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RBI Allows New For-Profit Umbrella Entity For Retail Payments

The last date to apply for a licence is Feb. 26, 2021.

Electronic payment terminals sit on a stool at a gas station in Bengaluru, India. (Photographer: Dhiraj Singh/Bloomberg)
Electronic payment terminals sit on a stool at a gas station in Bengaluru, India. (Photographer: Dhiraj Singh/Bloomberg)

The Reserve Bank of India has issued final guidelines for a new umbrella entity for retail payments systems, which will have an option to operate as a “for-profit” entity.

Payments system operators, and payments and technology service providers with three years of experience are eligible to apply and set up the new pan-India platform, according to the central bank’s notification on its website.

“It’s expected that the [new] umbrella entity shall offer innovative payment systems to include hitherto excluded cross-sections of the society, and which enhances access, customer convenience and safety, and the same shall be distinct yet interoperable,” said the RBI’s ‘Framework for Authorisation of Pan-India Umbrella Entity for Retail Payments’.

The RBI, in February last year, had proposed to create an alternative umbrella organisation for retail payments to prevent monopoly and concentration risk. In a policy paper, the central bank had suggested that the NPCI became ‘too big to fail’.

The last date to apply for a licence is Feb. 26, 2021.

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Scope Of Activities

Any retail payments solutions created by the new umbrella entity or entities should interact and be interoperable with existing systems operated by the National Payments Corporation of India, the RBI said. That means the new entity will compete on developing new retail payments technology and not necessarily replace payments platforms operated by the incumbent.

The NPCI, set up in 2008, currently dominates the retail payments space and operates more than 12 such platforms, including the Unified Payments Interface, Bharat Bill Payments and FASTag, among others.

The alternative umbrella entity can set-up, manage and operate new retail payment systems related to automated-teller-machines, white-label point-of-sale devices, Aadhaar-based payments and remittances services. It can also work on new forms of payments and develop new standards and technologies, the RBI said.

The new entity, according to the RBI’s guidelines, should be able to operate clearing and settlement systems for banks and non-banks that participate and manage various risks like settlement, credit, liquidity and operational risks.

The entity will also be tasked with monitoring domestic and international developments in retail payments to avoid shocks, frauds and contagions that can affect the system or the economy.

The applicants for the new umbrella entity can participate in the RBI’s payments and settlement systems by opening a current account with the central bank if required, the framework said. Once the apex bank grants an in-principle approval to the applicant, the umbrella entity will be required to commence operations within six months, extendable up to a maximum of one year.

Ownership Rules

While the new umbrella entity will be authorised under the Payment and Settlement Systems Act, 2007 and has to be incorporated under the Companies Act, 2013, the RBI said applicants can choose to operate as a profit-making entity.

The minimum paid-up capital of the entity has been set at Rs 500 crore and a minimum net worth of Rs 300 crore has to be maintained at all times, the central bank said.

The promoter/promoter group entity should be owned and controlled by resident Indians. No single promoter/promoter group can invest more than 40% of the paid-up capital. Any entity holding more than 25% of the paid-up capital will be deemed as promoter, the guidelines said.

At the time of application, an applicant has to demonstrate a capital contribution of not less than 10% of the total capital of the umbrella entity, with the balance capital available at the time of commencing operations, it said. After five years from the date of commencing operations as an umbrella entity, the promoter or promoter group can dilute shareholding to a minimum of 25%.

Also, any foreign direct/portfolio investment in the applicant entity should comply with the Foreign Exchange Management Act rules, the central bank said.

While the umbrella entity has to follow corporate governance norms set by the RBI, the central bank retains the right to approve the appointment of directors and nominate a member on the entities’ board.

At the time of making the application, an applicant must prepare a detailed business plan listing the payment systems proposed to be developed and operated, including details about the technology, market analysis and proposed scale of operations.