The circular on Regulation of Payment Aggregator – Cross Border (“PA – CB Notification”) has been issued by RBI, on October 31, 2023 (accessible here) to regulate all entities facilitating cross-border payment transactions for import and export of goods and services. The Notification is issued under Section 10(2) read with Section 18 of the Payment and Settlement Systems Act, 2007, and Section 10(4) and Section 11(1) of the Foreign Exchange Management Act (“FEMA”). Further, this directive is meant to be read with the other co-existing laws and does not have an overriding effect. This indicates that approvals, authorizations required under any other law in force, will remain unaffected.

Scope of Application:

While the purview of application of these directives is inclusive, it primarily covers, (a) Authorised Dealer (AD) banks, (b) Payment Aggregator (“PA”), and (c) Payment Aggregators-Cross Border (“PA-CBs”). It defines PA-CBs as entities that facilitate cross-border payment transactions for import and export of permissible goods and services in online mode. The directive specifies that an "escrow account" shall be used by PAs to pool or aggregate the money they collect on behalf of the merchants they onboard.

Authorization Requirement

Authorisation for PA-CB activity may be sought for any one of the following mutually-exclusive categories:

1. Export only PA-CB (“PA-CB-E”)
2. Import only PA-CB (“PA-CB-I”)
3. Export and Import PA-CB (“PA-CB- E&I”)

To facilitate monitoring under the PMLA as well, all non-bank PA-CBs (existing as of the date of this circular) must register with the Financial Intelligence Unit-India as a precursor for obtaining RBI authorization.

Note: For future reference, a single authorization will be required by any non-bank to undertake PA and PA-CB activity. Additionally, not applying for RBI’s authorization would be met with the closure of accounts held by non-banks PA-CB (used for PA-CB activity) by July 31, 2024.

Networth Requirement for entities providing PA-CB services

1. Non-banks providing PA-CB services must have a minimum networth of INR 15 (Indian Rupees fifteen crores)  at the time of submitting their application before RBI, and INR 25 (Indian Rupees twenty-five crores) by March 31, 2026.
2. New non-bank PA-CBs must have a minimum networth of INR 15 (Indian Rupees fifteen crores) at the time of submitting their application before RBI, and a minimum networth of INR 25 (Indian Rupees twenty-five crores) by the end of the third financial year of grant of authorization. Existing non-bank PA-CBs must submit a certificate from their statutory auditor, audited statement of financial accounts, and provisional balance sheet along with their application to substantiate their net-worth.
3. All existing non-bank PA-CBs which either do not apply for authorization in the given time-frame or are not able to comply with the net-worth requirements, must wind up their PA-CB activity by July 31, 2024.

Compliance Requirements

Note: For all entities currently carrying out PA-CB activity, the 2020 PA-PG Guidelines pertaining to governance, merchant on-boarding, customer grievance redressal and dispute management framework, baseline technology recommendations, security, fraud prevention and risk management framework, have to be complied with, within a period of 3 (three) months from date of this circular, i.e. January 31, 2024. Additionally, the compliance should be on an ongoing basis thereafter.

Analysis:

The regulatory instructions issued by the Reserve Bank of India (RBI) concerning Payment Aggregators and Cross-Border (PA-CB) services are intended to, (i) coexist with and complement other Instructions, and not supersede, other guidelines issued by the RBI, (ii) regulate the PA-CB activities of non-bank entities, by bringing these entities under the jurisdiction of the Financial Intelligence Unit-India (as per the Prevention of Money Laundering Act, 2002), and (iii) impose a limit on the maximum value of a single unit of goods or services that can be sold or purchased, which is set at INR 25,00,000 (Indian Rupees twenty-five lakh).

In summary, these instructions appear to be part of an effort to strengthen the regulatory framework around PA-CB services, ensuring compliance with existing laws and preventing money laundering. This move is likely to enhance the security and integrity of cross-border transactions, however at the same time, setting of net-worth requirements and bringing these entities under direct regulation might act as too high a caveat, thereby acting more as an obstruction/hurdle than just an entry barrier.

Please find attached a copy of the Circular.

This update has been contributed by Jitendra Soni and Neha Madan (Partners) and Ojaswini Mandhan (Associate).

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