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Legal Compliances for a FinTech Start-up in India: Best Corporate Lawyer Advice in Delhi NCR

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Legal Compliances for a FinTech Start-up in India: Best Corporate Lawyer Advice in Delhi NCR

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Over the last six years, the Indian FinTech market has grown tremendously and with that, the risk of fraud, data theft, and danger to cybersecurity is also on the rise. Distributed ledger technology (DLT), Blockchain, and crowdfunding are also developing the dangers of frauds and hacks. For this reason and to safeguard the interest of customers, different regulations are outlined by the Indian Government. In this article, those regulations and compliances for Fintech companies are discussed.

Regulations for a FinTech Start-up in India
There is no particular set of laws and regulations governing FinTech services and products in India. The regulations are there but highly fragmented. It means that there is no single Act for that but these regulations are outlined under many applicable Acts. These regulations are following- i.e.

Payment and Settlement Systems Act (2007)– The main legislation governing ‘payments’ in India is the Payment and Settlement Systems Act (2007). It regulates and supervises the financial transactions in India. Prohibition of initiating any payment system (which includes credit card, debit card operations, money transfers, smart card operations, and pre-paid payments [PPIs]) in India without the prior permission of the Reserve Bank of India (RBI) is given under section 4 of this Act. Under this Act, two regulations have been made by the RBI-
1. Board for Regulation and Supervision of Payment and Settlement Systems Regulations, 2008- It is also called BPSS Regulations and it exercises its power on the behalf of RBI. It is empowered for authorizing as well as setting standards for regulations.

2. Payment and Settlement Systems Regulations, 2008 – Also known as PPS Regulations. All the procedural compliances for commencing the payment system are laid down under these regulations.

Regulation of Prepaid Payment Instruments by the RBI– The RBI had issued a number of circulars and other regulations from time to time on the issuance and operation of Pre-paid Instruments (PPIs). RBI in its new PPI Master Directions has prescribed the eligibility criteria for issuing PPIs and according to this Master Directions, only three kinds of PPIs can be issued namely Closed System PPIs, Semi-closed System PPIs, and Open System PPIs. Eligibility criteria for these 3 kinds of PPIs differ and other compliances too.

Regulation of Payment Intermediaries by the RBI– To safeguard the interests of the customers and to ensure that the payments made by them are duly accounted for by the intermediaries receiving such payments, RBI issued Directions For Opening And Operation Of Accounts And Settlement Of Payments For Electronic Payment Transactions Involving Intermediaries (“2009 EPT Directions”). The 2009 EPT Directions define “intermediaries” and according to this definition, intermediaries would include not only payment aggregators and payment gateway service providers, but also electronic commerce and mobile commerce (e-commerce and m-commerce) service providers who provide platforms for facilitating electronic payments.

The 2009 EPT Directions provide that all accounts will be treated as internal accounts of the banks if are opened and maintained by banks for facilitating the collection of payments by intermediaries and hence, such accounts will not be maintained or operated by the intermediaries. Also, these accounts will be subject to concurrent audits and compliance certificates need to be submitted by the banks to the RBI on a quarterly basis. Other compliances given under this master circular need to be followed by the FinTech Companies.

Payment Banks– Payment banks operate as banks but on a smaller scale and have comparatively few functions like cannot advance loans or issue credit cards. These are registered as Private Limited Companies under the Companies Act, 2013. RBI has issued guidelines for licensing of Payment Banks. licensing of Payment Banks. According to these guidelines Payment banks are required to invest a minimum of 75% of their demand deposit balances in Statutory Liquidity Ratio (SLR) and a maximum of 25% of their demand deposit balances must be held in current and time/fixed deposits apart from amounts maintained as Cash Reserve Ratio (CRR) with the RBI.

Non-Banking Financial Company (NBFC) Regulation– Any entity which carries out FinTech business that falls within the prescribed eligibility criteria must register itself with RBI as NBFC. The point to be noted is that no NBFC can commence or carries out the business without obtaining the certificate of registration for RBI and without having a net owned fund of Rs. 25 lakh and not exceeding Rs.1 billion as given under the section 45-IA of the RBI Act.

National Payments Corporation of India (NCPI) Regulations- NCPI issued guidelines– UPI Procedural Guidelines govern the UPI payments in India. As outlined by these guidelines, money transfer services through UPI platforms have to be generated by banks and banks can engage technology providers for these payment transactions.

Compliance with the IT Act 2000– For data security and cybersecurity FinTech companies must comply with the provisions of the Information and Technology Act, 2000. They must ensure customer data security and follow security protocols as prescribed under the said Act.

For smooth operation and gaining the trust of customers, FinTech service providers must comply with the above-mentioned regulations. Non-compliance will lead to disrupting business activities, tarnishing the reputation, dissipating the trust of customers in the company and heavy penalties.
Authored By: Adv. Anant Sharma & Anjali Swami

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