In the present scenario, where the entire world is facing a huge crisis due to the outbreak of this pandemic caused by Covid-19 which has collapsed the economies inter-country or rather the inter-globe, the mode of transactions and payments have also undergone a sea change. These new methods were in practice from the last few years but the full fledged implementation of these changes i.e. through electronic mode by replacing the traditional exchange of currency, has turned out to be of great significance, as it not just makes the payment faster but also helps the people to follow the norms of social distancing by reducing the chances of spreading the infection by maintaining the required physical distance and minimizing contact between individuals.

With the introduction of this new system of cashless transactions, the concerns relating to security and the interest of the common people, the risks they might get subjected to, in order to avail the facilities of virtual methods of transactions, the Reserve Bank of India introduced a framework in 2007. This framework regulates the payment system providers, so that the customers can rely on proper and risk-free transaction methods.

If we read the Payment and Settlement of Systems Act, 2007 (hereinafter referred to PSS Act, 2007) it will be crystal clear that RBI was designated as the authority for the regulation and supervision of the payment system.

The Preamble of the PSS Act, 2007 states as follows- “An Act to provide 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 or incidental thereto.”

The PSS Act, 2007 provides for the regulation and supervision of payment systems in India, and designates the Reserve Bank of India (Reserve Bank) as the authority for that purpose and all related matters. The Reserve Bank is authorized under the Act to constitute a Committee of its Central Board, known as the Board for Regulation and Supervision of Payment and Settlement Systems (SPSS), to exercise its powers and perform its functions and discharge its duties under this statute. The Act also provides the legal basis for “netting” and “settlement finality”. This is of great importance, as in India, other than the Real Time Gross Settlement (RTGS) system, all other payment systems function on a net settlement basis.

RBI derives its power to accept the authority, from the amendment which came into effect on January 9, 2007. It is crystal clear that the amendment made in the RBI Act on January 9, 2007 and PSS Act, 2007 was notified on the date, 12th August 2008. Therefore, it can be rightly said that this amendment was brought in to make the RBI Act, 1934 consistent with the PSS Act, 2007.

The role of RBI in the payment system of India today is of great significance. A number of changes have been introduced through the RBI Amendment Act, 2006. Some fundamental changes through the amendment dated January 9, 2007 have been brought under Section 45 of the RBI Act. Definitions of a few terms have been incorporated, such as business of a non-banking financial institutions, companies, deposits, but the most important definition which must be focused upon is, of the term derivatives. The definition of the term derivatives was added in section 45U (a) of the RBI Act in 2006 and simultaneously it was added in section 2(b) of its parallel legislation the Payment and Settlement of Systems Act, 2007. The definition in both of these sections are exactly the same and therefore it can safely be presumed that section 45U of the RBI Act has been amended prior to PSS Act, 2007 came into force, to make the state provision of RBI Act consistent with the provisions of PSS Act, 2007.

The Payment and Settlement System Act 2007 defines “netting” under Section 2(e) and legally recognizes settlement finality. It states that a settlement, whether gross or net, will be final and irrevocable as soon as the money, securities, foreign exchange or derivatives or other transactions payable as a result of such settlement is determined, whether or not such money, securities or foreign exchange or other transactions is actually paid. In case a system participant is declared insolvent, or is dissolved or is wound up, no other law can affect any settlement which has become final and irrevocable and the right of the system provider to appropriate the collaterals contributed by the system participants towards settlement or other obligations.

The reason for the changing circumstances in the payment system, the electronic mode of transaction of money became more popular among the individual entities and from that perspective PSS Act required to have been enacted and implemented.

The electronic mode of transaction of the money has different facets. In view of the above necessity to enact a specific definition which inter alia empowers the RBI to act as designated authority with the following powers and functions-

1. To regulate/ overseas operating system in country including by non banking like CCIL Clearing Corporation of India Ltd., Card Companies and other payment system provided;

2. To download the procedure of authorisation of payment system as revocation of authorisation;

3. To lay down the technical operation in the payment system;

4. To call info and furnish doc from the service provider;

5. To issue guidelines/directions to system provider;

6. To audit and inspect system provider;

7. To lay down the duty of system provider;

8. To verify information or taking appropriate action for non providing of information.

These are the basic necessities for which the act was required to be enacted.

If we now analyse the overlapping effect for the RBI Act, 1934 and PSS Act, 2007 it is crystal clear that PSS Act, 2007 was enacted further to achieve the objective of keeping the RBI as an authority. Therefore few sections of the RBI Act and PSS Act which have been discussed clearly indicate the same.

The relationship between the two Acts is very essential. It ensures and enables the smooth, safe and efficient operations of payment and settlements of systems. The RBI under sections 58(2)(p), 58(2)(pp) and 58(4) of the RBI Act is empowered to frame rules and regulations. These sections are stated as follows-

Section 58. Power of the Central Board to make regulations.

(p) the regulation of clearing-houses for the banks l(including post office savings banks).

2[(pp) the regulation of fund transfer through electronic means between the banks or between the banks and other financial institutions referred to in clause (c) of section 45-I, including the laying down of the conditions subject to which banks and other financial institutions shall participate in such fund transfers, the manner of such fund transfers and the rights and obligations of the participants in such fund transfers.]

(4) Every regulation shall, as soon as may be after it is made by the Central Board, be forwarded to the Central Government and that Government shall cause a copy of the same to be laid before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the regulation, or both Houses agree that the regulation should not be made, the regulation shall, thereafter, have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that regulation.

Upon a careful reading of these sections along with the PSS Act in the respective order, one finds that under section 58(4) the ultimate authority lies in the hands of the Parliament, since any regulation formulated by the RBI has to be passed by both the houses of the Parliament. Therefore every action taken by the RBI is made subject to the approval of the Parliament. Under section 58(2)(p) of the RBI Act, the Central Board of Directors of the RBI are empowered to make resolutions for the clearing-houses for the banks, regulating the banking system of the nation. To supplement this provision, the PSS Act of 2007 was enacted. This Act vests in the RBI ultimate authority and control. Therefore, section 58(2)(p) serves as a connecting link between the RBI Act and the PSS Act.

In all the legislations the rules and regulations are formulated by a Board or a Committee, which is established under that statute. For example, under the Consumer Protection Act, 1986 the rules are formulated by the Standing committee constituted under the Act. But in the RBI and the PSS Act the situation seems to be different. The PSS Act gives RBI the complete power and control to make any rules and regulations, which are subject to the control and approval of the Parliament, by the virtue of section 58(4) of the RBI Act. Hence it can be concluded that, all the rules and regulations under these two acts, are made by the Central Government itself, and not by a Board or Committee established by the power of that statute. The RBI further implements these rules and regulations formulated by the Parliament, the representative of the people.

If we look into provision of PSS Act, 2007 certain powers are given to the authority, that is the RBI and by exercising such power in fact the RBI is keeping the entire control over payment system in India.

The Reserve Bank constitutes a committee of its central board known as Board for Regulation and Supervision of Payment and Settlement of Systems for performing the powers and functions along with certain duties. The powers for regulation of increment, the payment system act the authority is vested in RBI specifically from Sec. 58(2)(p) of RBI Act. Reserve Bank’s overall authority to the current legislation is enlisted in Sec. 4 & 5. Section 4 mentions the payment which cannot operate without the authorisation of the concerned body. While the process to receive bonafide authorisation is discussed in section 5.

Powers of the Reserve Bank u/s 4 of the act are mentioned below-

Section 4: Payment system not to operate without authorisation

(1) No person, other than the Reserve Bank, shall commence or operate a payment system except under and in accordance with an authorisation issued by the Reserve Bank under the provisions of this Act:

Provided that nothing contained in this section shall apply to—

(a) the continued operation of an existing payment system on commencement of this Act for a period not exceeding six months from such commencement, unless within such period, the operator of such payment system obtains an authorisation under this Act or the application for authorisation made under section 7 of this Act is refused by the Reserve Bank;

(b) any person acting as the duly appointed agent of another person to whom the payment is due;

(c) a company accepting payments either from its holding company or any of its subsidiary companies or from any other company which is also a subsidiary of the same holding company;

(d) any other person whom the Reserve Bank may, after considering the interests of monetary policy or efficient operation of payment systems, the size of any payment system or for any other reason, by notification, exempt from the provisions of this section.

(2) The Reserve Bank may, under sub-section (1) of this section, authorise a company or corporation to operate or regulate the existing clearing houses or new clearing houses of banks in order to have a common retail clearing house system for the banks throughout the country:

Provided, however, that not less than fifty-one per cent of the equity of such company or corporation shall be held by public sector banks.

The operation of payment systems, according to Chapter-3 deals with Authorization of Payment System where it has been declared that except the employee of Reserve Bank, no other person will be allowed to operate payment systems without any authorization. Now, for the purpose of the settlement of payment by two different service providers or rather operators cannot be made without authorisation which is stipulated in Sec. 4 of PSS Act, 2007. Therefore, every organisation, bank, non-banking financial institutes who are in the trade of settlement of payment needs to be registered under a new system if it is seen that the standard as prescribed for the determination of payment system is to be decided by RBI. Power of revocation of authorization if any illegal activity is noticed after getting authorization is also mentioned. RBI has the competent authority u/s 58(2)(p) and the accordingly the power of checks and balance is on the RBI is u/s 58(4).

Sec. 5 - Application for Authorisation

(1) Any person desirous of commencing or carrying on a payment system may apply to the Reserve Bank for an authorisation under this Act.

(2) An application under sub-section (1) shall be made in such form and in such manner and shall be accompanied by such fees as may be prescribed

Inquiry by Reserve Bank is mentioned in Section 6 of the PSS Act. After the receipt of an application under section 5, and before an authorisation is issued under this Act, the Reserve Bank may make such inquiries as it may consider necessary for the purpose of satisfying itself about the genuineness of the particulars furnished by the applicant, his capacity to operate the payment system, the credentials of the participants or for any other reason and when such an inquiry is conducted by any person authorised by it on its behalf, it may require a report from such person in respect of the inquiry.

Sec. 45W- Power to regulate transactions in derivatives, money market instruments, etc.

(1) The Bank may, in public interest, or to regulate the financial system of the country to its advantage, determine the policy relating to interest rates or interest rate products and give directions on its behalf to all agencies or any of them, dealing in securities, money market instruments, foreign exchange, derivatives, or other instruments of like nature as the Bank may specify from time to time:

Provided that the directions issued under this sub-section shall not relate to the procedure for execution or settlement of the trades in respect of the transactions mentioned therein, on the Stock Exchanges recognised under section 4 of the Securities Contracts (Regulation) Act, 1956.

(2) The Bank may, for the purpose of enabling it to regulate agencies referred to in sub-section (1), call for any information, statement or other particulars from them, or cause an inspection of such agencies.

Sec. 45X- Duty to comply with directions and furnish information.

It shall be the duty of every director or member or other body for the time being vested with the management of the affairs of the agencies referred to in section 45W to comply with the directions given by the Bank and to submit the information or statement or particulars called for, under that section.

In view of the above facts if we now consider the latest pronouncement of the Honourable Supreme Court of India, in a recent judgment of Internet and Mobile Association of India vs RBI (AIRONLINE 2020 SC 298), it was observed by the Hon’ble Supreme Court that there is no quarrel with the proposition that RBI has sufficient power to issue directions to its regulated entities in the interest of depositors, in the interest of banking policy or in the interest of the banking company or in public interest.

However, the Supreme Court stated that RBI is not just like any other statutory body created by an Act of legislature. It is a creature, created with a mandate to get liberated even from its creator. Therefore, RBI cannot be equated to any other statutory body that merely serves its master. It is specifically empowered to do certain things to the exclusion of even the central government, like issuance of notes. Therefore, to say that RBI is just like any other statutory authority whose decisions cannot invite due deference, is to do violence to the scheme of the Act.

Payment and settlement systems is a vast growing area, which involves advanced market policies with newer innovations in technology. For this area we have to focus on reducing costs and improving literacy about payment systems and its different products. The Reserve Bank has to put efforts to ensure among the public that all payment and settlement systems in the country are safe, efficient, interoperable, authorized and accessible, as it may also be furthering financial inclusion and compliance with some international standards. The main focus is to shift the cash payment system to electronic payment systems. RBI has the authority in section 58(2)(p) which is the connecting link with the Payment of Settlement System Act. Unlike any other law, parliament needs to agree upon every such authorisation brought in by the Reserve Bank. RBI is required to make regulations for the payment instructions and other matters which can cause disputes between both parties. Finally discussing and comparing few provisions of these two Acts, this can be in fact be said that the special provision of the RBI Act which talks about payment system could not be amended to a larger extent, so for more systematic and channelised way of working a new Act, Payment and Settlement system Act 2007, has come into picture.

By:
SHIV SHANKAR BANERJEE
Advocate, High Court of Calcutta
and The Supreme Court of India