(1) The payment obligations and settlement instructions among the system participants shall be determined in accordance with the gross or netting procedure, as the case may be, approved by the Reserve Bank while issuing authorisation to a payment system 1[under section 7, or, such gross or netting procedure as may be approved by it under any other provisions of this Act].
(2) Where the rules providing for the operation of a payment system indicates a procedure for the distribution of losses between the system participants and the payment system, such procedure shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force.
(3) A settlement effected under such procedure shall be final and irrevocable.
2[(4) Where, by an order of a court, Tribunal or authority–
(a) a system participant is declared as insolvent or is dissolved or wound up; or
(b) a liquidator or receiver or assignee (by whatever name called), whether provisional or otherwise, is appointed in a proceeding relating to insolvency or dissolution or winding up of a system participant,
then, notwithstanding anything contained in the Banking Regulation Act,1949 (10 of 1949) or the Companies Act,1956 (1 of 1956) or the Companies Act, 2013 (18 of 2013) 3[or the Insolvency and Bankruptcy Code, 2016] or any other law for the time being in force, such order shall not affect any settlement that has become final and irrevocable prior to such order or immediately thereafter, and the right of the system provider to appropriate any collaterals contributed by the system participants towards its settlement or other obligations in accordance with the rules, regulations or bye-laws relating to such system provider.]
4[(5) Where an order referred to in sub-section (4) is made with respect to a central counter party, then, notwithstanding such order or anything contained in the Banking Regulation Act, 1949 (10 of 1949) or the Companies Act,1956 (1 of 1956) or the Companies Act, 2013 (18 of 2015) 3[or the Insolvency and Bankruptcy Code, 2016] or any other law for the time being in force, the payment obligations and settlement instructions between the central counter party and the system participants including those arising from transactions admitted for settlement at a future date, shall be determined forthwith by such central counter party in accordance with the gross or netting procedure, as the case may be, approved by the Reserve Bank, while issuing authorisation or under any other provisions of this Act, and such determination shall be final and irrevocable.
(6) Notwithstanding anything contained in the Banking Regulation Act, 1949 (10 of 1949) or the Companies Act, 1956 (1 of 1956) or the Companies Act, 2013 (18 of 2013) 3[or the Insolvency and Bankruptcy Code, 2016] or any other law for the time being in force, the liquidator or receiver or assignee (by whatever name called) of the central counter party, whether appointed as provisional or otherwise, shall–
(a) not re-open any determination that has become final and irrevocable;
(b) after appropriating in accordance with the rules, regulations or bye-laws of the central counter party, the collaterals provided by the system participants towards their settlement or other obligations, return the collaterals held in excess to the system participants concerned.]
5[Explanation 1].–For the removal of doubts, it is hereby declared that the settlement, whether gross or net, referred to in this section is final and irrevocable as soon as the money, securities, foreign exchange or derivatives or other transactions payable as a result of such settlement is determined, whether or not such money, securities or foreign exchange or derivatives or other transactions is actually paid.
6[Explanation 2].–For the purposes of this section, the expression “central counter party” means a system provider who by way of novation interposes between system participants in the transactions admitted for settlement, thereby becoming the buyer to every seller and the seller to every buyer, for the purpose of effecting settlement of their transactions.]
1. Ins. by Act 18 of 2015, s. 3 (w.e.f. 1-6-2015).
2. Subs. by s. 3, ibid., for sub-section (4) (w.e.f. 1-6-2015).
3. Ins. by Act 31 of 2016, s. 253 and the Ninth Schedule (w.e.f. 15-11-2016).
4. Ins. by s. 3, ibid. (w.e.f. 1-6-2015).
5. Existing Explanation numbered as Explanation 1 by s. 3, ibid. (w.e.f. 1-6-2015).
6.The Explanation 2 ins. by s. 3, ibid. (w.e.f. 1-6-2015).
Simplified Explanation
Section 23 of the Payment and Settlement Systems Act, 2007 provides the legal framework for the settlement and netting of payment obligations between system participants. It outlines the procedures, rules, and protections for settling transactions within a payment system, emphasizing the finality and irrevocability of settlements.
Key Provisions of Section 23:
- Payment Obligations and Settlement Procedure (Subsection 1):
- Gross or Netting Procedure: The settlement obligations and procedures (whether gross settlement or netting) between system participants are determined according to the procedures approved by the Reserve Bank when granting authorisation to a payment system under Section 7 of the Act. This ensures uniformity and regulatory oversight in the operational mechanics of payment systems.
- Approved Procedures: The procedure for how payment obligations are settled must be explicitly approved by the Reserve Bank. The method used (whether gross or netting) has significant implications for how payments are processed and finalised between system participants.
- Distribution of Losses (Subsection 2):
- If the payment system’s rules provide a loss distribution procedure among participants, that procedure shall take precedence over any contrary provision in other laws. This allows the payment system to manage financial risks, including losses, in a way that aligns with its rules, regardless of other legal frameworks.
- Finality and Irrevocability of Settlements (Subsection 3):
- Final and Irrevocable: Any settlement completed under the prescribed procedure is final and irrevocable once it is carried out. This prevents reversals or disputes over completed settlements, ensuring certainty in the transaction settlement process.
- Insolvency or Winding-up of System Participants (Subsection 4):
- Effect of Court Orders: If a system participant is declared insolvent, dissolved, or wound up by a court, tribunal, or authority, the settlement made before or immediately after the order becomes final and irrevocable. This includes any collaterals provided by the system participants.
- Legal Protection for Settlements: The section clarifies that the insolvency or liquidation of a system participant will not affect any settlements that were finalised before the order or immediately thereafter, even if other laws like the Banking Regulation Act, Companies Act, or Insolvency and Bankruptcy Code suggest otherwise.
- Protection of Collaterals: The right to appropriate collaterals provided by system participants remains unaffected, allowing the payment system to use these funds towards settlement or other obligations as per the system’s rules.
- Impact on Central Counter Party (Subsections 5 and 6):
- Central Counter Party: A central counter party (CCP) is defined as a system provider who interposes between system participants to facilitate settlement through novation. This ensures that the CCP becomes the buyer to every seller and the seller to every buyer for settlement purposes.
- Settlement and Netting for CCPs: In the case of an order declaring a CCP participant as insolvent or under liquidation, the payment obligations and settlement instructions between the CCP and system participants (including future transactions) must be immediately determined according to the approved gross or netting procedure, and such settlements are also final and irrevocable.
- Liquidator’s Role: A liquidator or receiver appointed to a CCP cannot reopen a determination that has already become final and irrevocable. They must appropriately handle the collaterals provided by system participants and return any excess collaterals after settling the obligations.
- Explanation of Finality of Settlement (Explanation 1):
- Irrevocability of Settlements: The section clarifies that a settlement is final and irrevocable as soon as the payment (whether in money, securities, foreign exchange, derivatives, or other transactions) is determined. This applies even if the actual payment is not made immediately, ensuring that the settlement process is not delayed or contested based on timing.
- Definition of Central Counter Party (Explanation 2):
- The central counter party (CCP) is defined as a system provider that interposes itself between system participants, thereby assuming the roles of both buyer and seller in the transaction. The CCP is responsible for ensuring that settlements are finalised by managing the risks and obligations associated with the transactions.
Purpose of Section 23:
- Legal Certainty in Settlements: This section provides a strong legal foundation for ensuring that settlements are not contested once made. It enhances the certainty of payments within the payment system, which is critical for maintaining trust and stability in financial markets.
- Protection Against Insolvency: The protection offered to settlements in the event of insolvency or liquidation prevents the disruption of settled obligations, which could otherwise cause significant risks and instability within the payment system.
- Risk Management: The section allows for effective loss distribution among system participants, ensuring that risks are managed according to the rules of the payment system. This is particularly important for systems where multiple participants are involved in complex transactions.
- Collaterals and Settlement: The provisions ensure that collaterals provided by participants are protected and properly utilised in the event of insolvency, thus reducing the systemic risks associated with such events.
Implications for System Providers:
- Strict Adherence to Approved Procedures: System providers must ensure that the gross or netting procedures for settlement are approved by the Reserve Bank and must adhere strictly to these procedures.
- Finality of Settlements: Once a settlement is made, it must be treated as final, and system participants cannot later dispute or reverse it. This requires system providers to implement robust mechanisms for finalising and recording settlements.
- Risk Management Procedures: System providers need to have risk management frameworks in place to address situations of insolvency or liquidation, ensuring that settlements and collaterals are handled according to the law.
In Summary:
Section 23 of the Payment and Settlement Systems Act ensures the finality and irrevocability of settlements made within a payment system. It provides a clear legal framework for handling payment obligations, including procedures for netting, loss distribution, and the impact of insolvency. The section ensures that settlements are protected from disruptions caused by legal proceedings, insolvency, or liquidation, providing certainty and stability to the payment system. Additionally, it defines the role of central counter parties in settlement procedures, enhancing the security and efficiency of the system.
