Payment and Settlement Systems Act: Section 2 – Definitions

(1) In this Act, unless the context otherwise requires,–

(a) “bank” means,–

(i) a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);

(ii) a post office savings bank;

(iii) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);

(iv) a co-operative bank as defined in clause (cci) of section 5, as inserted by section 56 of the Banking Regulation Act, 1949 (10 of 1949); and

(v) such other bank as the Reserve Bank may, by notification, specify for the purposes of this Act;

(b)”derivative” means an instrument, to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, credit rating or credit index, price of securities (also called “underlying”), or any other underlying or a combination of more than one of them and includes interest rate swaps, forward rate agreements, foreign currency swaps, foreign currency rupee swaps, foreign currency options, foreign currency rupee options or any other instrument, as may be specified by the Reserve Bank from time to time;

(c) “electronic funds transfer” means any transfer of funds which is initiated by a person by way of instruction, authorisation or order to a bank to debit or credit an account maintained with that bank through electronic means and includes point of sale transfers, automated teller machine transactions, direct deposits or withdrawal of funds, transfers initiated by telephone, internet and card payment;

(d) “gross settlement system” means a payment system in which each settlement of funds or securities occurs on the basis of separate or individual instructions;

1[(da) “issuer” means a person who issues a legal entity identifier or such other unique identification (by whatever name called), as may be specified by the Reserve Bank from time to time;

(db) “legal entity identifier” means a unique identity code assigned to a person by an issuer for the purpose of identifying that person in such derivatives or financial transactions, as may be specified by the Reserve Bank from time to time;]

(e) “netting” means the determination by the system provider of the amount of money or securities, due or payable or deliverable, as a result of setting off or adjusting, the payment obligations or delivery obligations among the system participants, including the claims and obligations arising out of the termination by the system provider, on the insolvency or dissolution or winding up of any system participant or such other circumstances as the system provider may specify in its rules or regulations or bye-laws (by whatever name called), of the transactions admitted for settlement at a future date so that only a net claim be demanded or a net obligation be owned;

(f) “notification” means a notification published in the Official Gazette;

(g) “payment instruction” means any instrument, authorisation or order in any form, including electronic means, to effect a payment,–

(i) by a person to a system participant; or

(ii) by a system participant to another system participant;

(h) “payment obligation” means an indebtedness that is owned by one system participant to another system participant as a result of clearing or settlement of one or more payment instructions relating to funds, securities or foreign exchange or derivatives or other transactions;

(i) “payment system” 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.

Explanation.–For the purposes of this clause, “payment system” includes the systems enabling credit card operations, debit card operations, smart card operations, money transfer operations or similar operations;

(j) “prescribed” means prescribed by regulations made under this Act;

(k) “regulation” means a regulation made under this Act;

(l) “Reserve Bank” means the Reserve Bank of India, constituted under the Reserve Bank of India Act, 1934 (2 of 1934);

(m) “securities” means the Government securities as defined in the Public Debt Act, 1944 (18 of 1944) or such other securities as may be notified by the Central Government from time to time under that Act;

(n) “settlement” means settlement of payment instructions and includes the settlement of securities, foreign exchange or derivatives or other transactions which involve payment obligations;

(o) “systemic risk” means the risk arising from–

(i) the inability of a system participant to meet his payment obligations under the payment system as and when they become due; or

(ii) any disruption in the system,

which may cause other participants to fail to meet their obligations when due and is likely to have an impact on the stability of the system:

Provided that if any doubt or difference arises as to whether a particular risk is likely to have an impact on the stability of the system, the decision of the Reserve Bank shall be final;

(p) “system participant” means a bank or any other person participating in a payment system and includes the system provider;

(q) “system provider” means a person who operates an authorised payment system;

3[(r) “trade repository” means a person who is engaged in the business of collecting, collating, storing, maintaining, processing or disseminating electronic records or data relating to such derivatives or financial transactions, as may be specified by the Reserve Bank from time to time.]

(2) Words and expressions used, but not defined in this Act and defined in the Reserve Bank of India Act, 1934 (2 of 1934) or the Banking Regulation Act, 1949 (10 of 1949), shall have the meanings respectively assigned to them in those Acts.

1. Ins. by Act 18 of 2015, s. 2 (w.e.f. 1-6-2015).

2. Ins. by Act 18 of 2015, s. 2 (w.e.f. 1-6-2015).

Simplified Explanation

Section 2 of the Payment and Settlement Systems Act, 2007 contains a detailed list of definitions that are crucial for understanding the terms used throughout the Act. Let’s break down the key definitions provided:

Key Definitions

1. Bank:
   • This includes several types of financial institutions:
     • Banks listed in the Second Schedule of the Reserve Bank of India Act, 1934 (which includes commercial banks).
     • Post office savings banks.
     • Banking companies as defined under the Banking Regulation Act, 1949.
     • Co-operative banks as defined under the Banking Regulation Act, 1949.
     • Other banks as specified by the Reserve Bank of India (RBI).
2. Derivative:
   • A derivative is a financial instrument whose value is based on an underlying asset or index, such as interest rates, foreign exchange rates, or securities prices. Examples include:
     • Interest rate swaps
     • Foreign currency options and swaps
     • Forward rate agreements
3. Electronic Funds Transfer (EFT):
   • A method of transferring funds electronically, such as:
     • Point of Sale (POS) transactions
     • ATM withdrawals
     • Direct deposits or withdrawals
     • Transfers initiated via telephone, internet, or card payments.
4. Gross Settlement System:
   • A payment system where each transaction is settled individually, without offsetting or netting with other transactions.
5. Issuer:
   • A legal entity or person that issues a legal entity identifier (LEI) or other unique identifiers used in financial or derivative transactions.
6. Legal Entity Identifier (LEI):
   • A unique code assigned to a legal entity for identification in financial transactions or derivatives.
7. Netting:
   • The process of determining the net amount owed or deliverable after setting off or adjusting obligations among system participants. It may occur in the case of insolvency or other circumstances, as per the system rules.
8. Notification:
   • Refers to official notifications published in the Official Gazette.
9. Payment Instruction:
   • An instruction, authorization, or order for making a payment. This can be in various forms, including electronic means, to transfer funds between system participants.
10. Payment Obligation:
    • The amount a system participant owes to another as a result of the settlement of one or more payment instructions, covering obligations in funds, securities, or derivatives.
11. Payment System:
    • A system facilitating payments between a payer and a beneficiary, involving clearing, settlement, or payment services. It includes operations like credit/debit cards, smart cards, money transfers, etc., but does not include stock exchanges.
12. Prescribed:
    • Refers to any action or requirement prescribed by regulations made under this Act.
13. Regulation:
    • Regulations made under the Payment and Settlement Systems Act itself.
14. Reserve Bank:
    • The Reserve Bank of India (RBI), as defined under the Reserve Bank of India Act, 1934.
15. Securities:
    • Refers to Government securities as per the Public Debt Act, 1944, or other securities specified by the Central Government.
16. Settlement:
    • The process of settling payment instructions, including payments related to securities, foreign exchange, derivatives, and other transactions.
17. Systemic Risk:
    • The risk of failure in the payment system, either due to a participant’s inability to meet its payment obligations or due to system disruptions. It can lead to broader instability within the payment system.
18. System Participant:
    • A bank or any other entity participating in the payment system, including the system provider.
19. System Provider:
    • The entity that operates and manages an authorized payment system.
20. Trade Repository (Added in 2015):
    • A person or entity involved in the business of collecting, storing, and disseminating data related to derivatives or financial transactions, as specified by the Reserve Bank.

Interpretation of Undefined Terms:

• If a term is not explicitly defined in the Act, its meaning is taken from the definitions in the Reserve Bank of India Act, 1934 or the Banking Regulation Act, 1949.

Summary:

This section is important because it clarifies the key terms used throughout the Act, providing a clear framework for the operation of payment and settlement systems in India. Understanding these definitions is crucial for interpreting the subsequent provisions of the Act, as they define the entities involved, the types of transactions covered, and the risks associated with these systems.