The Division Bench (“DB”) of the Delhi High Court on 15th September 2022 in the matter titled Lotus Pay Solutions Pvt. Ltd. & Anr. vs. Union of India & Ors. W.P. (C) 8215/ 2020, while dismissing a writ petition, has held that “payment aggregators” will fall within the definition of a “payment system” under Section 23A of the Payment and Settlement Systems Act, 2007 (“Act”). The DB also held that the Reserve Bank of India (“RBI”) has the power to issue guidelines for efficient management for such payment systems.

The writ petition was preferred by Lotus Pay Solutions Pvt. Ltd. (“Lotus”), assailing the three clauses of the RBI issued circular titled “Guidelines on Regulation of Payment Aggregators and Payment Gateways (“2020 Guidelines”) released on 17th March 2020 which affected the working of payment aggregators by providing for the following:

1. Clause 3 – existing non-banking entities offering payment aggregation services would have to obtain authorization from RBI to continue such operations.
2. Clause 4 – payment aggregators existing on the date of issuance of the 2020 Guidelines shall achieve a net worth of 15 crores by 31st March 2021 (later extended by RBI to 30th September 2021) and shall scale upto 25 crores by the end of third financial year i.e., on or before 31st March 2023.
3. Clause 8 – all non-bank payment aggregators shall ensure that the amount collected by them is placed in an escrow account which is maintained by a scheduled commercial bank. This clause also states that for the maintenance of the escrow account, the operations of payment aggregators shall be deemed to be “designated payment settlements” under the Act.

Submissions by Lotus

Lotus submitted that it is engaged in providing “recurring payment solutions” for businesses through an authorized payment system known as National Automated Clearing House (“NACH”) and largely functions as a payment gateway. However, as one of its sponsor banks i.e., ICICI Bank does not have an internal NACH system, Lotus functions as a payment aggregator for ICICI Bank. In furtherance of the same, Lotus submitted that it largely acts as an “intermediary” and in doing so carries out the following functions – (i) collects funds from merchant clients/ e-commerce marketing companies; (ii) deposits these funds in the “nodal bank account” designated by a “Nodal Bank”. These funds are then remitted by nodal banks to Lotus’s merchant clients/ e-commerce marketing companies as per the agreed upon terms in the Nodal Account Agreement. A three-day settlement period is provided for transmission of funds.

According to Lotus, it provides an intermediary tool to payment systems to facilitate remittance of payments cannot itself be treated as a “payment system”. Lotus submitted that payment aggregators who perform the work of intermediaries does not fall within the ambit of the definition of “payment systems” and are effectively “system participants” as defined in the Act.

The DB’s Considerations

The DB while considering Lotus’s stand analyzed the definition and functions of the “payment aggregator” and noted that in a digital payment transaction there is – (i) a payer; (ii) a beneficiary; (iii) the interface which is the payment aggregator which ensures that the money is transferred to the nodal account and the settlement of the amount is done in the next three days. The DB also noted that as per clause 8 of the 2020 Guidelines payment aggregators are required to maintain an escrow account with a scheduled bank which shows that in addition to an integration system, the payment aggregators also handle funds of the customer.

The DB then analyzed the definition of a “payment system” and noted that it includes a system that – (i) enables payment to be effected between a payer and a beneficiary; (ii) concerns clearing, payment or settlement service or all of them, but does not include a stock exchange.

The DB’s Holdings

The DB clarified that the payment aggregators, as it is concerned with handling the funds of the customer using technology, would be covered under the definition of the “payment systems” and the RBI has the power to issue guidelines for efficient management for such payment systems.

Considering the above, the DB upheld the validity of the Clauses 3, 4 and 8 and rejected Lotus’s writ petition by noting that:

1. As payment aggregators are covered under the definition of payment systems, they would be called upon to seek authorization from RBI as per clause 3 of the 2020 Guidelines.
2. The DB upheld RBI’s eligibility criteria as mentioned in Clause 4 of the 2020 Guidelines noting that since payment aggregators will handle funds provided by customers, RBI would require such applicants to enter the industry who have some amount of financial wherewithal.
3. The DB also upheld Clause 8 of the 2020 Guidelines by noting that the alternative of “escrow accounts” is a more robust mechanism which protects the interest of all stakeholders i.e., the customers, merchant clients, and payment aggregators.

Our Take

The preceding paragraphs clearly show that RBI has laid great emphasis on customer protection and customer interest while drafting the said 2020 Guidelines which seek to ensure entry and survival of only those entities which meet the necessary criteria and obtain the necessary RBI authorization. The Delhi High Court by affirming that that a “payment aggregator” will be included within the scope of a “payment systems” and thereby fall within the regulatory framework of the RBI, has confirmed that the norms and safeguards put in place for “payment aggregators” the said 2020 Guidelines are valid and that the public interest element imbued in the framing of the 2020 Guidelines, trumps the concerns raised by the petitioner company.

It is also worth noting that the Bench found merit in RBI’s submissions which was to the effect that separate legislation may have to be enacted for payment aggregators. However, given that the 2020 Guidelines appears to place the necessary checks and balances in place for a regulatory framework for payment aggregators, a separate legislation further regulating this space may run the risk of potential overregulation.

This article was first published on Saikrishna&Associates