Banking Article, Banking Finance 2021, Banking Finance December 2021

New Umbrella Entity – A boon for retail payment system

In India at present retail payment system is managed by NPCI. NPCI is a non-profit entity, owned by banks. NPCI operates settlement systems like UPI, AEPS, RUPAY. Fastag  etc. To enhance retail payment system RBI has planned to allow other entities to set up umbrella entities for payments systems. New Umbrella Entity is an non-profit entity that will set-up manage and operate new payment systems especially in the retail space such as ATMs, white-label PoS, Aadhaar-based payments and remittance services. In August 2020, the reserve Bank of India came out with a framework of authorization of a pan-India new umbrella entity (NUE) for retail payments. Main objective to set-up pan –India new umbrella entities focusing on retail payment systems. Such entity shall be a company incorporated in India under the Companies Act2012 and may be a ‘for-profit, or a section 8 Company as may be decided by it. There is an active collaboration among banks, payment banks, and fintechs and technology providers for NUE. The regulator’s intent was to create a parallel to the National Payment Corporation of India (NPCI). New Umbrella entity will be able to operate their own clearing and settlement systems, establish new standards and technologies and develop innovative new payment systems that enhance customer access, convenience and safe. All NUEs will be interoperable with the NPCI.

The umbrella entity shall be ac Company authorized by RBI under Section 4 of the PSS Act, 2007. It shall be governed by the provisions of the PSS Act and other relevant statutes and directives, prudential regulations and other guidelines/ Instructions.

Eligibility : All entities eligible to apply as promoter / promoter group of the umbrella entity shall be owned and controlled by resident Indian Citizens The rules / Regulations framed under the Foreign Exchange Management Act,1999(FEMA) as amended from time to time with 3 years experience in the payments ecosystem as Payment System Operator / Payment Service provider / Technology Service Provider. The shareholding pattern shall be diversified, Any entity holding more than 25% of the paid up capital of the umbrella entity shall be deemed to be a promoter. The Memorandum of Association of the applicant entity must cover the proposed activities of operating a pan-India umbrella entity for retail payment systems.

If any Foreign Direct investment (FDI) / Foreign Portfolio Investment (FPI) entity then It shall additionally fulfill

  • The capital requirements as applicable under the rules / regulations framed under FEMA, as amended from time to time
  • They submit necessary approval from the competent authority as required under rules / regulations framed under FEMA, as amended from time to time

Fit and proper criteria: The Promoters / Promoter Groups, shall conform to the Reserve Bank’s “fit and proper” criteria Director of a Promoter Company / Group Company shall be deemed to be a “fit and proper” person if:

Such person has a record of fairness and integrity, including but not limited to

  • Financial integrity
  • Good reputation and character and
  • Honesty

Such person has not incurred any of the following disqualification:

  • Convicted by a court for any offence involving moral turpitude or any economic offence or any offence under the law administered by the RBI
  • Declared insolvent and not discharged
  • An order restraining, prohibiting or debarring the person from accessing/ dealing in any financial system, passed by any regulatory authority, and the period specified in the order has not elapsed
  • Found to be of unsound mind by a court of competent jurisdiction and the finding is in force and
  • Is financially not sound

If any question arises as to whether a person is a fit and proper person, then the RBI’s decision on such question shall be final.

Requirement of Capital: The new umbrella entity shall have a minimum paid up capital of Rs 500 crore. No single Promoter/ promoter Group shall have more than 40% investment in the capital of the umbrella entity. The Promoters/ Promoter Groups shall upfront demonstrate capital contribution of not less than 10% i.e. Rs.50 crore at the time of making an application for setting up of the umbrella entity. The balance capital shall be secured at the time of commencement of business / operations. The Promoter / Promoter Group shareholding can be diluted to a minimum of 25% after 5 years of the commencement of business of the umbrella entity. A minimum net worth of Rs 300 crore shall be maintained at all time.

Scope of New Umbrella entity:

  • To set up, manage and operate new payment systems in the retail space comprising of but not limited to ATM, White Label Pos, Aadhaar based payments and remittance services newer payment methods, standards and technologies, monitor related issues in the country and internationally take care of developmental objectives like enhancement of awareness about the payment systems
  • To operate clearing and settlement systems for participating banks and non banks identify and manage relevant risks such as settlement, credit , liquidity and operational and preserve the integrity of the system, monitor retail payment system developments and related issues in the country and internationally to avoid shocks, frauds and contagions that may adversely affect the systems and the economy in general
  • To fulfill it policy objectives and ensure that principles of fairness, equity and competitive neutrality are applied in determining participation in the system, frame necessary rules and the related processes to ensure that the system is safe and sound and that payments are exchanged efficiently
  • To carry on any other business as suitable to further strengthen the retail payments ecosystem in the country. It is expected that the umbrella entity shall offer innovative payment systems to include hitherto excluded cross section of the society and which enhance access, customer convenience and safety and the same shall be distinct yet interoperable
  • It should interact and be interoperable to the extent possible with the systems operated by NPCI
  • The umbrella entity may be permitted to participate in Reserve Bank’s payment and settlement systems, including having a current account with Reserve Bank, if required

The NUE shall conform to the norms of corporate governance along with “fit and proper” criteria for persons to be appointed on its board. The RBI retains the right to approve the appointment of directors as also to nominate a member on the Board of the NUE.

Business Plan: The application for setting up the umbrella entity shall contain a detailed business plan covering the payment system proposed to be set up and operated along with other documents to duly establish its experience in the payments ecosystem. The plan shall include technology, security features, market analysis/ research benefit, if any of such payment systems, operational structure of the payment systems, time period for setting up the payment systems and proposed scale of operation etc, A proposed organizational strategy in terms of fulfilling its responsibility as an umbrella entity shall also be given in the business plan. The umbrella entity shall commence business / operation within a time of 6 months, extendable to a maximum of one year, if required from the date of “in-principle approval”

The application shall be submitted in an envelope “Application for Umbrella Entity addressed to the Chief General Manager, Department of Payment and Settlement Systems, Central office RBI Mumbai. The application will be taken up for processing only after the last date of receipt of applications, in order of their receipt at the RBI. Scrutiny of applications will be undertaken by an External Advisory Committee (EAC). The EAC will submit its recommendations to the RBI.

Board for Regulation and Supervision of Payment for setting up umbrella entity RBI will endeavor to complete the process within a period of sex months.

RBI has set a deadline of March 31 for firms to submit their applications for setting up NUEs. The Idea of NUE floated by the Reserve Bank Of India to create an alternate mechanism to the existing National Payment Corporation of India(NPCI).  Entities owned and controlled by Indian citizens with at least 3 years of experience in the payments segment can become promoters of NUEs. Private companies are queueing up to set up NUEs. Reliance, Tata, Amazon and Paytm companies are in line to set up new umbrella entities for payment systems.  Reliance ,  Facebook and Google are planning to apply as a consortium. Tata group joined hands with HDFC bank, Kotak Mahindra Bank, Master Card and Bharti Airtel. Amazon has tied up with Visa, ICICI Bank, Axis Bank and fintech startups, Bill Desk and PineLabs for the NUE licence.

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