(1) No person, other than the Reserve Bank, shall commence or operate a payment system except under and in accordance with an authorisation issued by the Reserve Bank under the provisions of this Act:
Provided that nothing contained in this section shall apply to–
(a) the continued operation of an existing payment system on commencement of this Act for a period not exceeding six months from such commencement, unless within such period, the operator of such payment system obtains an authorisation under this Act or the application for authorisation made under section 7 of this Act is refused by the Reserve Bank;
(b) any person acting as the duly appointed agent of another person to whom the payment is due;
(c) a company accepting payments either from its holding company or any of its subsidiary companies or from any other company which is also a subsidiary of the same holding company;
(d) any other person whom the Reserve Bank may, after considering the interests of monetary policy or efficient operation of payment systems, the size of any payment system or for any other reason, by notification, exempt from the provisions of this section.
(2) The Reserve Bank may, under sub-section (1) of this section, authorise a company or corporation to operate or regulate the existing clearing houses or new clearing houses of banks in order to have a common retail clearing house system for the banks throughout the country:
Provided, however, that not less than fifty-one per cent. of the equity of such company or corporation shall be held by public sector banks.
“Explanation”.–For the purposes of this clause, “public sector banks” shall include a “corresponding new bank”, “State Bank of India” and “subsidiary bank” as defined in section 5 of the Banking Regulation Act, 1949 (10 of 1949).
Simplified Explanation
Section 4 of the Payment and Settlement Systems Act, 2007 governs the operation of payment systems in India. It specifies that no person or entity, other than the Reserve Bank of India (RBI), is allowed to commence or operate a payment system without obtaining authorization from the RBI. Here’s a detailed explanation of this section:
Key Provisions of Section 4:
1. Authorization Requirement:
- No person (individual, company, or other entity), except the Reserve Bank of India, can commence or operate a payment system unless they receive authorization from the RBI under the provisions of this Act.
- This means that any entity wishing to operate a payment system must first apply to the RBI and obtain approval before offering payment services such as electronic funds transfer, clearing, and settlement.
2. Exemptions from Authorization:
- The section provides specific exemptions where the requirement for authorization does not apply:
(a) Continued operation of existing payment systems:- Any existing payment system that was already in operation before the commencement of this Act can continue operating for a maximum period of six months after the Act comes into force.
- During this period, the operator of the system must obtain authorization from the RBI. If the operator fails to do so or if the RBI rejects the application, they must cease operations after the six-month period.
- (b) Agents acting on behalf of another person:
- If a person is acting as the agent of another person to whom a payment is due, they do not need authorization. This is typically applicable in cases like money transfers or payment intermediaries.
- (c) Internal payments between related companies:
- A company that accepts payments only from its holding company, subsidiary, or other companies within the same group (i.e., companies that are part of the same holding company) does not require authorization. This provision is meant to facilitate internal transfers within corporate groups without imposing unnecessary regulation.
- (d) Exemption by the Reserve Bank:
- The RBI has the power to exempt any person or system from the requirements of this section based on factors such as the size of the payment system, its impact on monetary policy, or its efficient operation.
- If the RBI considers that a system does not pose risks to the broader economy or payment infrastructure, it may grant an exemption via a notification in the Official Gazette.
3. Authorization for Clearing Houses:
- The RBI may also authorize a company or corporation to operate or regulate clearing houses for banks. This is to ensure there is a common retail clearing house system for all banks in the country.
- For such a company or corporation, at least 51% of its equity must be held by public sector banks. This ensures that public sector banks have majority control over these key infrastructure entities, which play a crucial role in clearing and settling payments across the banking system.
- The term public sector banks includes:
- State Bank of India (SBI)
- Subsidiary banks of SBI
- Corresponding new banks (banks formed after nationalization under the Banking Regulation Act, 1949).
Summary:
Section 4 of the Payment and Settlement Systems Act, 2007:
- Requires authorization from the RBI to operate a payment system.
- Provides exemptions for certain cases, such as:
- Existing systems operating for up to six months post-commencement of the Act.
- Agents acting on behalf of others for payment.
- Internal payments within corporate groups.
- Systems exempted by the RBI based on specific criteria.
- Allows the RBI to authorize a company or corporation to operate clearing houses for retail payments, with a majority of equity held by public sector banks.
This section is essential for ensuring that payment systems in India operate under regulated conditions, reducing the risk of financial instability and promoting safe and efficient payment infrastructure.
