. Executive summary
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1 10 November 2017 EY Regulatory Alert RBI issues Master Directions on issuance and operation of PPIs Regulatory Alerts cover significant regulatory news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest regulatory issues. For more information, please contact your EY advisor. Executive summary On 20 March 2017, the Reserve Bank of India (RBI) issued Draft Master Directions for stakeholders comments on the issuance and operation of prepaid payment instruments (PPIs) (Draft Master Directions). Comments and suggestions on the Draft Master Directions were to be provided to the RBI by 15 April After taking into consideration the stakeholders comments/feedback, the RBI has, on 11 October 2017, issued the final Master Directions on issuance and operation of PPIs (Master Directions), which shall come into force with immediate effect (i.e. 11 October 2017). This alert summarizes the key features of the Master Directions.
2 Page 2 Background The disruption of the organised financial services sector has resulted in extensive use of digitized means of payment for procurement of goods and services and use of electronic banking as a medium for transfer of funds. One of such widely used digitized means of payment are PPIs 1. At present, the PPI Issuers 2 in India are required to obtain approvals/ authorisation from the RBI under the Payment and Settlement Systems Act, 2007 (PSS Act) and are required to operate within the framework of the guidelines on Issuance and Operation of PPIs issued in April 2009 and the subsequent Master Circulars issued in this regard. to foster competition and encourage innovation in this segment in a prudent manner while taking into account safety and security of transactions as well as systems along with customer protection and convenience; and to provide for harmonisation and interoperability of PPIs. Salient Provisions of the Master Directions The key features/ provisions as laid down in the Master Directions are as under: Applicability Owing to the extensive use of PPI, various stakeholders had approached the RBI for rationalisation of certain requirements while providing a well-regulated ecosystem. Accordingly, a comprehensive review of the PPI guidelines was undertaken and the RBI had on 20 March 2017, issued the Draft Master Directions on the issuance and operation of PPIs for stakeholder comments 3. Based on the comments/ feedback received from various stakeholders, the RBI on 11 October 2017, issued the Master Directions on issuance and operation of PPIs which shall come into effect immediately. Applicable to all PPI Issuers, System Providers and System Participants. Existing PPI Issuers to comply with the Master Directions by 31 December 2017, except where specific timelines have been provided. Eligibility criteria PPI issuers (Banks and Non-banks) regulated by any of the financial sector regulators to submit their application to the Department of Payment and Settlement Systems (DPSS) within 45 days of obtaining a No Objection Certificate from such regulators. The RBI seeks to achieve the following through the Master Directions: to provide a framework for authorisation, regulation and supervision of entities operating payment systems for issuance of PPIs in the country; Non-bank PPI issuers shall be a company incorporated in India and registered under the Companies Act, 1956/ the Companies Act, 2013 (Cos Act). Non-bank PPI issuers having Foreign Direct Investment/ Foreign Portfolio Investment 1 PPIs are payment instruments that facilitate the purchase of goods and services, including financial services, remittance facilities, etc., against the value stored on such instruments 2 Entities operating the payment systems issuing PPIs to individuals / organisations. The money so collected is used by these entities to make payment to the merchants who are part of the acceptance arrangement and for facilitating funds transfer/ remittance services 3 Comments were invited by 15 April 2017
3 Page 3 shall meet the capital requirements with the extant norms. Non-bank entities to have minimum positive net-worth 4 of INR 50 million as per the latest audited balance sheet while submitting its application 5 to the DPSS. Such Non-bank entities to ensure and maintain at all times the minimum net-worth of INR 50 million. By the end of the third financial year from the date of receiving the final authorization, such entities shall achieve a minimum net-worth of INR 150 million and shall maintain the same at all times thereafter. Authorisation process Application by Non-bank entities to be made in the prescribed format (along with a declaration from all the directors in the prescribed format and requisite fees), to the DPSS. Where the eligibility criteria is met, the RBI shall issue an in-principle approval with a validity of six months 6 during which the entity shall submit a satisfactory System Audit Report (SAR) to the RBI accompanied by a net-worth compliance certificate of INR 50 million from the CA. Thereafter, such entities to furnish audited balance sheet and net-worth certificate to the RBI within six months of the close of the financial year. Pursuant to receipt of satisfactory SAR and net-worth certificate, the RBI shall grant the final Certificate of Authorisation (CoA) with a validity of five years. Newly incorporated Non-bank entities, not having audited balance sheet, to provide certificate in the prescribed format from a CA along with a provisional balance sheet. Existing Non-bank PPI Issuers to maintain capital requirements as applicable to them prior to issue of the Master Directions. Such Non-bank PPI issuers to ensure a minimum net-worth of Rs 150 million by 31 March 2020 and thereafter maintain this minimum net-worth at all times. Further, such Non-bank PPI issuers to furnish audited balance sheet and CA certificate in the prescribed format to the RBI by 30 September Every authorised Non-bank entity to submit a CA certificate, in the prescribed format, to the RBI within six months from the end of the relevant financial year. Entities to commence business within six months 6 from the grant of the CoA. Application of renewal to be filed at least three months before the expiry of validity of the CoA. Any proposed major change 7 or any takeover or acquisition of control or change in management of a Non-bank entity shall be communicated with complete details to the DPSS. Types of PPIs RBI has notified following three types of PPIS: Closed System PPIs; Semi-closed System PPIs; and Open System PPIs. 4 Net-worth will consist of paid up equity capital, compulsorily convertible preference shares, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets but not reserves created by revaluation of assets; and adjusted for accumulated loss balance, book value of intangible assets and deferred revenue expenditure, if any 5 A compliance certificate, in the prescribed form, from a Chartered Accountant (CA) to be submitted alongwith the application 6 A one-time extension for a maximum period of six months can be made in advance with valid reasons 7 such as changes in product features/ process, structure or operation of the payment system, etc
4 Page 4 Closed system PPI cannot be used for payments or settlements for third party service. Thus, issuance and operation of such instruments are not classified as payments systems requiring approval from the RBI. Closed system PPIs are thus not governed by the Master Directions. Cross-Border Transactions The use of INR denominated PPIs for cross border transactions shall not be permitted except as under: PPIs for cross-border outward transactions The salient features of the Semi-closed System and Open system PPIs have been attached as Annexure to this Alert. Specific categories of PPIs Gift instruments Maximum value shall not exceed INR 10,000. Gift instruments shall not be reloadable. Withdrawals/ refunds/ funds transfer shall not be permitted. KYC of the purchasers of such instruments shall be maintained by the PPI Issuers. PPIs for Mass Transit Systems (PPI-MTS) PPI-MTS shall contain an Automated Fare Collection application related to the transit service. Usage is restricted to MTS and merchants whose activities are allied/ related to or are carried on within the premises of the transit system. Only KYC compliant reloadable Semi-closed and Open System PPIs issued by Banks having Authorised Dealer category I license shall be permitted to be used. Permissible only to undertake current account transactions under FEMA, subject to adherence to the extant norms. Usage restricted for remittances under the Liberalised Remittance Scheme. Facility to be extended only on specific request of the PPI holders and shall have a limit of INR 10,000 per transaction and INR 50,000 per month. PPIs for credit towards cross-border inward remittance PPI issuers, appointed as Indian agents of the authorised overseas principal, shall be permitted to issue PPIs to the beneficiaries of inward remittance under the Money Transfer Service Scheme (MTSS). Non-bank PPI Issuers to issue such PPIs for a period of three years from the date of the Master Directions. Such instruments are reloadable and the value outstanding to be maximum INR 3,000 at any point of time. Withdrawals/ refunds/ funds transfer shall not be permitted for such instruments. Foreign Exchange PPIs Master Directions not to be applicable to entities authorized under Foreign Exchange Management Act, 1999 (FEMA) issuing foreign exchange denominated PPIs. Usage of KYC compliant, reloadable PPIs issued in electronic form will be permitted subject to adherence to extant norms under the MTSS Guidelines issued by RBI. Facility shall have a limit of INR 50,000 per inward MTSS remittance. Remittance of amount exceeding INR 50,000 shall be as credit to the bank account of the beneficiary.
5 Page 5 Issuance, loading and reloading of PPIs Name of the company issuing the PPI and the brand name should be prominently displayed. No interest shall be paid on PPI balances. Expiry period of the PPI shall be clearly indicated to the customer at the time of issuance of PPIs. Intimation of expiry of PPIs shall be sent to PPI holders at reasonable intervals during 45 days period prior to expiry of PPIs. PPI shall be permitted to be loaded and reloaded by cash/ cards/ other PPIs 8 and electronic means 9. Cash loading to PPIs shall be restricted to maximum INR 50,000 per month subject to overall limit of PPI. Issuance of PPIs in the form of paper vouchers shall no longer be permitted except for Meal Paper Vouchers which may be issued up to 31 December 2017 as Semi-closed PPIs. PPIs with no financial transaction for a consecutive period of one year shall be made inactive after sending a notice to the PPI holders. These can be reactivated after validation and applicable due diligence. Non-bank PPI issuers cannot transfer the outstanding balances to their profit and loss account for atleast three years from the expiry date of PPI. Such balances can be refunded to the PPI holders as credit to their bank accounts. Restriction on co-mingling of funds originating from any other activity carried on by the PPI issuer. Transaction Limits PPIs under co-branding arrangement Co-branding arrangements to be as per the policy approved by the Board of the PPI Issuer. PPI Issuers having regard to the transaction limits prescribed by the RBI, are permitted to place such lower limits as they may deem appropriate. Refunds of payments made through PPI to be applied to the respective PPI immediately, even if such application of funds results in exceeding the limits prescribed for that type/ category of PPI. Co-branding partner shall be a company incorporated in India and registered under the Cos Act. Where the co-branding partner is a Bank, it shall be licensed by the RBI. Where the co-branding partner is a financial entity, it shall obtain prior approval from its regulator for entering into such arrangement. In case of Open system PPI, limits on cash withdrawals at Point of Sale (POS) terminals to be upto INR 2,000 per day in rural areas and INR 1,000 per day in other areas, subject to satisfaction of the prescribed conditions. Validity and redemption Minimum validity of the PPIs shall be one year from the date of last loading/ reloading. Co-branding arrangement between two Non-bank PPI Issuers, shall clearly indicate the partner and the PPI Issuer. Bank shall be the PPI Issuer where co-branding arrangements is between Bank and Non-bank entity. Non-bank entity to only undertake marketing/ distribution of the PPIs or providing access to the PPI holder to the services being offered. 8 As permitted from time to time 9 Electronic loading/ reloading of PPI shall be permitted only in INR and through specified payment instruments issued by entities regulated in India
6 Page 6 Non-bank PPI Issuer issuing co-branded PPIs shall seek one-time approval from DPSS. Details of existing co-branding arrangements shall be furnished to the DPSS in the prescribed format by 10 November Such arrangements to ensure compliance with the Master Directions by 31 December Additionally, details of new arrangements to be reported to the RBI within 7 days of finalization of the arrangement. year; after any security incident or breach; and before/ after a major change to their infrastructure or procedures. Prescribed minimum requirements to be put in place by the PPI to address safety and security concerns, and for risk mitigation and fraud prevention. The PPI Issuers may deploy additional checks and balances, as considered appropriate. Interoperability Deployment of money collected The RBI has adopted a phased approach for the interoperability of PPIs (which was not permitted in the existing framework). First phase - The PPI Issuers shall make all KYC compliant PPIs issued in the form of wallets interoperable amongst themselves through Unified Payments Interface (UPI) by 10 April Subsequent phases - Interoperability shall be enabled between wallets and bank accounts through UPI. Similarly, interoperability for PPIs issued in the form of cards shall also be enabled in due course. However, Banks may continue to issue PPIs in association with authorized card networks. Security, Fraud prevention and Risk Management Framework PPI issuers shall put in place adequate information and data security infrastructure and systems for prevention and detection of frauds. Board approved Information Security policy for the safety and security of the payment systems operated by them should also be put in place which shall be reviewed: on on-going basis but at least once a Non-bank PPI issuers are required to maintain their outstanding balance in an escrow account (subject to prescribed conditions) with any scheduled commercial bank. Only prescribed debits and credits shall be permitted in the escrow account. The Bank maintaining the escrow account to be permitted to use the monies in the escrow account to make payments to merchants/ PPI holders. Settlement of funds with merchants shall not be co-mingled with other business, if any, handled by the PPI Issuer. No interest shall be payable by the bank on the escrow balances. However, Non-bank PPI Issuer, subject to certain conditions, are permitted to transfer core portion 10 of the amount in the escrow account to a separate interest bearing account. Quarterly/ Annual certificate in the prescribed format signed by the auditor, to be submitted to DPSS certifying adequate maintenance of funds in the escrow account to cover the outstanding value of PPIs issued and payments due to merchants. 10 Core Portion shall be computed as under: Step 1: Compute lowest daily outstanding balance (LB) on a fortnightly (FN) basis, for one year (26 fortnights) from the preceding month. Step 2: Calculate the average of the lowest fortnightly outstanding balances [(LB1 of FN1+LB2 of FN LB26 of FN26) divided by 26]. Step 3: The average balance so computed represents the Core Portion eligible to earn interest.
7 Page 7 Conversion of existing PPIs An option for conversion of existing Semi-closed and Open System PPIs to any type of PPI to be given to all existing PPI holders. Conversion to be completed by 31 December 2017 failing which the existing PPI to be mandatorily converted into minimum detail PPIs with a limit of maximum INR 10,000 at all times. Where the balance post mandatory conversion exceeds INR 10,000, no further loading to be permitted till such time the balance is below INR 10,000. Safeguards against Money Laundering PPI issuer and their agents to comply with guidelines on KYC/ Anti-Money Laundering (AML)/ Combating Financing of Terrorism (CFT) issued by the Department of Banking Regulation (DBR). PPI issuers to also adhere to the provisions of Prevention of Money Laundering Act, 2002 and the rules framed thereunder. Account statements of atleast 6 months shall be made available to the PPI holders. In case of PPIs issued by Bank entities, customers shall have recourse to the Banking Ombudsman Scheme for grievance redressal. Non-bank PPI Issuers to provide a quarterly report in the prescribed format regarding the receipt of complaints and action taken status thereon by the 10 th of the following month to the respective Regional Office of DPSS. Bank PPI Issuer shall submit the same report to DPSS, Mumbai Regional Office. PPI Issuer to also display Frequently Asked Questions in relation to the PPI on their website/ mobile application. Information system audit The authorised Non-bank entities shall submit SAR, including cyber security audit conducted by CERT-IN empaneled auditors, within two months of the close of their financial year to the respective Regional Office of DPSS. PPI Issuers to maintain a log of all PPI transactions for at least 10 years and shall also file a Suspicious Transaction Reports with the Financial Intelligence Unit - India. Customer Protection and Grievance Redressal Framework The terms and conditions, charges, expiry, etc. shall be clearly disclosed by the PPI Issuer. The authorised Bank entities shall adhere to guidelines 11 on Cyber Security Framework in Banks, which inter alia, covers requirements for mobile-based applications. The Master Directions provides the minimum framework which the PPI Issuer should put in place. The PPI issuers shall put in place a formal, publicly disclosed customer grievance redressal framework, including a designated nodal officer to handle the customer complaints/ grievances, the escalation matrix and turn-around-times for complaint resolution. 11 Circular DBS.CO/CSITE/BC.11/ / dated 2 June 2016
8 Page 8 Comments The financial technology (FinTech) space in India has been evolving and going through a dynamic phase. Recognizing the rapid changes to digital payments, the RBI felt the need for a change in law to strike balance between regulation vis-à-vis viability and to boost the objective of financial inclusion and a digital economy. In relation to PPIs, the RBI has swiftly acted on the recommendations of various stakeholders. In light of various technological advancements, the RBI in the Master Directions has laid suitable measures for protection of PPI holders and interoperability of PPI. While the Master Directions provide for a well-regulated eco-system, PPI Issuers (especially the e-wallet companies) are faced with the challenge of adhering to enhanced compliances/ higher capital.
9 Page 9 Annexure Particulars Semi-closed System PPIs (on minimum details) Semi-closed System PPIs [on Know Your Customer (KYC) completion] Open System PPIs (on KYC completion) Issuing entity Bank and non-bank entity Bank KYC compliance Requirement of obtaining minimum details 12 Compliance with KYC norms as per the Master Direction on KYC Permissible transactions Maximum permissible amount of loading Maximum outstanding amount at any time Transaction limits Conversion Transfer of outstanding Purchase of goods and services permitted; Cash withdrawals and funds transfer not permitted INR 10,000 per month and INR 1,00,000 per financial year Purchase of goods and services and fund transfer permitted; Cash withdrawals not permitted Purchase of goods and services permitted Cash withdrawals 13 and funds transfer permitted Not specified INR 10,000 INR 1,00,000 Amount of debit shall not exceed INR 10,000 per month Mandatory conversion required into KYC compliant Semi-closed System PPI within a period of 12 months from the date of issue of the PPI, failing which no further credit shall be allowed in such PPIs The outstanding balance shall be transferred at the request of the PPI holder to In case of a pre-registered beneficiary Fund transfer shall be restricted to INR 1,00,000 per month per beneficiary In any other case - Fund transfer shall be restricted to Rs 10,000 per month Not applicable The outstanding balance, shall be transferred at the request of the PPI holder to the bank account of the PPI holder, other PPIs of the same issuer/ other 12 The minimum details shall include mobile number verified with One Time Pin (OTP) and self-declaration of name and unique identification number of any of the officially valid document 13 In the case of Open System PPIs, cash withdrawal at Point of Sale (POS) terminals shall be permitted up to a limit of Rs 2,000 per day in rural areas and Rs 1,000 per day in other areas, subject to the conditions as applicable to debit cards (for cash withdrawal at POS)
10 Page 10 Particulars balance on closure of PPI Semi-closed System PPIs (on minimum details) the bank account of the PPI holder (duly verified by the PPI Issuer), after complying with KYC requirements of the PPI holder PPI issuers shall also allow transfer of funds back to source (i.e. payment source from where the PPI was loaded) at the time of closure Semi-closed System PPIs [on Know Your Customer (KYC) completion] Open System PPIs (on KYC completion) issuers (as permitted) [duly verified by the PPI Issuer] PPI issuers shall allow transfer of funds back to source (i.e. payment source from where the PPI was loaded) at the time of closure
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