Section 2 – Definitions

Section 2 of the Payment and Settlement Systems Act, 2007 defines the important terms used throughout the Act. These definitions help in understanding the provisions of the Act clearly.

(a) Bank

A bank means:

A bank listed in the Second Schedule of the Reserve Bank of India Act, 1934 (Scheduled Bank).
A Post Office Savings Bank.
A Banking Company under the Banking Regulation Act, 1949.
A Co-operative Bank under the Banking Regulation Act, 1949.
Any other bank notified by the Reserve Bank of India (RBI).

Simple Meaning:
A bank includes scheduled banks, post office savings banks, banking companies, co-operative banks, and any other bank notified by the RBI.

(b) Derivative

A derivative is a financial contract whose value depends on another asset, such as:

Interest rates
Foreign exchange rates
Credit ratings
Securities
Other financial assets

Examples:

Interest Rate Swap
Forward Rate Agreement
Currency Swap
Currency Option

Simple Meaning:
A derivative is a financial instrument whose value changes according to another financial asset or market value.

(c) Electronic Funds Transfer (EFT)

Electronic Funds Transfer means transferring money electronically based on the customer’s instructions.

Examples include:

NEFT
RTGS
IMPS
UPI
ATM transactions
POS (Point of Sale) payments
Internet banking
Mobile banking
Direct deposits
Card payments

Simple Meaning:
Electronic Funds Transfer is the transfer of money electronically without using cash or cheques.

(d) Gross Settlement System

A Gross Settlement System settles every payment individually.

Each transaction is settled separately without combining it with other transactions.

Example: RTGS

Simple Meaning:
Each payment is settled one by one immediately.

(da) Issuer

An Issuer is a person or organization that issues a Legal Entity Identifier (LEI) or any other unique identification specified by the RBI.

Simple Meaning:
An issuer provides unique identification codes to businesses or entities.

(db) Legal Entity Identifier (LEI)

A Legal Entity Identifier (LEI) is a unique identification number assigned to a business or legal entity for financial transactions.

Simple Meaning:
LEI is a unique ID used to identify companies in financial transactions.

(e) Netting

Netting means adjusting all mutual payment obligations between participants and calculating only the final amount payable or receivable.

Instead of making several payments, only the net amount is settled.

Simple Meaning:
Netting combines multiple payments into one final payment.

(f) Notification

A Notification means a notice officially published in the Official Gazette.

Simple Meaning:
An official government announcement published in the Gazette.

(g) Payment Instruction

A Payment Instruction means any instruction, authorization, or order to make a payment.

It may be:

Written
Electronic
Digital

Simple Meaning:
A payment instruction is an order to transfer money.

(h) Payment Obligation

A Payment Obligation means the amount that one participant is legally required to pay another participant after clearing or settlement.

Simple Meaning:
It is the money that one participant owes another.

(i) Payment System

A Payment System is a system that enables money to be transferred from a payer to a beneficiary through clearing, payment, or settlement services.

It includes:

Credit card systems
Debit card systems
Smart card systems
Money transfer systems
Similar electronic payment systems

It does not include a Stock Exchange.

Simple Meaning:
A payment system is a system used to transfer money between two parties.

(j) Prescribed

Prescribed means prescribed by the regulations made under this Act.

Simple Meaning:
Anything specified in the Regulations under the Act.

(k) Regulation

A Regulation means any regulation made under the Payment and Settlement Systems Act, 2007.

Simple Meaning:
Rules made under the Act.

(l) Reserve Bank

Reserve Bank means the Reserve Bank of India (RBI) established under the RBI Act, 1934.

Simple Meaning:
India’s central bank.

(m) Securities

Securities include:

Government Securities
Any other securities notified by the Central Government

Simple Meaning:
Financial instruments such as Government bonds and notified securities.

(n) Settlement

Settlement means completing payment obligations after processing payment instructions.

It includes settlement relating to:

Funds
Securities
Foreign exchange
Derivatives

Simple Meaning:
Settlement is the final transfer of money or securities between parties.

(o) Systemic Risk

Systemic Risk means the risk that:

One participant fails to make payment on time, or
A disruption in the payment system causes other participants to fail,

thereby affecting the stability of the financial system.

If there is any dispute regarding systemic risk, the RBI’s decision is final.

Simple Meaning:
Systemic risk is the risk that one failure can affect the entire payment system.

(p) System Participant

A System Participant means:

A bank, or
Any other person participating in a payment system,

including the System Provider.

Simple Meaning:
Anyone who participates in a payment system.

(q) System Provider

A System Provider is a person or organization that operates an authorized payment system.

Examples:

NPCI
Card payment operators
Authorized payment service providers

Simple Meaning:
The organization that manages and operates a payment system.

(r) Trade Repository

A Trade Repository is an organization that collects, stores, maintains, processes, and shares electronic records of derivatives and other financial transactions as specified by the RBI.

Simple Meaning:
A trade repository keeps electronic records of financial transactions.

Section 2(2): Words Not Defined in the Act

If any word or expression is not defined in the Payment and Settlement Systems Act, 2007, but is defined in:

the Reserve Bank of India Act, 1934, or
the Banking Regulation Act, 1949,

then it will have the same meaning as given in those Acts.

Simple Meaning:
If a term is not explained in the PSS Act, its meaning will be taken from the RBI Act, 1934 or the Banking Regulation Act, 1949.

Section 3 – Designated Authority

Purpose of Section 3

Section 3 of the Payment and Settlement Systems Act, 2007 designates the Reserve Bank of India (RBI) as the authority responsible for regulating and supervising all payment systems in India. It also provides for the establishment and composition of the Payments Regulatory Board (PRB), through which the RBI exercises its powers under the Act.

Section 3(1) – RBI as the Designated Authority

The Reserve Bank of India (RBI) is the designated authority for regulating and supervising all payment systems in India under this Act.

Simple Meaning

RBI is the main regulator of payment systems in India.
It ensures that payment systems operate safely, securely, and efficiently.
Every authorized payment system works under the supervision of the RBI.

Section 3(2) – Payments Regulatory Board (PRB)

The RBI performs its powers, functions, and duties under the Act through a Board called the Payments Regulatory Board (PRB).

Simple Meaning

The RBI carries out its responsibilities through the Payments Regulatory Board.
The PRB helps regulate and supervise payment and settlement systems in India.

Section 3(3) – Composition of the Payments Regulatory Board

The Payments Regulatory Board (PRB) consists of the following members:

Member	Position
Governor of the RBI	Chairperson (Ex-officio)
Deputy Governor of the RBI (In charge of Payment and Settlement Systems)	Member (Ex-officio)
One Officer of the RBI nominated by the Central Board	Member (Ex-officio)
Three Persons nominated by the Central Government	Members

Simple Meaning

The PRB has six members:

Governor of RBI – Chairperson.
Deputy Governor (Payment and Settlement Systems).
One RBI Officer nominated by the Central Board.
Three members nominated by the Central Government.

Meaning of Ex-officio

Ex-officio means a person becomes a member because of the office or position they hold, not through a separate appointment.

Example:
The Governor of the RBI is automatically the Chairperson of the Payments Regulatory Board because he or she holds the office of Governor.

Section 3(4) – Powers and Functions of the Board

The powers and functions of the Payments Regulatory Board, as well as matters relating to:

Meetings of the Board,
Time and place of meetings,
Procedure to be followed,
Quorum (minimum number of members required for a meeting),
Other related matters,

shall be prescribed by the rules or regulations made under the Act.

Simple Meaning

The Act provides that the detailed working of the PRB, including its meetings, procedures, quorum, and functions, will be governed by the prescribed rules and regulations.

Chapter III – Authorisation of Payment Systems

Simple Notes

Chapter III explains the procedure for obtaining authorization from the Reserve Bank of India (RBI) before operating a payment system in India. It also describes the application process, inquiry by the RBI, and the conditions for granting or refusing authorization.

Section 4 – Payment System Not to Operate Without Authorisation

Purpose of Section 4

Section 4 makes it mandatory for every person or organization (except the RBI) to obtain prior authorization from the Reserve Bank of India (RBI) before starting or operating a payment system.

Section 4(1) – Prior Authorisation is Mandatory

No person, except the Reserve Bank of India, can commence or operate a payment system unless authorized by the RBI under the Act.

Simple Explanation

RBI does not require authorization because it is the regulator.
Every other person or organization must first obtain RBI approval.
Operating a payment system without RBI authorization is not permitted.

Exceptions to Section 4(1)

The following are exempt from obtaining authorization:

(a) Existing Payment Systems

A payment system already operating when the Act came into force could continue for up to six months.

However, within six months:

It must obtain RBI authorization, or
If its application is rejected, it must stop operating.

Simple Meaning:
Existing payment systems were given six months to obtain RBI approval.

(b) Duly Appointed Agents

A person acting only as an authorized agent to collect payments on behalf of another person does not require separate authorization.

Example:
An insurance collection agent receiving premium on behalf of an insurance company.

(c) Intra-Group Company Payments

Authorization is not required where payments are made:

Between a holding company and its subsidiary.
Between subsidiaries of the same holding company.

Simple Meaning:
Payments within the same corporate group are exempt.

(d) RBI Exemptions

The RBI may exempt any person from obtaining authorization by issuing a notification if it considers:

Monetary policy.
Efficient operation of payment systems.
Size of the payment system.
Any other relevant reason.

Simple Meaning:
The RBI has the power to grant exemptions in appropriate cases.

Section 4(2) – Authorisation of Clearing Houses

The RBI may authorize a company or corporation to operate or regulate:

Existing clearing houses, or
New clearing houses,

to establish a common retail clearing house system for banks across India.

Condition

At least 51% of the equity of such company or corporation must be held by Public Sector Banks.

Simple Explanation

The RBI may authorize a company to manage bank clearing systems, but Public Sector Banks must own at least 51% of that company.

Section 5 – Application for Authorisation

Purpose of Section 5

Section 5 explains how a person can apply to the RBI for authorization to establish or operate a payment system.

Section 5(1)

Any person wishing to start or operate a payment system must submit an application to the RBI.

Simple Meaning

Before starting a payment system, an application must be made to the RBI.

Section 5(2)

The application must:

Be in the prescribed form.
Be submitted in the prescribed manner.
Be accompanied by the prescribed fee.

Simple Meaning

The application must follow the RBI’s prescribed procedure and include the required fee.

Section 6 – Inquiry by the Reserve Bank

Purpose of Section 6

Before granting authorization, the RBI may conduct an inquiry to verify the applicant.

RBI May Verify

The RBI may examine:

Whether the information provided is genuine.
The applicant’s financial and operational capacity.
The credibility of the applicant.
The credentials of participants.
Any other relevant matter.

The RBI may also appoint an authorized person to conduct the inquiry and submit a report.

Simple Meaning

The RBI checks whether the applicant is trustworthy, financially sound, and capable of operating a safe payment system.

Section 7 – Issue or Refusal of Authorisation

Purpose of Section 7

Section 7 explains how the RBI decides whether to grant or refuse authorization.

Section 7(1) – Grant of Authorisation

The RBI may grant authorization if it is satisfied that:

The application is complete.
The applicant complies with the Act and Regulations.
The proposed payment system is suitable.

Factors Considered by RBI

Before granting authorization, the RBI considers:

1. Need for the Payment System

Whether the proposed payment system is necessary.

2. Technical Standards

Whether the system meets appropriate technical and operational standards.

3. Terms and Conditions

Whether the proposed operating conditions and security procedures are satisfactory.

4. Fund Transfer Mechanism

How money will be transferred through the payment system.

5. Netting Procedure

How payment obligations will be settled through netting.

6. Financial Position and Management

The applicant’s:

Financial strength.
Management experience.
Integrity.

7. Consumer Interest

Whether the payment system adequately protects consumers.

8. Monetary and Credit Policies

Whether the payment system is consistent with RBI’s monetary and credit policies.

9. Other Relevant Factors

Any other factor considered relevant by the RBI.

Section 7(2) – Contents of the Authorisation

If authorization is granted, it will specify:

The effective date.
Conditions of authorization.
Applicable fees.
Security requirements (if any).
Validity until revoked.

Simple Meaning

The authorization document clearly states:

When it becomes effective.
Conditions to be followed.
Fees payable.
Security to be maintained.
That it remains valid until cancelled.

Section 7(3) – Refusal of Authorisation

If the RBI decides to reject the application:

It must provide written reasons.
It must give the applicant an opportunity to be heard before rejecting the application.

Simple Meaning

The RBI cannot reject an application without explaining the reasons and giving the applicant a fair chance to present their case.

Section 7(4) – Time for Disposal

The RBI should process applications as quickly as possible.

It should make every effort to dispose of the application within six months from the date it is received.

Simple Meaning

The RBI aims to decide the application within six months.

Section 8 – Revocation of Authorisation (Simple Notes)

Purpose of Section 8

Section 8 empowers the Reserve Bank of India (RBI) to cancel (revoke) the authorization granted to a payment system provider if it violates the provisions of the Act, regulations, or RBI’s directions.

Section 8(1) – Grounds for Revocation of Authorisation

The RBI may revoke the authorization of a system provider if it:

(i) Violates the Act

The system provider contravenes any provision of the Payment and Settlement Systems Act, 2007.

Simple Meaning:
If the provider breaks any provision of the Act, the RBI can cancel its authorization.

(ii) Does Not Follow the Regulations

The system provider fails to comply with the regulations made under the Act.

Simple Meaning:
If the provider does not follow the prescribed rules and regulations, the RBI may revoke its authorization.

(iii) Does Not Follow RBI Orders or Directions

The system provider fails to comply with any order or direction issued by the RBI.

Simple Meaning:
The provider must follow RBI’s instructions. Failure to do so may lead to cancellation of authorization.

(iv) Violates the Conditions of Authorisation

The system provider operates the payment system in violation of the conditions attached to its authorization.

Simple Meaning:
If the provider does not follow the conditions under which authorization was granted, the RBI can revoke it.

Opportunity of Being Heard

Before revoking the authorization, the RBI must:

Give the system provider a reasonable opportunity to explain its case (principle of natural justice).
The RBI may also direct the provider to stop operating the payment system until the final revocation order is issued.

Simple Meaning

The RBI cannot immediately cancel authorization. It must first hear the system provider before making a final decision.

Section 8(2) – Immediate Revocation in Public Interest

The RBI may revoke the authorization without following the above procedure if it considers it necessary:

In the interest of the country’s monetary policy, or
For any other reason specified in its order.

Simple Meaning

If public interest or monetary policy requires urgent action, the RBI can revoke authorization immediately by recording its reasons.

Section 8(3) – Protection of Affected Persons

When the RBI revokes an authorization, its order must contain suitable provisions to protect the interests of persons affected by the revocation.

Simple Meaning

The RBI must ensure that customers, banks, and other participants do not suffer unnecessary loss because of the cancellation.

Section 8(4) – Insolvency, Dissolution or Winding Up

If a system provider:

Becomes insolvent,
Is dissolved, or
Is wound up,

it must immediately inform the RBI.

The RBI may then take appropriate steps to revoke the authorization.

Simple Meaning

If the payment system provider closes down or becomes financially incapable of operating, it must inform the RBI, which may cancel its authorization.

Section 9 – Appeal to the Central Government (Simple Notes)

Purpose of Section 9

Section 9 provides the right to appeal against certain decisions of the RBI.

If a person is dissatisfied with the RBI’s decision, they may appeal to the Central Government.

Section 9(1) – Right to Appeal

The following persons may file an appeal:

(a) Applicant Whose Authorization is Refused

If the RBI refuses an application for authorization under Section 7(3), the applicant may appeal.

(b) System Provider Whose Authorization is Revoked

If the RBI revokes the authorization under Section 8, the system provider may appeal.

Time Limit

The appeal must be filed within 30 days from the date on which the RBI’s order is communicated.

Simple Meaning

A person whose application is rejected or whose authorization is cancelled has 30 days to appeal to the Central Government.

Section 9(2) – Disposal of Appeal

The Central Government should make every effort to decide the appeal within three months.

Simple Meaning

The appeal should preferably be decided within three months.

Section 9(3) – Final Decision

The decision of the Central Government on the appeal is final.

Simple Meaning

After the Central Government decides the appeal, no further appeal is provided under this Act.

Chapter IV – Regulation and Supervision by the Reserve Bank

Chapter IV gives the Reserve Bank of India (RBI) wide powers to regulate, supervise, inspect, monitor, and issue directions to payment systems and their participants. The objective is to ensure that payment systems remain safe, secure, efficient, transparent, and reliable.

Section 10 – Power to Determine Standards

Purpose of Section 10

Section 10 empowers the Reserve Bank of India (RBI) to prescribe standards and guidelines for the proper operation of payment systems in India.

Section 10(1) – Standards Prescribed by RBI

The RBI may prescribe the following standards:

(a) Format of Payment Instructions

The RBI may decide:

The format of payment instructions.
The size and design of payment instruments.

Simple Meaning:
The RBI can prescribe how payment instructions should be prepared and processed.

(b) Timings of Payment Systems

The RBI may prescribe:

Working hours.
Settlement timings.
Operational schedules.

Simple Meaning:
The RBI decides the operating hours of payment systems.

(c) Manner of Transfer of Funds

The RBI may prescribe how money should be transferred through:

Paper-based systems.
Electronic systems.
Any other approved method.

The transfer may take place:

Between banks.
Between banks and other system participants.

Simple Meaning:
The RBI determines the methods by which funds are transferred.

(d) Other Operational Standards

The RBI may prescribe any additional standards necessary for the efficient functioning of payment systems.

Simple Meaning:
The RBI can issue any other standards required for safe and efficient payment systems.

(e) Membership Criteria

The RBI may prescribe:

Eligibility for becoming a system participant.
Continuation of membership.
Termination of membership.
Rejection of membership applications.

Simple Meaning:
The RBI decides who can join or remain a member of a payment system.

(f) Rights and Obligations of Participants

The RBI may prescribe:

Conditions for participation.
Rights of participants.
Duties and responsibilities of participants.

Simple Meaning:
The RBI lays down the rules that all participants must follow.

Section 10(2) – Power to Issue Guidelines

Apart from prescribing standards, the RBI may issue guidelines for:

Efficient management of payment systems.
Proper functioning of all payment systems.
Regulation of a specific payment system.

Simple Meaning:
The RBI can issue additional guidelines whenever necessary.

Section 10A – No Charges on Certain Electronic Payments

Purpose

Banks and payment system providers cannot charge customers for using electronic payment modes prescribed under Section 269SU of the Income-tax Act, 1961.

Simple Meaning

No direct or indirect charges can be imposed on customers for using specified digital payment methods.

Section 11 – Notice of Change in the Payment System

Purpose of Section 11

A system provider cannot make major changes in its payment system without RBI approval.

Requirements

Before making any change:

Obtain prior approval from the RBI.
Give at least 30 days’ notice to system participants after obtaining RBI approval.

Exception

The RBI may:

Waive the notice requirement, or
Require a notice period longer than 30 days,

if it is necessary in the public interest or for monetary policy.

Objections by RBI

The RBI may object to the proposed changes within two weeks.
The system provider must respond within two weeks.
Changes can be implemented only after receiving RBI approval.

Simple Meaning

Significant changes in a payment system require RBI approval before implementation.

Section 12 – Power to Call for Returns, Documents or Information

Purpose

The RBI may require any payment system provider to submit:

Returns.
Reports.
Documents.
Information.

The provider must furnish such information in the prescribed form and within the prescribed time.

Simple Meaning

The RBI can ask for any information relating to the operation of a payment system.

Section 13 – Access to Information

Purpose

The RBI has the right to access information relating to:

Payment systems.
System providers.
System participants.

Every participant must provide such information whenever required.

Simple Meaning

The RBI has the legal right to inspect and obtain information from payment system operators.

Section 14 – Power to Enter and Inspect

Purpose

Authorized RBI officers may inspect payment systems to ensure compliance with the Act.

During inspection, the RBI officer may:

Enter business premises.
Inspect equipment.
Examine computer systems.
Verify records and documents.
Seek information from employees.

Simple Meaning

The RBI can inspect payment system providers to ensure they are following the law.

Section 15 – Confidentiality of Information

Section 15(1)

Any information or documents obtained by the RBI under Sections 12–14 must be kept confidential.

Simple Meaning

The RBI must protect confidential information received from payment system providers.

Section 15(2)

The RBI may disclose such information if necessary:

To protect payment system security.
To maintain the integrity of payment systems.
In the interest of banking.
For monetary policy.
In the public interest.

Simple Meaning

The RBI may disclose confidential information only when necessary for public interest or financial stability.

Section 16 – Power to Conduct Audit and Inspection

Purpose

The RBI may conduct or arrange:

Audits.
Inspections.

These may cover:

Payment systems.
System providers.
System participants.

All concerned persons must cooperate.

Simple Meaning

The RBI may audit payment systems, and everyone must assist during the audit.

Section 17 – Power to Issue Directions

Purpose

The RBI may issue directions if:

A payment system creates systemic risk.
A participant’s conduct threatens financial stability.
The payment system affects monetary or credit policy.

RBI May Direct

The payment system or participant to:

Stop the harmful activity.
Take corrective action.
Eliminate systemic risk.

Simple Meaning

If the RBI finds that a payment system may harm the financial system, it can order corrective measures.

Section 18 – General Power to Issue Directions

Purpose

The RBI may issue general directions whenever necessary:

To regulate payment systems.
To ensure efficient management.
To protect public interest.

These directions may apply to:

Electronic payment systems.
Non-electronic payment systems.
Domestic payment systems.
International payment systems affecting India.

Simple Meaning

The RBI can issue general policy directions to regulate all kinds of payment systems.

Section 19 – Compliance with RBI Directions

Purpose

Every person receiving directions from the RBI must:

Comply with the directions without delay.
Submit a compliance report within the time specified by the RBI.

Simple Meaning

All RBI directions are legally binding and must be followed promptly.

Summary of Chapter IV

Section	Subject	Simple Purpose
10	Power to determine standards	RBI prescribes operational standards and guidelines for payment systems.
10A	No charges on specified electronic payments	Banks and system providers cannot charge for prescribed electronic payment modes.
11	Notice of change	RBI approval is required before making significant changes to a payment system.
12	Power to call for information	RBI may require returns, documents, and reports from system providers.
13	Access to information	RBI has the right to obtain information relating to payment systems.
14	Power to inspect	RBI officers may inspect premises, equipment, systems, and records.
15	Confidentiality	Information obtained by RBI must remain confidential, except in specified circumstances.
16	Audit and inspection	RBI may conduct audits and inspections of payment systems and participants.
17	Power to issue directions	RBI may direct payment systems to stop risky activities and take corrective measures.
18	General directions	RBI may issue policy directions to regulate payment systems in the public interest.
19	Compliance	All persons must comply with RBI directions and report compliance within the prescribed time.

Chapter V – Rights and Duties of a System Provider

Chapter V explains the rights, duties, and responsibilities of a System Provider under the Payment and Settlement Systems Act, 2007. It requires every system provider to operate payment systems in accordance with the law, maintain confidentiality, disclose necessary information, and ensure proper settlement of payment obligations.

Section 20 – System Provider to Act in Accordance with the Act, Regulations, etc.

Purpose of Section 20

Section 20 requires every System Provider to operate its payment system in accordance with the provisions of the Act, RBI regulations, and the conditions of authorization.

Responsibilities of the System Provider

Every system provider must operate the payment system in accordance with:

The Payment and Settlement Systems Act, 2007.
The regulations made under the Act.
The agreement or contract between system participants.
The rules and procedures governing the payment system.
The conditions mentioned in the authorization granted by the RBI.
Directions and instructions issued by the RBI from time to time.

Simple Explanation

A system provider must always follow:

The law.
RBI regulations.
RBI directions.
The conditions of its authorization.
The rules governing the payment system.

Failure to do so may result in regulatory action by the RBI.

Section 21 – Duties of a System Provider

Purpose of Section 21

Section 21 specifies the duties of every system provider towards its participants.

Section 21(1) – Duty to Provide Information

Every system provider must disclose important information to existing and prospective system participants.

The information includes:

Terms and conditions of participation.
Charges or fees payable.
Limits of liability.
Rules and regulations governing the payment system.
Netting arrangements.
Other relevant documents.

Simple Explanation

Before joining a payment system, every participant should know:

The applicable rules.
The fees payable.
Their rights and responsibilities.
How payments will be settled.

The system provider must provide complete and transparent information.

Section 21(2) – Duty to Maintain Standards

Every system provider must maintain the standards prescribed by the RBI under the Act.

Simple Explanation

The payment system must always comply with RBI standards relating to:

Security.
Efficiency.
Reliability.
Operational procedures.

Section 22 – Duty to Keep Information Confidential

Purpose of Section 22

Section 22 protects the confidentiality of information shared by system participants.

Section 22(1) – Confidentiality of Documents and Information

A system provider shall not disclose:

Any document.
Any information.
Any part of a document received from a system participant.

Disclosure is Allowed Only When:

Required under the provisions of the Act.
The participant gives express consent.
The participant gives implied consent.
A competent court orders disclosure.
A statutory authority legally requires disclosure.

Simple Explanation

Information received from participants must remain confidential unless disclosure is legally permitted.

Section 22(2) – Application of the Bankers’ Books Evidence Act

The provisions of the Bankers’ Books Evidence Act, 1891 apply to all documents, records, and information maintained by the system provider.

Simple Explanation

The records maintained by the system provider are treated as official banking records and may be used as evidence according to law.

Section 23 – Settlement and Netting

Purpose of Section 23

Section 23 provides the legal framework for settlement and netting in payment systems. It ensures that payment obligations are settled according to the procedure approved by the Reserve Bank of India (RBI) and that once a settlement is completed, it becomes final and irrevocable. It also protects settlements even if a participant or a Central Counter Party (CCP) becomes insolvent or is wound up.

Section 23(1) – Settlement According to RBI-Approved Procedure

Payment obligations and settlement instructions between system participants must be determined according to the Gross Settlement or Net Settlement procedure approved by the RBI.

The RBI may approve the settlement procedure:

While granting authorization under Section 7, or
Under any other provision of the Act.

Simple Explanation

Every payment system must settle transactions using the method approved by the RBI. The approved method may be either Gross Settlement or Net Settlement.

Meaning of Gross Settlement

Gross Settlement means that each payment is settled individually without adjusting it against any other transaction.

Example

Bank A transfers ₹5 lakh to Bank B.
The entire ₹5 lakh is settled immediately.
No adjustment is made against any other payment.

Simple Meaning

Each transaction is settled separately.

Meaning of Net Settlement

Net Settlement means that multiple payment obligations are adjusted against each other, and only the final balance (net amount) is settled.

Example

Bank A owes Bank B ₹10 lakh.
Bank B owes Bank A ₹7 lakh.

Instead of transferring both amounts separately, only the net amount of ₹3 lakh is paid by Bank A to Bank B.

Simple Meaning

Only the remaining balance after adjustment is settled.

Section 23(2) – Distribution of Losses

If the payment system rules contain a procedure for sharing losses between:

The system participants, and
The payment system,

that procedure will apply even if another law provides otherwise.

Simple Explanation

If a payment system has its own approved rules for distributing losses, those rules will prevail over conflicting provisions of other laws.

Section 23(3) – Settlement is Final and Irrevocable

Any settlement made according to the approved settlement procedure becomes:

Final, and
Irrevocable.

Meaning of Final

The settlement is legally complete.

Meaning of Irrevocable

The settlement cannot be cancelled, reversed, or challenged.

Simple Explanation

Once settlement is completed according to RBI-approved procedures, it cannot be undone.

Section 23(4) – Effect of Insolvency of a System Participant

If a court, tribunal, or any competent authority:

Declares a system participant insolvent,
Orders its dissolution,
Orders its winding up, or
Appoints a liquidator, receiver, or assignee,

then any settlement that became final before or immediately after such order will remain valid.

This rule applies even if other laws provide otherwise, including:

Banking Regulation Act, 1949
Companies Act, 1956
Companies Act, 2013
Insolvency and Bankruptcy Code, 2016
Any other applicable law

The system provider also retains the right to use the collateral provided by participants according to its rules.

Simple Explanation

If a participant becomes bankrupt, the settlements already completed cannot be cancelled.

The system provider may also use the participant’s collateral to complete settlement obligations.

Meaning of Collateral

Collateral means money, securities, or other assets deposited by participants as security for fulfilling their payment obligations.

Example

A bank participating in a payment system deposits Government Securities as collateral.

If the bank fails to meet its payment obligation, the system provider may use those securities to complete the settlement.

Section 23(5) – Insolvency of a Central Counter Party (CCP)

If a court or authority passes an insolvency or winding-up order against a Central Counter Party (CCP):

Payment obligations between the CCP and participants,
Including future settlement transactions,

must immediately be determined according to the RBI-approved Gross or Net Settlement procedure.

The settlement remains:

Final, and
Irrevocable.

Simple Explanation

Even if the CCP becomes insolvent, all pending settlement obligations must still be completed according to the approved settlement process.

Meaning of Central Counter Party (CCP)

A Central Counter Party (CCP) is a system provider that acts as an intermediary between buyers and sellers in financial transactions.

The CCP becomes:

The buyer to every seller, and
The seller to every buyer.

Its role is to ensure that settlements are completed safely even if one party defaults.

Example

Suppose:

Bank A sells Government Securities to Bank B.

Instead of Bank A dealing directly with Bank B:

The CCP purchases the securities from Bank A.
The CCP sells the securities to Bank B.

If one party fails, the CCP still completes the settlement.

Section 23(6) – Duties of the Liquidator of a Central Counter Party

If a liquidator, receiver, or assignee is appointed for the CCP:

The Liquidator Cannot:

Reopen settlements that have already become final.

The Liquidator Must:

Use the collateral according to the CCP’s rules to settle obligations.
Return any excess collateral to the concerned participants after settlement.

Simple Explanation

Even during liquidation:

Completed settlements remain valid.
Extra collateral must be returned after meeting settlement obligations.

Explanation 1 – When Settlement Becomes Final

For the purpose of this section:

Settlement becomes final and irrevocable as soon as the amount payable is determined under the approved settlement procedure.

Actual payment of:

Money,
Securities,
Foreign exchange,
Derivatives, or
Other financial transactions

is not necessary for settlement to become legally final.

Simple Explanation

The settlement becomes legally complete as soon as the payable amount is calculated, even if the actual transfer takes place later.

Explanation 2 – Meaning of Central Counter Party

A Central Counter Party (CCP) is a system provider that, through novation, places itself between system participants.

As a result:

It becomes the buyer for every seller.
It becomes the seller for every buyer.

This arrangement ensures the safe settlement of transactions.

Meaning of Novation

Novation means replacing the original contract between two parties with a new arrangement.

In payment systems:

Instead of the buyer and seller dealing directly:

Both parties deal with the CCP.

Example

Original transaction:

Bank A sells securities to Bank B.

After novation:

Bank A sells to the CCP.
The CCP sells to Bank B.

The original contract between Bank A and Bank B is replaced by two separate contracts involving the CCP.

Section 23A – Protection of Funds Collected from Customers

Purpose of Section 23A

Section 23A protects the money collected by designated payment systems from their customers. It empowers the Reserve Bank of India (RBI) to ensure that customer funds are kept safe and are used only for the purposes permitted under the Act.

The main objective of this section is to:

Protect customers’ money.
Ensure payment system providers do not misuse customer funds.
Safeguard customer interests if a payment system provider becomes insolvent or is wound up.

Section 23A(1) – RBI’s Power to Protect Customer Funds

The RBI may issue directions to the system provider of a designated payment system if it considers it necessary:

In the public interest.
In the interest of customers.
To prevent the payment system from operating in a manner harmful to customers.

Simple Explanation

Whenever the RBI believes that customers’ money needs additional protection, it can require the payment system provider to follow specific safeguards.

Methods for Protecting Customer Funds

The RBI may require the system provider to adopt either of the following methods:

(a) Deposit Customer Funds in a Separate Bank Account

The system provider may be directed to:

Deposit customer funds in one or more separate accounts.
Maintain those accounts with a Scheduled Commercial Bank.

Simple Explanation

Customer money must be kept separately from the company’s own business funds so that it remains safe.

(b) Maintain Liquid Assets

Instead of keeping the money in a separate account, the RBI may require the provider to maintain liquid assets.

Liquid assets are assets that can easily be converted into cash whenever required.

Examples of Liquid Assets

Cash
Bank deposits
Government securities
Other highly liquid investments approved by the RBI

Simple Explanation

The payment system provider must always keep enough easily available assets to repay customers whenever required.

Amount to be Maintained

The amount to be maintained shall be equal to the percentage specified by the RBI of:

The money collected from customers, and
The amount that remains outstanding.

Simple Explanation

The RBI decides how much customer money must always remain protected.

Different Rules for Different Payment Systems

The RBI may prescribe:

Different percentages.
Different methods.
Different forms of maintaining customer funds.

These requirements may vary for different categories of designated payment systems.

Simple Explanation

Different payment systems may have different customer fund protection requirements depending on their size, nature, and risk.

Section 23A(2) – Permitted Use of Customer Funds

The money kept in the separate account or maintained as liquid assets cannot be used freely.

It may be used only for:

(a) Paying Customer Liabilities

To discharge obligations arising from payment services used by customers.

(b) Refunding Customers

To repay customers whenever payment becomes due.

(c) Other Purposes Approved by the RBI

Any other purpose specifically permitted by the RBI.

Simple Explanation

Customer funds cannot be used for:

Business expenses.
Salaries.
Investments.
Expansion of business.
Repayment of company debts.

They can only be used for customer-related payments or other RBI-approved purposes.

Section 23A(3) – Priority of Customer Claims

If:

The payment system provider becomes insolvent,
It is dissolved,
It is wound up,
A liquidator or receiver is appointed,

or even if the Scheduled Commercial Bank holding the separate account faces such proceedings,

then the customers entitled to receive payment under Section 23A(2) shall have a first and paramount charge over the balance in the protected account.

This rule applies notwithstanding anything contained in:

The Banking Regulation Act, 1949.
The Companies Act, 1956.
The Companies Act, 2013.
The Insolvency and Bankruptcy Code, 2016.
Any other law in force.

Simple Explanation

If the payment system provider or the bank holding the protected funds becomes insolvent, customers have the highest priority to receive payment from those funds before any other creditor.

Meaning of First and Paramount Charge

A First and Paramount Charge means that customers have the highest legal priority over the protected funds.

No other creditor can claim those funds before customers are paid.

Example

Suppose a digital wallet company has:

₹100 crore collected from customers.
The company later becomes insolvent.

The ₹100 crore kept in the protected account must first be used to repay customers.

Only after customers have been paid in full can any remaining amount be used to satisfy the claims of other creditors.

Role of the Liquidator or Receiver

If a liquidator, receiver, or assignee is appointed:

They cannot use the protected customer funds for any other purpose.
They must first ensure that all customers are paid in full.
If immediate payment is not possible, they must make adequate arrangements to protect customer claims.

Simple Explanation

The person managing the company’s assets during insolvency cannot divert customer money to pay banks, suppliers, or other creditors until customers are fully protected.

Explanation – Meaning of Designated Payment System

A Designated Payment System means:

A payment system or a class of payment systems specified by the RBI that collects money from customers for providing payment services.

Examples

Prepaid Payment Instruments (PPIs)
Digital Wallets
Mobile Payment Systems
Other payment systems notified by the RBI

Simple Explanation

A designated payment system is any payment system identified by the RBI for which these customer fund protection rules apply.

Explanation – Meaning of Scheduled Commercial Bank

A Scheduled Commercial Bank means a bank that:

Is included in the Second Schedule of the Reserve Bank of India Act, 1934, and
Includes:
- Banking Companies,
- Corresponding New Banks,
- State Bank of India (SBI),
- Subsidiary Banks of SBI.

Simple Explanation

A Scheduled Commercial Bank is a bank recognized by the RBI and listed in the Second Schedule of the RBI Act.

Chapter VI – Settlement of Disputes

Chapter VI explains how disputes relating to payment systems are resolved and also creates an offence for dishonour (failure) of an electronic funds transfer due to insufficient funds.

Section 24 – Settlement of Disputes

Purpose of Section 24

This section provides a three-level dispute resolution mechanism for payment systems:

Level 1: Panel created by the System Provider.
Level 2: Reserve Bank of India (RBI).
Level 3: Central Government (only when RBI itself is a party to the dispute).

The objective is to resolve disputes quickly without immediately approaching ordinary courts.

Section 24(1) – Creation of a Dispute Resolution Panel

Every System Provider must create a panel of at least three system participants.

Important Condition

The members of the panel cannot be the parties involved in the dispute.

Simple Explanation

If a dispute arises between participants, it should first be decided by an independent panel formed under the payment system.

Example

Suppose:

Bank A and Bank B have a settlement dispute.
The panel may include Bank C, Bank D, and Bank E.
Bank A and Bank B cannot sit on the panel.

This ensures impartiality.

Section 24(2) – Reference of Dispute to the Panel

If a dispute arises between two or more system participants, the System Provider must refer the dispute to the panel.

Simple Explanation

Disputes between participants are first handled internally through the panel mechanism.

Example

A disagreement regarding settlement timing between two banks participating in NEFT would first go to the panel.

Section 24(3) – Reference to the RBI

A dispute is referred to the Reserve Bank of India when:

The dispute is between a system participant and the system provider.
The dispute is between two system providers.
A participant is not satisfied with the decision of the panel.

Simple Explanation

The RBI acts as the appellate and adjudicating authority for more serious or unresolved disputes.

Examples

A bank disputes a penalty imposed by the payment system operator.
Two payment system operators disagree on settlement arrangements.
A participant loses before the panel and wants further adjudication.

Section 24(4) – Decision of the RBI

The dispute referred to the RBI is decided by an officer of the RBI who is generally or specially authorized for this purpose.

The decision of the RBI is:

Final, and
Binding on all parties.

Simple Explanation

Once the RBI gives its decision, the parties must comply with it.

Section 24(5) – Disputes Involving the RBI

Sometimes the RBI itself may act as:

A System Provider, or
A System Participant.

In such a case, the RBI cannot decide its own dispute.

The matter is therefore referred to the Central Government.

The Central Government may authorize an officer not below the rank of Joint Secretary to decide the dispute.

That officer’s decision is final.

Simple Explanation

If the RBI is one of the parties, an independent authority (Central Government) decides the dispute.

Section 25 – Dishonour of Electronic Funds Transfer

Purpose of Section 25

This section makes it an offence to initiate an electronic funds transfer (EFT) when the account has insufficient funds or when the transfer exceeds the permitted limit.

It is similar in principle to the dishonour of a cheque under Section 138 of the Negotiable Instruments Act, 1881.

Section 25(1) – When Does the Offence Occur?

An offence is committed when:

A person initiates an electronic funds transfer from his account, and
The transfer cannot be executed because:
- The account has insufficient funds, or
- The transfer amount exceeds the limit arranged with the bank.

Simple Explanation

If a person tries to make an electronic payment without having enough money in the account, it may become a criminal offence.

Punishment

The person may be punished with:

Imprisonment up to 2 years, or
Fine up to twice the amount of the electronic transfer, or
Both imprisonment and fine.

Example

If a person initiates a ₹50,000 transfer without sufficient funds, the court may impose:

Up to 2 years imprisonment, and/or
A fine up to ₹1,00,000.

Conditions Required for Prosecution

The offence is not automatic. All the following conditions must be satisfied.

Condition (a) – Transfer Must Be for a Debt or Liability

The electronic transfer must have been initiated for payment of a legally enforceable debt or liability.

Simple Explanation

The payment must be meant to repay money that is legally payable.

Examples

Loan repayment.
Payment for goods purchased.
Payment for services rendered.
Rent payment.

Condition (b) – Transfer Must Follow Procedural Guidelines

The transfer must have been initiated according to the procedural guidelines issued by the system provider.

Simple Explanation

The payment must be made through the proper authorized electronic payment process.

Condition (c) – Written Notice by the Beneficiary

The beneficiary must send a written demand notice within 30 days from receiving information from the bank that the transfer was dishonoured.

Simple Explanation

The receiver of the money must formally demand payment within 30 days.

Example

Bank informs the beneficiary on 1 August that the transfer failed.
The beneficiary must send a written notice by 31 August.

Condition (d) – Failure to Pay Within 15 Days

After receiving the notice, the person who initiated the transfer must pay the amount within 15 days.

If payment is made within 15 days, criminal liability does not arise.

Simple Explanation

The law gives the payer a final opportunity to make good the payment.

Section 25(2) – Presumption of Debt

The law presumes that the electronic transfer was made for repayment of a debt or liability unless the contrary is proved.

Simple Explanation

The court starts with the assumption that the payment was legally payable.

The accused must produce evidence to show otherwise.

Section 25(3) – No Defence of Lack of Knowledge

It is not a valid defence to say:

“I did not know that my account had insufficient funds.”

Simple Explanation

The person is expected to know the balance available in the account.

Ignorance of insufficient funds does not excuse the offence.

Section 25(4) – Presumption of Dishonour

If the bank issues a communication stating that the electronic transfer was dishonoured, the court will presume that the dishonour actually occurred.

Simple Explanation

The bank’s dishonour message is treated as prima facie evidence.

The accused must prove that the dishonour did not occur.

Section 25(5) – Application of the Negotiable Instruments Act

The provisions of Chapter XVII of the Negotiable Instruments Act, 1881 (which deals with cheque dishonour) apply to electronic funds transfer dishonour as far as possible.

Simple Explanation

The same legal principles used in cheque bounce cases are applied to failed electronic payment transactions.

Explanation – Meaning of Debt or Other Liability

“Debt or other liability” means a legally enforceable debt or liability.

Simple Explanation

Only payments that are legally recoverable are covered by this section.

Included

Loans.
Sale consideration.
Rent.
Professional fees.
Contractual payments.

Not Included

Gifts.
Voluntary donations.
Payments made without any legal obligation.

Important Practical Example

Suppose:

A buys goods worth ₹1,00,000 from B.
A initiates an electronic transfer of ₹1,00,000.
The bank returns the transaction due to insufficient funds.
B sends a written notice within 30 days.
A fails to pay within 15 days of receiving the notice.

In this situation:

The payment was for a legally enforceable debt.
The transfer was dishonoured.
Proper notice was given.
Payment was not made within the statutory period.

Therefore, A may be prosecuted under Section 25 of the PSS Act, 2007.

Chapter VII – Offences and Penalties

Section 26 – Penalties

Purpose of Section 26

Section 26 prescribes the penalties and punishments for violating the provisions of the Payment and Settlement Systems Act, 2007. It ensures that payment system providers, system participants, and other persons comply with the Act, RBI regulations, and RBI directions. It also discourages fraud, false information, unauthorized payment systems, and non-compliance.

Section 26(1) – Penalty for Operating Without Authorisation or Violating Authorisation Conditions

A person commits an offence if he:

Operates a payment system without obtaining RBI authorisation under Section 4, or
Fails to comply with the terms and conditions of the authorisation granted under Section 7.

Punishment

The person may be punished with:

Imprisonment: Not less than 1 month and up to 10 years, or
Fine: Up to ₹1 crore, or
Both imprisonment and fine.

If the violation continues:

An additional fine of up to ₹1 lakh per day may be imposed for every day after the first day of the continuing offence.

Simple Explanation

No person can legally operate a payment system without RBI approval. If someone does so or violates the conditions of approval, severe punishment may be imposed.

Example

A company starts a digital payment platform without RBI authorisation.

The company may face:

Imprisonment,
Fine up to ₹1 crore,
Additional daily fine until the violation stops.

Section 26(2) – False Statements or Concealment of Material Information

A person commits an offence if, while:

Applying for RBI authorisation,
Filing returns,
Submitting documents, or
Providing information under the Act,

he knowingly:

Makes a false statement, or
Conceals an important (material) fact.

Meaning of Material Particular

A material particular is any important fact that may influence the RBI’s decision.

Punishment

The person may be punished with:

Imprisonment up to 3 years, and
Fine of at least ₹10 lakh, which may extend to ₹50 lakh.

Simple Explanation

Providing false information or hiding important facts from the RBI is a serious offence.

Example

A company falsely claims that it has sufficient capital while applying for RBI authorisation.

If discovered, the company may be prosecuted under this section.

Section 26(3) – Failure to Provide Information or Documents

A person commits a default if he fails to:

Produce documents,
Submit returns,
Furnish required information,
Provide statements, or
Answer questions asked during an inspection under Sections 12, 13, or 14.

Penalty

Instead of criminal punishment, the person is liable to a monetary penalty imposed under Section 30.

Simple Explanation

Every system provider and participant must cooperate with the RBI by providing documents and information whenever required.

Failure to do so may result in financial penalties.

Example

The RBI asks a payment system provider to submit transaction records.

If the provider refuses or fails to submit them, the RBI may impose a penalty under Section 30.

Section 26(4) – Unauthorised Disclosure of Confidential Information

A person commits an offence if he discloses confidential information that is protected under Section 22 without legal authority.

Punishment

The person may be punished with:

Imprisonment up to 6 months, or
Fine up to ₹5 lakh, or
Fine equal to twice the amount of damage caused, whichever is higher, or
Both imprisonment and fine.

Simple Explanation

Confidential information received during the operation of a payment system cannot be shared without permission or legal authority.

Example

An employee of a payment system provider leaks confidential customer transaction data.

The employee may face imprisonment, fine, or both.

Section 26(5) – Failure to Comply with RBI Directions or Pay Penalty

A system provider or system participant commits an offence if:

It fails to comply with directions issued by the RBI within the prescribed time, or
It fails to pay the penalty imposed under Section 30 within 30 days.

Punishment

The person may be punished with:

Imprisonment: Not less than 1 month and up to 10 years, or
Fine: Up to ₹1 crore, or
Both imprisonment and fine.

If the default continues:

Additional fine up to ₹1 lakh per day may be imposed for every day after the first day.

Simple Explanation

RBI directions are legally binding. Ignoring them or failing to pay penalties can result in severe punishment.

Example

The RBI directs a payment system provider to stop an unsafe payment service.

If the provider ignores the direction, criminal action may be taken.

Section 26(6) – General Penalty for Other Violations

If any person:

Violates any provision of the Act,
Fails to comply with any regulation,
Disobeys any order or direction,
Violates any condition imposed under the Act,

and no specific penalty is provided elsewhere, then the person is liable to a monetary penalty under Section 30.

Simple Explanation

This is a general penalty provision that applies to violations for which no separate punishment has been specifically prescribed.

Example

Suppose a payment system provider violates a procedural requirement under RBI regulations, and no specific punishment exists for that violation.

In such a case, the RBI may impose a penalty under Section 30.

Important Legal Terms

Contravention

Contravention means violating or acting against the provisions of the Act, regulations, or RBI directions.

Material Particular

A material particular is any important fact or information that may affect the RBI’s decision regarding authorisation or regulation.

Confidential Information

Confidential information includes customer data, transaction details, payment records, business information, or any information protected under the Act.

Reasonable Time

Reasonable time means the period that is fair and appropriate under the circumstances when no specific time limit has been prescribed.

Chapter VII – Offences and Penalties

Section 27 – Offences by Companies

Purpose of Section 27

Section 27 explains who will be held responsible when a company commits an offence under the Payment and Settlement Systems Act, 2007.

It ensures that not only the company but also the persons responsible for managing its business can be held liable for violations of the Act, RBI regulations, directions, or orders.

Section 27(1) – Liability of the Company and Responsible Persons

If a company commits a contravention of:

Any provision of the Act,
Any regulation,
Any direction, or
Any order issued under the Act,

then the following persons are considered guilty:

The company, and
Every person who was:
- In charge of the company’s business, and
- Responsible for the conduct of its business at the time the offence was committed.

Simple Explanation

If a company violates the law, the company itself and the persons managing its day-to-day business can both be punished.

Example

Suppose an authorised payment company operates without following RBI directions.

The following may be held liable:

The company.
The Managing Director.
The Chief Executive Officer (CEO).
Any other person responsible for managing the company’s operations.

Defence Available to Responsible Persons

A responsible person will not be punished if he proves that:

The offence happened without his knowledge, or
He exercised all due diligence to prevent the offence.

Meaning of Due Diligence

Due diligence means taking all reasonable care, precautions, and necessary steps to ensure compliance with the law.

Simple Explanation

A person who genuinely tried to prevent the violation and had no knowledge of it may avoid liability.

Example

A Compliance Officer had established proper compliance procedures, regularly monitored operations, and issued warnings against violations.

If another employee secretly violated the law without the officer’s knowledge, the Compliance Officer may not be held liable if he proves that he exercised due diligence.

Section 27(2) – Liability of Directors and Other Officers

Even if a person is not directly responsible under Section 27(1), he will still be guilty if the offence occurred because of:

His consent,
His connivance, or
His neglect.

This applies to:

Directors,
Managers,
Secretaries,
Other officers of the company.

Meaning of Consent

Consent means knowingly permitting the unlawful act.

Meaning of Connivance

Connivance means secretly supporting, encouraging, or allowing the unlawful act.

Meaning of Neglect

Neglect means failing to perform one’s legal duties with reasonable care.

Simple Explanation

A company officer cannot escape liability if the offence occurred because he approved it, ignored it, or failed to prevent it.

Example

A Director knows that the company is operating a payment system without RBI authorisation but deliberately allows it to continue.

The Director can be punished along with the company.

Explanation – Meaning of Company

For the purposes of this section, Company includes:

A body corporate,
A partnership firm,
Any association of individuals.

Simple Explanation

The term “company” is interpreted broadly and is not limited to companies registered under the Companies Act.

Explanation – Meaning of Director in a Firm

If the organisation is a partnership firm, the word Director means a Partner of the firm.

Simple Explanation

In a partnership firm, the partners are treated as directors for the purpose of fixing responsibility.

Importance of Section 27

Section 27:

Prevents companies from avoiding liability by blaming employees.
Makes senior management responsible for legal compliance.
Encourages effective corporate governance.
Promotes accountability of directors and officers.
Protects the integrity of the payment system.

Section 28 – Cognizance of Offences

Purpose of Section 28

Section 28 specifies:

Who can file a complaint for offences under the Act.
Which courts have the authority to try such offences.
The procedure for taking cognizance of offences.

Its purpose is to ensure that criminal proceedings are initiated only by authorised persons and heard by competent courts.

Section 28(1) – Complaint by an Authorised RBI Officer

No court can take cognizance of an offence under the Act unless:

A written complaint is filed, and
The complaint is made by an officer of the Reserve Bank of India who has been generally or specially authorised by the RBI.

Meaning of Cognizance

Cognizance means the stage at which a court formally takes notice of an offence and begins legal proceedings.

Simple Explanation

A court cannot start criminal proceedings on its own. It can do so only after receiving a written complaint from an authorised RBI officer.

Competent Court

No court below the rank of:

Metropolitan Magistrate, or
Judicial Magistrate First Class (JMFC)

can try offences under this Act.

Simple Explanation

Only higher-level Magistrate Courts are empowered to hear offences under the Payment and Settlement Systems Act.

Proviso – Exception for Section 25

There is one important exception.

For offences under Section 25 (Dishonour of Electronic Funds Transfer):

The complaint may be filed by:

The person aggrieved by the dishonoured electronic funds transfer.

Simple Explanation

Unlike other offences, an RBI officer is not required to file the complaint in cases involving dishonour of an electronic funds transfer.

The affected person can directly approach the court.

Example

Suppose A transfers money electronically to B for repayment of a loan.

The transfer fails due to insufficient funds.

After fulfilling the legal requirements under Section 25, B can directly file a complaint before the competent court.

Section 28(2) – Personal Attendance of RBI Officer

Normally, the RBI officer who files the complaint does not have to appear personally before the court in every hearing.

The Magistrate may exempt the officer from personal attendance.

However, if necessary, the Magistrate may require the RBI officer to appear personally at any stage of the proceedings.

Simple Explanation

The RBI officer is generally allowed to avoid attending every hearing, but the court may call the officer whenever his presence is required.

Example

If the court needs clarification regarding the complaint or evidence, it may direct the RBI officer to appear personally.

Important Legal Terms

Cognizance

Cognizance means the court’s formal acceptance of a complaint and the commencement of criminal proceedings.

Authorised Officer

An authorised officer is an officer of the RBI who has been officially empowered by the RBI to file complaints under the Act.

Metropolitan Magistrate

A Metropolitan Magistrate is a criminal court judge who exercises jurisdiction in metropolitan areas notified under the Code of Criminal Procedure.

Judicial Magistrate First Class (JMFC)

A Judicial Magistrate First Class is a Magistrate empowered to try serious criminal offences and impose punishments within the limits prescribed by law.

Chapter VII – Offences and Penalties

Section 29 – Application of Fine

Purpose of Section 29

Section 29 gives the court the power to decide how the fine imposed under the Payment and Settlement Systems Act, 2007 should be used.

Instead of keeping the entire fine with the Government, the court may direct that all or part of the fine be used to meet the expenses of the legal proceedings.

Section 29 – Application of Fine

If a court imposes a fine under this Act, it may order that:

The whole fine, or
A part of the fine,

shall be used to pay the costs of the legal proceedings.

Simple Explanation

The court can use the fine collected from the offender to cover expenses incurred during the case, such as court proceedings and related legal costs.

Example

Suppose a payment system provider is fined ₹20 lakh.

The court may direct that:

₹5 lakh be used to meet the expenses of the legal proceedings, and
The remaining amount be dealt with according to law.

Section 30 – Power of the Reserve Bank to Impose Penalties

Purpose of Section 30

Section 30 empowers the Reserve Bank of India (RBI) to impose monetary penalties for certain violations of the Act without initiating criminal prosecution.

The purpose is to ensure quick and effective enforcement of the law through administrative action.

Section 30(1) – RBI’s Power to Impose Monetary Penalty

If a person commits a contravention or default referred to in:

Section 26(2),
Section 26(3), or
Section 26(6),

the RBI may impose a monetary penalty.

Maximum Penalty

The RBI may impose:

Up to ₹10 lakh, or
Twice the amount involved in the contravention or default (if that amount can be calculated),

Whichever is higher.

If the violation continues:

An additional penalty of up to ₹25,000 per day may be imposed after the first day until the violation is corrected.

Simple Explanation

Instead of filing a criminal case, the RBI may directly impose financial penalties for certain types of violations.

Example

Suppose a payment system provider fails to submit mandatory information to the RBI.

The RBI may impose:

A penalty up to ₹10 lakh, and
An additional daily penalty if the default continues.

Section 30(2) – Opportunity of Being Heard

Before imposing any penalty, the RBI must:

Issue a Show Cause Notice to the person,
Explain the proposed penalty, and
Give the person a reasonable opportunity to present his explanation.

Meaning of Show Cause Notice

A Show Cause Notice is a written notice asking the person to explain why the proposed penalty should not be imposed.

Simple Explanation

The RBI cannot impose a penalty without first hearing the person concerned.

This follows the principle of Natural Justice.

Example

Before imposing a ₹5 lakh penalty, the RBI sends a notice asking the company to explain the reasons for its non-compliance.

Section 30(3) – Payment and Recovery of Penalty

Once the RBI imposes a penalty:

The person must pay it within 30 days from receiving the RBI’s demand notice.

If payment is not made:

The RBI may approach the Principal Civil Court having jurisdiction over the person’s place of business or registered office.

The court may then issue directions for recovery of the penalty.

Condition

The application to the court must be made by an officer authorised by the RBI.

Simple Explanation

If the defaulter refuses to pay, the RBI can use the civil court to recover the amount.

Section 30(4) – RBI’s Power to Recover Penalty

The RBI may recover the penalty by:

Debiting the defaulter’s current account (if maintained with the RBI),
Selling (liquidating) securities held by the RBI on behalf of the defaulter, or
Using any other recovery method permitted under the Act.

Simple Explanation

The RBI has the legal authority to recover unpaid penalties directly through available financial assets.

Example

If a bank maintains a current account with the RBI and fails to pay the penalty, the RBI may debit the amount from that account.

Section 30(5) – Court Certificate

When the civil court directs recovery:

It issues a certificate specifying the amount payable.

That certificate is enforceable in the same way as a civil court decree.

Meaning of Civil Court Decree

A decree is a formal order of the court that can be executed through legal recovery proceedings.

Simple Explanation

The recovery certificate has the same legal effect as a judgment passed in a civil suit.

Section 30(6) – No Double Proceedings

If a criminal complaint has already been filed for certain offences under Section 26 (such as those covered by Section 26(2) or Section 26(4)), the RBI cannot simultaneously impose an administrative penalty under Section 30 for the same contravention.

Simple Explanation

A person cannot be punished twice through parallel proceedings for the same offence.

The law avoids double punishment for the same violation.

Section 31 – Power to Compound Offences

Purpose of Section 31

Section 31 allows certain offences under the Act to be settled by compounding instead of continuing criminal prosecution.

This saves time, reduces litigation, and enables quicker resolution of minor offences.

Meaning of Compounding of Offence

Compounding means settling an offence by paying the prescribed amount or complying with the conditions imposed by the competent authority.

After compounding:

The criminal case is closed.
No further proceedings continue for that offence.

Simple Explanation

Instead of facing a lengthy criminal trial, the offender can legally settle certain offences through the RBI.

Section 31(1) – Power to Compound

Any offence under this Act may be compounded if:

The offence is not punishable with imprisonment only, or
The offence is not punishable with both imprisonment and fine.

The person may apply:

Before criminal proceedings begin, or
Even after proceedings have started.

The application is decided by an officer of the RBI authorised for this purpose.

Simple Explanation

Certain offences can be settled by applying to the RBI instead of continuing criminal prosecution.

Example

A payment system provider commits a procedural violation that is eligible for compounding.

The provider submits an application to the RBI, and if approved, the matter is settled without continuing the criminal case.

Section 31(2) – Effect of Compounding

Once an offence has been compounded:

No new proceedings can be started for that offence.
If proceedings have already started, they must be discontinued.

Simple Explanation

After compounding, the matter comes to an end and the offender cannot be prosecuted again for the same contravention.

Example

A company compounds an eligible offence with the RBI.

The pending criminal proceedings relating to that offence are terminated.

Important Legal Terms

Penalty

A monetary punishment imposed for violating the provisions of the Act.

Show Cause Notice

A written notice asking a person to explain why legal action or a penalty should not be taken against him.

Compounding of Offence

A legal process by which an eligible offence is settled without continuing criminal prosecution, subject to approval by the competent authority.

Civil Court Decree

A formal order of a civil court that is legally enforceable and can be executed to recover money or enforce rights.

Natural Justice

A legal principle requiring that every person must be given a fair opportunity to be heard before any adverse action is taken against them

CHAPTER VIII – MISCELLANEOUS

These sections contain general provisions that support the implementation and enforcement of the Payment and Settlement Systems Act, 2007. They deal with the overriding effect of the Act, recovery of penalties, exemptions, protection of officials, rule-making powers, and other administrative matters.

Section 32 – Act to Have Overriding Effect

Purpose

Section 32 gives the Payment and Settlement Systems Act, 2007 supremacy over other laws whenever there is any conflict.

Provision

If any provision of another law is inconsistent with this Act, the provisions of the Payment and Settlement Systems Act, 2007 will prevail.

Simple Explanation

If there is a conflict between this Act and another law, the provisions of this Act will apply.

This ensures that payment and settlement systems are regulated uniformly across the country.

Example

If another law allows a procedure that conflicts with RBI regulations under the PSS Act, the provisions of the PSS Act will prevail.

Importance

Gives legal supremacy to the Act.
Avoids conflicts between different laws.
Ensures uniform regulation of payment systems.

Section 33 – Mode of Recovery of Penalty

Purpose

Section 33 explains how the Reserve Bank of India (RBI) can recover penalties imposed under Section 30 when the defaulter does not pay voluntarily.

Section 33(1) – Recovery from Third Parties

If any person owes money to the defaulter, the RBI may issue a notice directing that person to:

Deduct the penalty amount from the money payable to the defaulter.
Pay that amount directly to the RBI.

Simple Explanation

Instead of waiting for the defaulter to pay, the RBI can recover the penalty from money that someone else owes to the defaulter.

Example

A payment company has to pay a vendor ₹20 lakh.

If the company owes a penalty to the RBI, the RBI may direct the vendor to pay the penalty amount directly to the RBI instead of the company.

Section 33(2) – Duty to Comply with RBI Notice

Every person receiving such a notice must comply.

Banks, post offices, and insurance companies must also obey the notice even if passbooks, deposit receipts, policies, or similar documents are not produced.

Simple Explanation

Once the RBI issues a recovery notice, the person receiving it must follow the instructions.

Section 33(3) – Claims after Notice Become Invalid

If someone claims ownership of the money or property after the RBI issues the notice, such claim will not affect the RBI’s right to recover the penalty.

Simple Explanation

Nobody can avoid RBI recovery by creating new claims after receiving the notice.

Section 33(4) – Objection by the Person Receiving Notice

The person receiving the notice may object by giving a sworn statement that:

No money is payable to the defaulter, or
He does not hold any money belonging to the defaulter.

If this statement is later found to be false, that person becomes personally liable to the RBI.

Simple Explanation

False statements made to avoid payment can result in personal liability.

Section 33(5) – RBI May Amend or Withdraw Notice

The RBI may:

Amend the notice,
Cancel the notice, or
Extend the time for payment.

Simple Explanation

The RBI has flexibility to modify recovery notices whenever necessary.

Section 33(6) – Receipt for Payment

The RBI will issue an official receipt for every payment received.

After payment, the payer is discharged from liability to the defaulter to the extent of the amount paid.

Simple Explanation

Once payment is made to the RBI, the payer is no longer responsible for paying that amount to the defaulter.

Section 33(7) – Payment after Notice

If a person pays money to the defaulter even after receiving the RBI notice, that person becomes personally liable to the RBI.

Simple Explanation

After receiving the RBI notice, payment should not be made to the defaulter.

Section 33(8) – Failure to Comply

If the person receiving the notice does not pay the RBI, he will be treated as a defaulter.

The RBI may start recovery proceedings against him.

Simple Explanation

Ignoring the RBI’s recovery notice has legal consequences.

Meaning of Defaulter

A defaulter means:

A person,
A system provider, or
A system participant

on whom the RBI has imposed a penalty under Section 30.

Importance of Section 33

Provides an effective recovery mechanism.
Prevents avoidance of penalties.
Ensures quick recovery of unpaid amounts.

Section 34 – Act Not Applicable to Stock Exchanges

Purpose

Section 34 excludes stock exchanges and their clearing corporations from the scope of this Act.

Provision

The Payment and Settlement Systems Act does not apply to:

Stock Exchanges.
Clearing Corporations of Stock Exchanges.

These entities are regulated under separate laws.

Simple Explanation

The PSS Act governs payment systems but not stock exchange settlement systems.

Example

The clearing mechanism of a stock exchange is regulated under securities laws rather than the PSS Act.

Importance

Prevents overlapping regulation.
Clearly separates the jurisdiction of financial regulators.

Section 34A – Act to Apply to Designated Trade Repository and Issuer

Purpose

Section 34A extends the application of this Act to:

Designated Trade Repositories.
Issuers of Legal Entity Identifiers (LEIs).

Meaning of Trade Repository

A Trade Repository is an organisation that:

Collects,
Stores,
Maintains,
Processes, and
Shares information

about derivative and financial transactions.

Meaning of Issuer

An Issuer is a person authorised to issue a Legal Entity Identifier (LEI) or another unique identification code recognised by the RBI.

Section 34A(1)

Most provisions of the Act apply to:

Designated Trade Repositories.
Issuers.

Wherever the Act refers to:

“Payment System” it should be read as “Designated Trade Repository” or “Issuer”, wherever applicable.

Simple Explanation

The Act applies to these institutions in the same manner as it applies to payment system operators, with necessary modifications.

Section 34A(2)

The RBI may:

Permit, or
Direct

a designated trade repository to provide additional services whenever necessary.

Simple Explanation

The RBI can expand the functions of a designated trade repository when required.

Importance

Strengthens regulation of financial market infrastructure.
Improves transparency in derivative transactions.
Enhances financial stability.

Section 34B – RBI’s Powers Not Applicable to IFSC

Purpose

Section 34B clarifies regulatory powers relating to International Financial Services Centres (IFSCs).

Provision

The RBI’s powers under this Act do not apply to payment systems operating in an IFSC.

Instead, such powers are exercised by the:

International Financial Services Centres Authority (IFSCA).

Simple Explanation

Payment systems functioning inside an IFSC are regulated by the IFSCA rather than the RBI.

Importance

Avoids overlapping regulatory powers.
Gives specialised regulation for IFSCs.

Section 35 – Officers of RBI Deemed to be Public Servants

Purpose

Section 35 grants legal status to RBI officers exercising powers under this Act.

Provision

Every RBI officer exercising powers under this Act is treated as a Public Servant.

Simple Explanation

RBI officers performing duties under this Act receive the same legal status and protections as government officials.

Importance

Ensures accountability.
Protects officers while performing official duties.
Makes corruption laws applicable to them.

Section 36 – Protection of Actions Taken in Good Faith

Purpose

Section 36 protects the Government and RBI officials from unnecessary legal proceedings.

Provision

No legal action can be taken against:

The Central Government.
The RBI.
RBI officers.

for actions done in good faith under this Act.

Meaning of Good Faith

Good faith means acting honestly and with genuine intention while performing official duties.

Simple Explanation

Officials acting honestly under the Act cannot be sued merely because someone suffers loss.

Example

An RBI officer cancels a payment system authorisation after following the law.

Even if the operator suffers financial loss, the officer cannot be personally sued if he acted honestly.

Importance

Protects honest officials.
Enables fearless decision-making.
Prevents unnecessary litigation.

Section 37 – Power to Remove Difficulties

Purpose

Section 37 allows the Central Government to remove practical difficulties in implementing the Act.

Section 37(1)

If any difficulty arises in implementing the Act, the Central Government may issue an order published in the Official Gazette.

The order must:

Be consistent with the Act.
Be necessary for removing the difficulty.

However, this power can be exercised only within two years from the commencement of the Act.

Simple Explanation

The Government can solve implementation problems during the initial years of the Act.

Section 37(2)

Every such order must be placed before both Houses of Parliament.

Simple Explanation

Parliament supervises the Government’s exercise of this power.

Importance

Helps smooth implementation of new legislation.
Ensures parliamentary oversight.

Section 38 – Power of RBI to Make Regulations

Purpose

Section 38 authorises the RBI to make regulations for implementing the Act.

Section 38(1)

The RBI may issue regulations through a notification, provided they are consistent with the Act.

Simple Explanation

The RBI can make detailed rules to effectively implement the provisions of the Act.

Section 38(2) – Matters for Which Regulations May Be Made

The RBI may frame regulations regarding:

Powers and functions of the Payments Regulatory Board.
Meetings and quorum of the Board.
Application forms for authorisation.
Authorisation fees.
Form of authorisation certificates.
Payment instruction formats.
Standards for payment systems.
Information and returns to be submitted.
Any other matter required under the Act.

Simple Explanation

The RBI can create detailed operational rules whenever the Act requires them.

Section 38(3) – Laying Before Parliament

Every regulation made by the RBI must:

Be sent to the Central Government.
Be placed before both Houses of Parliament.

Parliament may:

Modify the regulation, or
Cancel it.

However, actions already taken under that regulation remain valid.

Simple Explanation

The RBI makes regulations, but Parliament has the authority to review them.

Importance of Section 38

Gives flexibility to the RBI.
Enables quick regulatory changes.
Ensures parliamentary control over delegated legislation.

Importance of Chapter VIII

Chapter VIII provides the administrative and legal framework necessary for the effective implementation of the Payment and Settlement Systems Act, 2007. It:

Gives the Act overriding effect over conflicting laws.
Establishes mechanisms for recovering penalties.
Clarifies the Act’s applicability and exemptions.
Extends the Act to designated trade repositories and LEI issuers.
Defines regulatory jurisdiction for IFSCs.
Grants legal protection to RBI officers acting in good faith.
Allows the Central Government to remove implementation difficulties.
Empowers the RBI to make detailed regulations while ensuring parliamentary oversight.