The Reserve Bank of India (“RBI”), vide notification dated August 27, 2021 (“Notification”), issued the Master Directions on Prepaid Payment Instruments (“Master Directions”) in place of the erstwhile Master Directions on Issuance and Operation of Prepaid Payment Instruments dated October 11, 2017 (“2017 Master Directions”).
A brief overview of the key changes brought about in the Master Directions are as follows:
1. Classification of Prepaid Payment Instruments (PPIs)
a) Earlier, the 2017 Master Directions classified the PPIs into 3 (three) categories - Closed System PPIs which could be issued by anyone and did not require an approval from the RBI, Semi-closed System PPIs which could be issued by banks or non-banks but did not provide cash withdrawal facility and Open System PPIs which could only be issued by banks and allowed cash withdrawals.
b) The Master Directions have now classified the PPIs into the following 3 (three) categories – Closed System PPIs, Small PPIs and Full-KYC PPIs. While Closed System PPIs are essentially the same, Small PPIs and Full-KYC PPIs are similar to Semi-Closed System PPIs and Open System PPIs respectively, albeit with some differences. Small PPIs can be issued by banks and non-banks after obtaining minimum details of the PPI holder and can be used only for purchase of goods and services. Full-KYC PPIs can be issued by banks and non-banks after completing Know Your Customer (KYC) of the PPI holder and can be used for purchase of goods and services, funds transfer or cash withdrawal.
2. Certificate of Authorisation
a) Earlier, under the 2017 Master Directions, an entity had to provide satisfactory audit report and net-worth certificate to obtain the Certificate of Authorisation for setting up payment systems for issuance of PPIs. Under the Master Directions, the issuance of the Certificate of Authorisation is also subject to receipt of satisfactory due diligence report by the RBI.
b) Under the 2017 Master Directions, the Certificate of Authorisation was valid for a period of 5 (five) years. Under the Master Directions, it has been provided that the Certificate of Authorisation shall be granted on a perpetual basis subject to compliance with certain conditions.
c) The Master Directions have also introduced the concept of ‘cooling period’ which provides that entities shall be prohibited from submission of applications for operating any payment system under the Payment and Settlement Systems Act, 2007 (“Act”) in the following situations:
i) PPI issuer whose Certificate of Authorisation is revoked or not renewed for any reason; or
ii) Certificate of Authorisation is voluntarily surrendered for any reason; or
iii) Application for authorisation has been rejected by the RBI; or
iv) New entities that are set-up by promoters involved in any of the above categories.
3. Permission to use INR denominated PPIs for cross-border outward transactions
Earlier, under the 2017 Master Directions, both KYC compliant Semi-closed System PPIs and Open System PPIs could be used in cross-border outward transactions. However, under the Master Directions, only the Full KYC PPIs can be used for such transactions.
4. Requirement to maintain Current Account with the RBI
Earlier, under the 2017 Master Directions, a non-bank PPI issuer was required to maintain its outstanding balance in an escrow account with a scheduled commercial bank. Under the Master Directions, a non-bank PPI issuer, which is a member of Centralised Payments Systems operated by the RBI, is also required to maintain a current account with the RBI.
5. Additional Safety Norms
Under the Master Directions, PPI issuers are mandated to put in place a Two Factor Authentication (2FA) in case of all wallet transactions involving debit to the wallet (except for PPIs issued under PPI- for Mass Transit Systems and gift PPIs). In addition to this, the PPI issuers are mandated to send alerts even in the case of offline transactions.
6. Other Key Changes
a) The Master Directions provide that a government department/ ministry can also be a co-branding partner.
b)Earlier, under the 2017 Master Directions, banks and non-banks, after obtaining the non-objection certificate under the Act, could apply to the Department of Payment and Settlement Systems within a period of 45 (forty-five) days of obtaining the aforesaid non-objection certificate. Under the Master Directions, the aforesaid period has been reduced to 30 (thirty) days.
This update has been contributed by Aastha (Partner) and Vansh Aggarwal (Associate).
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