Introduction
The rapid advancement of financial technology, or fintech, with
an overall transaction value of $24 Trillion in FY21-22 alone, has
revolutionised the way financial services are delivered and
accessed worldwide. Fintech encomp،es a wide range of di،al
financial services, including but not limited to mobile payments,
،r-to-،r lending, robo-advisory and blockchain-based
solutions.
This article aims to discuss the regulatory regime governing
fintech in India. It will explore the regulatory ،ies and
frameworks responsible for overseeing fintech activities and delve
into the specific regulations applicable to different fintech
sectors.
The Regulatory Landscape
In India, the regulatory framework for fintech is currently
fragmented, lacking a unified set of rules or norms that govern all
fintech services. This fragmentation poses challenges in
effectively regulating the industry since there is no comprehensive
set of fintech laws. The primary regulatory agencies overseeing
this sector in India include the Reserve Bank of India (RBI), the
Insurance Regulatory and Development Aut،rity of India (IRDAI),
the Securities and Exchange Board of India (SEBI), the Ministry of
Corporate Affairs (MCA), and the Ministry of Electronics and
Information Technology (MEITY). Specific sect، regulations
brought in place by the aforementioned ،ies are as follows:
Regulations/ guidelines by the RBI
The Payment and Settlement Systems Act, 2007 (the
“PSS Act“) has designated the RBI to
regulate and supervise “payment systems” in India. Under
the PSS Act, a “payment system” is described as a
mechanism that facilitates the transfer of funds between a person
making a payment (payer) and the recipient (beneficiary). This
system involves services related to clearing, payment, or
settlement, or a combination of these elements. However, it
explicitly excludes stock exchanges from its definition.
- The Directions for Opening and Operation of Accounts
and Settlement of Payments for Electronic Payment Transactions
Involving Intermediaries, 2009 (the “EPT Directions”) and
the Guidelines on Regulation of Payment Aggregators and Payment
Gateways (the “PAPG Guidelines”): The EPT
Directions and the PAPG Guidelines govern intermediaries such as a
Payment Aggregators (PA(s)) and Payment Gateways
(PG(s)).Intermediaries are en،ies that collect money from
customers through electronic payment met،ds for goods and services
and then transfer it to merchants as final payment. PA(s)
facilitate e-commerce sites and merchants to accept payments, while
PG(s) provides technology for online payment processing. Beyond PAs
and PGs, the EPT Directions apply to a wide range of en،ies
including electronic commerce (e-commerce) and mobile commerce
(m-commerce) service providers facilitating electronic payments,
and merchants accepting payments through electronic or online
payment met،ds. The PAPG Guidelines set eligibility criteria,
capital requirements, and technology-related recommendations for
PAs. For PGs, the PAPG Guidelines serve as a set of non-binding
technology-related recommendations. These recommendations cover
various aspects related to technology infrastructure, security,
data standards, risk management, and fraud prevention.
- The Master Direction on Issuance and Operation of
Prepaid Payment Inst،ents (“PPI
Guidelines“): A Prepaid Payment Inst،ent (PPI(s))
refers to a financial inst،ent that enables individuals to load a
specific amount of money onto the inst،ent in advance. This
loaded value can then be used to make payments for various goods
and services, including purchases, bill payments, money transfers,
and more. Prominent examples of PPIs are pre-paid credit and debit
cards, E- wallets, vouchers, etc. In order to promote innovation
and compe،ion while ensuring safety, security, and customer
protection, the RBI released comprehensive PPI Guidelines to
effectively regulate PPIs.
- The Guidelines for Licensing of Payments Banks
(“Payment Bank Guidelines”): The objective of
payment banks is to promote financial inclusion by offering small
savings accounts and payment/remittance services to various groups.
These banks are registered as public limited companies and licensed
under the Banking Regulation Act, 1949 with limitations mainly on
accepting deposits and providing payment and remittance services.
The objective of the Payment Bank Guidelines is to set out a number
of requirements that payment banks must meet, such as minimum
capital requirements, liquidity requirements, and governance
standards. This is to ensure that payment banks are
well-capitalised and run in a safe and sound manner.
The RBI has also issued regulations for Peer-to-Peer (P2P)
Lending Platforms in 20171 and released the Guidelines on
Di،al Lending, outlining eligibility criteria, ،ntial norms,
and risk management practices to protect the interests of lenders
and borrowers.
Additionally, the RBI has been proactive in promoting innovation
in the fintech sector by creating a regulatory sandbox framework2, allowing fintech
companies to test their innovative ،ucts or services in a
controlled environment.
Regulations/ guidelines by the IRDAI
With the rise of InsurTech, the IRDAI has been proactive in
encouraging the adoption of fintech in the insurance sector, while
also ensuring that policy،lders’ and insurance ،uct
buyer’s interests are protected. In that regard, the
IRDAI’s regulations in the insurance fintech sector broadly
govern corporate agents, web aggregators and insurance brokers:
- The Insurance Regulatory and Development Aut،rity of
India (Registration of Corporate Agents) Regulations,
2015: Corporate agents act as intermediaries between
insurance companies and ،ential policy،lders. This regulation
provides a framework with respect to the owner،p and control,
record keeping, registration, conduct, and operations of these
corporate agents operating in the insurance business of life
insurance, health insurance and general insurance.
- The Insurance Web Aggregator Regulations,
2017: This regulation was introduced to oversee and
monitor web aggregators acting as insurance intermediaries. These
intermediaries operate websites that offer users a platform to
compare prices and access information about ،ucts from various
insurance companies and other relevant topics.
- The Insurance Regulatory and Development Aut،rity of
India (Insurance Brokers) Regulations, 2018: Insurance
brokers are intermediaries w، facilitate the buying and selling of
insurance ،ucts between the insurer and the insured. These
regulations safeguard the policy،lder’s interest by ensuring
that insurance brokers are qualified, registered and licensed.
Further, it regulates online sales, telemarketing and distance
marketing and highlights measures to be followed upon
non-compliance.
Furthermore, similar to the RBI, the IRDAI also released its
regulatory sandbox framework3 with the aim of promoting innovation
in the insurance industry to ease existing regulations while still
safeguarding the rights and benefits of policy،lders.
Regulations/ guidelines by the SEBI
The Securities and Exchange Board of India Act, 1992, and the
Securities Contracts (Regulation) Act, 1956 provide SEBI with
wide-ranging powers to regulate securities markets and ensure the
integrity and fairness of trading activities.
SEBI has established various regulations to oversee the conduct
of individuals and en،ies operating as stock brokers and
investment advisers.4
These regulations set criteria for eligibility, registration
requirements and compliance-based obligations to ensure that these
market parti،nts adhere to the necessary standards of
competence, professionalism and ethical conduct.
Furthermore, SEBI plays a role in regulating5 the issuance and listing of
securitised debt inst،ents and security receipts within India in
order to safeguard the interests of investors in these inst،ents
and foster the growth of the securitisation market.
The SEBI (Alternative Investment Funds) Regulations, 2012 govern
securities trading in the fintech ،e, particularly concerning
Alternative Investment Funds (AIFs). These regulations provide
guidelines for the establishment and operation of AIFs, including
various types such as venture capital funds, private equity funds,
and similar investment vehicles. The regulations impose
registration criteria, restrictions on investments, disclosure
obligations and norms for investor protection on AIFs operating in
India. Such regulations aim to ensure transparency, responsible
practices and investor confidence within the fintech-driven AIF
sector.
Other Significant Legislations
- The National Payments Corporation of India (NPCI)
Regulations: TheNPCI is responsible for managing several
notable payment systems in India, such as the Unified Payment
Interface (UPI), RuPay card payment network and payment
aggregators. The NPCI oversee the operation and functioning of
these payment systems, ensuring their efficiency and effectiveness
in facilitating transactions. Last year, the RBI released its RBI
Payments Vision 2025, which emphasises cross-border payments as a
key focus area in its recommendations. To expand its global reach,
the NPCI established NPCI International Payments Limited (NIPL), a
w،lly-owned subsidiary, dedicated to deploying RuPay and UPI
services outside of India. Through bilateral cooperation,
agreements have been reached with countries like France, Singapore,
the UAE, and the United Kingdom to promote UPI adoption.
- The Companies Act, 2013: Fintech businesses
operating in India are subject to various laws and regulations that
govern their operations. Under the Companies Act 2013, fintech
businesses are required to register and comply with all applicable
laws and regulations like any other business in the country.
Conclusion
The regulatory regime for fintech in India exhibits dynamism and
continuous evolution, attuned to the rapid advancements within the
industry. This article provides an inexhaustive list of mandates
for India’s most successful industry. It is evident that
government ،ies and regulatory aut،rities display an unwavering
dedication to nurturing innovation whilst concurrently safeguarding
consumer interests, data privacy and overall financial stability.
For fintech en،ies, proactive comprehension and adherence to
pertinent laws and guidelines are imperative to prosper within this
burgeoning sector. As the fintech ecosystem further expands, it
becomes indispensable for all stake،lders, encomp،ing s،ups,
investors, and consumers, to possess a comprehensive understanding
of regulatory mandates.
Corrida Legal is the preferred corporate law firm in Gurgaon (Delhi
NCR) and Mumbai.
Footnotes
1. The Reserve Bank of
India, Master Directions – Non-Banking Financial Company
– Peer to Peer Lending Platform (Reserve Bank) Directions,
2017https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11137
dated 4th October, 2017.
2. Department of
Banking Regulation Banking Policy Division, Enabling Framework
for Regulatory Sandbox, the Reserve Bank of India
https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/ENABLING79D8EBD31FED47A0BE21158C337123BF.PDF
dated 18th April, 2019.
3. Insurance
Regulatory and Development Aut،rity of India (Regulatory Sandbox)
Regulations, 2019.
4. The SEBI (Stock
Brokers) Regulation,1992; and SEBI (Investment Advisers)
Regulations, 2013.
5. The SEBI (Issue and
Listing of Securitised Debt Inst،ents and Security Recipients)
Regulations, 2008.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.
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