RBI issues New Master Directions for Authorisation of Payment Systems

The Reserve Bank of India (RBI) has issued new Master Directions on Authorisation to Operate a Payment System. The new rules have been issued under the Payment and Settlement Systems (PSS) Act, 2007.

No Payment System Can Operate Without RBI Approval

The RBI has said that no person or entity can operate a payment system in India without obtaining authorisation from the central bank under the PSS Act. The directions apply to Entities applying for authorisation to operate a payment system and also to existing entities already authorised by RBI.

The RBI has also clarified that authorisation will continue to be available on an “on-tap” basis, meaning eligible entities can apply whenever they wish instead of waiting for a specific application window.

What is a Payment System?

A payment system is a mechanism that enables transfer of money between individuals, businesses, merchants and financial institutions. Examples include digital payment platforms, prepaid payment instruments, card networks, payment gateways and other payment-related infrastructure. Entities operating such systems are known as Payment System Operators (PSOs).

Eligibility Conditions for Applicants

Any entity seeking authorisation must submit an application through RBI’s designated portal in the prescribed format. The applicant must meet the capital and net-worth requirements specified for the particular payment system category.

How Net Worth Will Be Calculated

The RBI has clearly defined net worth for payment system operators. Net worth will include:

• Paid-up equity capital
• Preference shares compulsorily convertible into equity
• Free reserves
• Share premium account balance
• Capital reserves arising from sale of assets

However, the following will be deducted:

• Accumulated losses
• Intangible assets
• Deferred revenue expenditure
• Deferred tax assets

Applicants must submit a certificate from their statutory auditor confirming compliance with the net-worth requirement. Newly incorporated companies without audited financial statements can submit a provisional balance sheet along with the auditor’s certificate.

RBI’s ‘Fit and Proper’ Criteria

One of the most important requirements is compliance with RBI’s “fit and proper” criteria. The RBI will assess:

• Integrity and reputation of the entity.
• Financial soundness of promoters and directors.
• Governance standards.
• Overall credibility of management.

A promoter, director or related person may be disqualified if:

• Convicted by a court for offences involving moral turpitude or economic offences.
• Declared insolvent and not discharged.
• Debarred by any financial regulator.
• Declared of unsound mind by a competent court.
• Found financially unsound.

The RBI has clarified that its decision on whether a person is “fit and proper” will be final.

Strong Technology and Governance Required

Apart from financial strength, RBI will also evaluate:

• Technological capability.
• Operational preparedness.
• Risk management systems.
• Governance framework.
• Management quality.

Applications that are incomplete, not in the prescribed format, or fail to meet minimum eligibility requirements may be returned without further processing.

Restrictions on Investments from FATF Non-Compliant Jurisdictions

The RBI has imposed strict restrictions on investments originating from jurisdictions identified by the Financial Action Task Force (FATF) as having weak anti-money laundering or anti-terror financing controls.

Existing investors from such jurisdictions can continue their investments and may bring additional funds under existing regulations to support ongoing business operations.

However, new investors from FATF non-compliant jurisdictions will not be allowed to acquire significant influence in a payment system operator.

The RBI has specified that fresh investments from such jurisdictions must remain below 20% of voting power, including potential future voting rights arising from convertible instruments or contractual arrangements.

Perpetual Validity of Authorisation

One of the major features of the new directions is perpetual validity of the Certificate of Authorisation (CoA). New entities receiving RBI approval will be granted authorisation on a perpetual basis.

Existing operators may also receive perpetual validity when their licence comes up for renewal if they satisfy certain conditions, including:

• Full compliance with authorisation conditions.
• No major regulatory concerns.
• No adverse reports from RBI departments, regulators or statutory authorities.

What Happens If Conditions Are Not Met?

If an existing payment system operator fails to meet the required standards, RBI may grant only one-year renewals. Failure to rectify deficiencies within a reasonable period may result in withdrawal of authorisation. The RBI also retains powers to impose operational restrictions or revoke the Certificate of Authorisation if an operator becomes non-compliant.

Detailed Process for Voluntary Surrender of Licence

The directions introduce a comprehensive framework for payment system operators wishing to voluntarily surrender their authorisation. A payment system operator intending to stop operations must submit:

• A board resolution approving the surrender.
• Auditor-certified details of escrow accounts and liabilities.
• A detailed Memorandum of Procedure (MoP) for settling liabilities.
• An undertaking that no further payment system operations will be conducted during the surrender process.

Mandatory Customer Protection Measures

If any payment operater decides to close its operations then before closure of operations, operators must inform stakeholders through SMS messages, Email communication, In-app notifications and Public notices in English, Hindi and local languages.

Public notices must clearly explain:

• How customers can claim refunds.
• Methods for submitting claims.
• Contact details of the nodal officer.
• Timelines for repayment.

The operator must also submit monthly progress reports to RBI regarding settlement of liabilities.

Settlement of Customer Liabilities

The RBI has emphasized that all liabilities must be cleared before authorisation is surrendered. These liabilities may include:

• Customer balances.
• Merchant dues.
• Agent payments.
• Bank settlements.
• Chargebacks.
• Disputed transactions.

After liabilities are extinguished, the operator must submit an auditor-certified “No Liability Certificate.”

Special Provision for Unsettled Liabilities

If liabilities cannot be fully extinguished, the entity must keep the remaining escrow funds intact for three years after cancellation of authorisation. The amount cannot be treated as income or transferred to the profit and loss account during this period. Customers and merchants can continue to make valid claims during these three years. The RBI will also issue a public notification informing stakeholders about their right to claim dues.

Surrender Process for Non-Operational Entities

Entities that obtained authorisation but never commenced payment system operations can also voluntarily surrender their licence. Such entities must submit:

• Board resolution.
• Auditor certificate confirming no operations were started.
• Latest audited balance sheet.
• Supporting documents.

After RBI accepts the request, the original Certificate of Authorisation must be returned for cancellation.

RBI Introduces One-Year Cooling Period

The RBI has retained and strengthened provisions relating to cooling-off periods. A one-year cooling period may be imposed in cases where:

• Authorisation is revoked.
• Licence renewal is denied.
• Authorisation is voluntarily surrendered.
• Application for authorisation is rejected.
• New entities are promoted by persons associated with such cases.

During the cooling period, entities cannot apply for authorisation to operate any payment system. However, RBI may waive or shorten the cooling period in exceptional circumstances.

Click here to download RBI new circular on Authorisation to operate a Payment System