Revisions to framework for imposing monetary penalties

By Sawant Singh and Aditya Bhargava, Phoenix Legal

The enactment of the Payments and Settlement Systems Act, 2007 (PSS Act), was a laudable and farsighted move as it not only created a regulatory framework for payment and settlement systems, but also provided guidelines to foster the growth of such systems. The PSS Act designated the Reserve Bank of India (RBI) as the regulatory and supervisory authority, and sections 30 and 31 of the PSS Act enable the RBI to impose penalties and compound offences, respectively.

Sawant Singh
Phoenix Legal

In a refreshing turnabout, the RBI also issued directions on October 2016 prescribing a framework under which it would impose monetary penalties and compound offences under the PSS Act. This framework provided much needed guidance on the operational procedure to be followed for imposing any penalty or fine, including detailed prescriptions such as the issue of a letter citing the offence and seeking an explanation, explicitly stating that the explanation would be examined, the issue of a show cause notice if the explanation is unsatisfactory, and a personal hearing if requested before taking any penal action.

The RBI’s 10 January 2020 circular (circular) notes that there have been rapid developments with the “increased adoption of technology, availability of payment products, entry of more non-bank players, disintermediation, significant surge in turnover, etc.”, and introduces changes to the levying of penalties on payments systems operators with the intent of ensuring continued compliance.

The circular helpfully sets out the key changes introduced, notable among which are, (a) an objective methodology and scoring matrix to determine the amount of the penalty to be imposed, (b) a scoring matrix to determine whether a show cause notice should be issued, (c) prescribing separate procedures for imposing penalties and compounding offences, and (d) prescribing separate procedures to be followed for imposing penalty and compounding offences.

Aditya Bhargava
Phoenix Legal

In another first, the revised framework also sets out principles to be followed to determine the materiality of a contravention under the PSS Act.

These include (a) the severity of the contravention based on the degree of the breach and whether it is isolated, localized, extensive or widespread, (b) the frequency of such contraventions, (c) the seriousness of the contravention based on the amount involved as compared to the total value of the transactions handled, (d) the amount involved, and (e) the level of inadequacy of compliance. In considering the amount of a penalty, the following factors will be considered: the amount of the gain or unfair advantage, and whether this is quantifiable; the loss caused to any authority, agency, the exchequer, or any other market participant, and monetary benefits accruing from delayed compliance or non-compliance. All monetary penalties imposed will also have to be disclosed by the relevant entity in its notes to the accounts in the annual statements for the financial year in which the penalty was imposed.

The granular provisions of the revised framework also include the constitution of a designated authority to consider contraventions and impose penalties. Where a contravention is quantifiable, a committee of senior officers comprising the chief general manager of the Department of Payment and Settlement Systems (DPSS), and senior officers from two other departments, will be the designated authority. For non-quantifiable contraventions, the committee will comprise the executive director in charge of the DPSS and chief general managers from two other departments of the RBI. Notably, the revised framework explicitly requires a designated authority to pass a “speaking order” based on its evaluation of the information and documents presented, and the submissions made in a personal hearing.

While the framework may not have gathered much attention when it was first issued, it represents a positive step forward as it provides direction on the regulatory thought process. Although the framework provides for the RBI to disclose the imposing of any penalties on its website, it would also be useful for legal practitioners and scholars of administrative law alike if statistics of all such proceedings were made publicly available. It is expected that these statistics will illustrate the benefits of openness and transparency in government. All in all, the voluntary fencing of discretionary power by the RBI provides much-needed comfort to market participants and encourages them to take appropriate risks in a sound and principle-based ecosystem.

Sawant Singh and Aditya Bhargava are partners in the Mumbai office of Phoenix Legal. Sristi Yadav, an associate, also provided assistance on the article.


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