E-commerce, in recent times, has mushroomed and has now touched all forms of business transactions in the country. Due to the ease, safety, security and convenience provided by electronic payment systems, E-wallets or mobile wallets have taken over the traditional system of payments.
The latest Consolidated Foreign Direct Investment Policy dated June 07, 2016 issued by the Department of Industrial Policy and Promotion defines ‘E-commerce’ as the ‘buying and selling of goods and services including digital products over digital & electronic network [See End Note 1]. Therefore, e-commerce includes within its ambit all forms of electronic wallets (e-wallets) or mobile wallets (m-wallets). Also, E-wallets are a form of Pre-paid Payment Instruments [See End Note 2]. E-wallets permit an individual to carry out any commercial transaction, which may involve online purchasing of goods/ services or purchasing of a product or availing a service, at an outlet. E-wallet stores a person’s credit or debit card details. Since the payment information is securely stored in an e-wallet, the need to carry cash physically has been eliminated [See End Note 3].
Categories of Pre-paid Payment Instruments
Pre-paid Payment Instruments are categorized based on their functioning and operation.
1. Closed System Payment Instruments
These are payment instruments issued by a person for facilitating the purchase of goods or services from him/it. These instruments do not allow cash withdrawal or redemption. As these instruments do not facilitate payments and settlement of third party services, issue and operation of such instruments are not classified as payment systems.
2. Semi-Closed System Payment Instruments
These are payment instruments which can be used for purchase of goods or services, including financial services at a group of clearly identified merchant locations/ establishments which have a specific contract with the issuer to accept the payment instrument. These instruments do not permit cash withdrawal or redemption by the holder [See End Note 4].
3. Open System Payment Instruments.
These are payment instruments which can be used for purchase of all goods and services, including financial services like fund transfer at any card-accepting merchant locations (point of sale terminals) and also permit cash withdrawal at ATM’s/ BC’s [See End Note 5].
4. Semi-closed System Payment Instruments for Mass Transit Systems (PPI-MTS)
The semi-closed payment instruments will be issued by mass transit systems operators (PPI-MTS), after authorization under the Payment and Settlement Systems Act, 2007, to issue and operate such Pre-paid Payment Instruments. The PPI-MTS will necessarily contain the automated fare collection application related to the transit service to qualify as PPI-MTS. Apart from mass transit system, such PPI-MTS can be used only at other merchants whose activities are allied to or are carried on within the premises of the transit system [See End Note 6].
With the rapid growth of e-commerce, e-wallets have become the preferred mode of payment. E-wallets offer an easy and hassle-free means of payment, which in turn provides a competitive advantage over the traditional forms of payment.
Laws applicable to electronic payments in India
Due to rapid growth in the electronic payment system and tremendous increase in the usage of e-wallets, it is necessary to know the regulations governing electronic payments.
1. Payment and Settlement Systems Act, 2007
The Payment and Settlement Systems Act, 2007, deals with all the regulatory aspects pertaining to payment systems in India. This Act empowers the Reserve Bank of India (hereinafter referred to as “RBI”) to serve this purpose. The term “Payment System” has been defined under Section 2(i) of the Payment and Settlement Systems Act, 2007, which “means a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange.”
The term “System Provider” has been defined under Section 2(q) of the Payment and Settlement Systems Act, 2007, as “a person who operates an authorized payment system”. The “System Participant” has been defined under Section 2(p) of the act as “a bank or any other person participating in the payment system and includes the system provider”
2. Payment and Settlement Systems Regulations, 2008
Under the Payment and Settlement Regulations, 2008, the RBI has been authorized to formulate regulations under the powers conferred upon RBI under Section 38 of the Payment and Settlement Systems Act, 2007. Any person or entity who wishes to set up a payment system has to adhere to the provisions of the Payment and Settlement Systems Regulations, 2008. If such an applicant complies with the provisions and if the RBI is satisfied, then RBI may issue an “authorization certificate” to set up the payment system, subject to provisions of Section 7 of the Payment and Settlement Systems Act, 2007. The authorization certificate has been defined under Section 2(c) of the Payment and Settlement Systems Regulations, 2008 as “the certificate containing the authorization issued by the Bank under sub-section (1) of section 7 of the Act” [The Payment and Settlement Systems Act].
Every effort is made by RBI to ensure that the application for obtaining the authorization certificate is finalized within six (6) months from the date of filing such application. If the RBI feels that the application should be refused, then it shall give the applicant a written notice to this effect, stating the same with reasons for such denial. Before refusing any such application, the applicant is given a chance of a hearing before RBI.
The RBI is also authorized to conduct any inquiry, if necessary, to satisfy itself about the information provided by the applicant and any other background details of the applicant, as it thinks are necessary before granting the authorization certificate.
3. RBI Guidelines:
Under Section 38(1) of the Payment and Settlement Systems Act, 2007, the RBI is authorized to formulate all regulations pertaining to Pre-paid Payment Instruments. Banks comply with the eligibility criteria would be permitted to issue all categories of pre-paid payment instruments [See End Note 7]. However, only those banks who have been permitted to provide mobile banking transactions by the RBI shall be permitted to launch mobile-based pre-paid payment instruments (mobile wallets and mobile accounts) [See End Note 8]. Non-banking Financial Companies (hereinafter referred to as “NBFC’s”) and other persons would be permitted to issue only closed and semi-closed system payment instruments, including mobile phone based pre-paid payment instruments [See End Note 9].
The Policy Guidelines issued by the RBI dated July 01, 2014 (further updated on December 03, 2014) defines “Pre-paid Payment Instruments" [See End Note 10] as “payment instruments that facilitate purchase of goods and services, including funds transfer, against the value stored on such instruments.” The value stored on such instruments represents the value paid for by the holders by cash, by debit to a bank account, or by credit card. The pre-paid instruments can be issued as smart cards, magnetic stripe cards, internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers and any such instrument which can be used to access the pre-paid amount [See End Note 11].
The RBI in its Policy Guidelines defines “issuer” as “persons operating the payment systems issuing pre-paid payment instruments to individuals/ organizations.” The money so collected is used by these persons to make payment to the merchants who are part of the acceptance arrangement directly, or through settlement arrangement [See End Note 12].
The term “Holder” has been defined in the Policy Guidelines as “individuals/ organizations who acquire pre-paid payment instruments for purchase of goods and services, including financial services” [See End Note 13].
4. RBI Guidelines for safeguards regarding electronic payments and Know Your Customer (“KYC”) policy
The guidelines pertaining to Know Your Customer (KYC) norms, Anti-Money Laundering (AML) standards and Combating of Financing of Terrorism (CFT) obligations issued by RBI to other banks from time to time, shall apply mutatis mutandis to all persons issuing pre-paid payment instruments [See End Note 14].
The KYC policy includes the following four key elements:
- Customer Acceptance Policy;
- Risk Management;
- Customer Identification Procedures (CIP); and
- Monitoring of Transactions.
- Customer Acceptance Policy: Every bank should develop a clear customer acceptance policy laying down explicit criteria for acceptance of customers [See End Note 15].
- Risk Management: The board of directors of the bank should ensure that an effective KYC program is put in place by establishing appropriate procedures and ensuring their effective implementation. It should cover proper management oversight, systems and controls, segregation of duties, training and other related matters [See End Note 16].
- Customer Identification Procedures (CIP): The policy approved by the board of banks should clearly spell out the customer identification procedure to be carried out at different stages, i.e. while establishing a banking relationship; carrying out a financial transaction or when the bank has a doubt about the authenticity/ veracity or the adequacy of the previously obtained customer identification data [See End Note 17].
- Monitoring of Transactions: Banks should pay special attention to all complex, unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose. Banks may prescribe threshold limits for a particular category of accounts and pay particular attention to transactions which exceed these limits [See End Note 18].
FDI and E-Commerce in India
The latest Consolidated FDI Policy Circular (hereinafter “FDI Policy”) dated June 07, 2016, defines ‘E-Commerce’ as “buying and selling of goods on an electronic network” [See End Note 19].
The FDI Policy further defines an ‘E-Commerce Entity’ as a “company incorporated under the Companies Act 1956 or the Companies Act 2013 or a foreign company covered under section 2(42) of the Companies Act, 2013 or an office, branch or agency in India as provided in section 2 (v) (iii) of FEMA 1999, owned or controlled by a person resident outside India and conducting the e-commerce business”.
The FDI Policy defines ‘Inventory based model of E-commerce’ as “an E-commerce activity where the inventory of goods and services is owned by that particular e-commerce entity and the goods are sold to the customers directly.” [See End Note 20]
The FDI Policy defines ‘Marketplace based model of E-commerce’ as “providing an information technology platform by an e-commerce entity on a digital & electronic network in order to act as a facilitator between buyer and seller.” [See End Note 21]
Entry Routes for Foreign Investment
Investments can be made by non-residents in (i) equity shares; (ii) fully, compulsorily and mandatorily convertible debentures; and (iii) fully, compulsorily and mandatorily convertible preference shares of an Indian company, through the Automatic Route or Government Route. Under the Automatic Route, the non-resident investor or the Indian company does not require prior approval from the Government of India for the investment. Under Government Route, prior approval from the Government of India is required. Proposals for foreign investment under Government Route are considered by Foreign Investment Promotion Board (hereinafter referred to as “FIPB”) [See End Note 22]. The question of automatic route or prior Government approval will come in, depending on the nature of activities to be carried out by the company looking for investment.
[The author is a Joint Partner, Lakshmikumaran & Sridharan, Bengaluru]