The National Payments Corporation of India (“NPCI”) was set up according to the provisions of the Payment and Settlement Systems Act, 2007, with the aim of forming a ‘robust Payment and Settlement Infrastructure in India’. As a joint initiative of the Reserve Bank of India (“RBI”) and the Indian Banks’ Association (“IBA”), NPCI was incorporated as a ‘not-for-profit’ company under the Companies Act, 2013 (“CA Act”). It is an umbrella organisation that operates retail payments and settlement systems across India. It has worked towards improving the retail payment systems, introducing updated technology and making them more efficient. The NPCI is currently supported by 54 banks, including 17 public sector banks, 17 private banks, 10 co-op banks, 7 regional rural banks and 3 foreign banks.
In August 2020, the RBI issued a notification titled ‘Framework for authorisation of pan-India Umbrella Entity for Retail Payments’. As per this notification, the RBI has opened the floor of retail payment systems management to private entities. The objective is to introduce a pan-India umbrella entity (or entities) that focuses on retail payment systems, that will give competition to the NPCI. The notification details the eligibility criteria, the scope of activities and the governance structure for those entities that are interested in applying for being considered to set up a pan-India umbrella entity for retail payments. Following are certain conditions that need to be complied with –
- The entity must be a Company incorporated under the CA Act.
- It could be either ‘for-profit’ or a ‘not-for-profit’ company.
- The promoters/promoter group applying to form an New umbrella entity (“NUE”) are/is required to have a minimum paid up capital of Rs. 500 crores cumulatively with no promoter forming more than 40% of the investment.
- The promoter shareholding in the NUE can be diluted only to a minimum of 25 percent pursuant to the completion of five years of the functioning of the umbrella entity.
- The umbrella entity would be required to maintain a minimum net worth of Rs. 300 crores at all times.
The final deadline for applying was 31st March 2021 and it was noted that six consortiums comprising of several banks, fintech companies were keen on obtaining the NUE license. One of the big consortiums saw tech giants such as Facebook, Google teaming up with Infibeam Avenue’s SoHum Bharat and Reliance Industries’ digital services unit, Jio Platforms. Ferbine Private Limited (a TATA group subsidiary) along with Flipkart, Mastercard and PayU applied as a consortium. Kotak Mahindra bank, HDFC bank and Airtel Digital each hold stakes valued at less than 10% in Ferbine Private Limited. Various state banks expressed their disapproval at not being allowed to file an application for forming an NUE directly. The reason that certain state banks were barred from doing so was because they held shares in the NPCI and if they were allowed to become a part of the NUE, they would be posing a competition to the NPCI which would be unfair. However, the State Bank of India also requested the Finance Ministry to reverse this stance as it claimed that keeping the country’s largest mass lender out of the NUE race could impede innovation.
A few Indian and international bank unions had expressed their hesitance to the RBI regarding allowing private companies to set up an NUE. They were of the opinion that the involvement of big MNCs would raise fears surrounding abuse of user data and that India’s digital payment systems should continue to be monitored by the NPCI as a non-profit entity. Special concerns were raised regarding an application submitted by a consortium with the tech giant Amazon as it had often received flak for its business practices and was under investigation surrounding the same in India and abroad. Those against an NUE believe that privatisation of the payments system will compromise on data security.
Those in favour of the NUE criticised the grounds of opposition as being “flimsy”. It was noted that since the NUE(s) would be set up and operated according to the provisions of the Payments and Settlement Systems Act, the concerns surrounding data privacy were misplaced as the Act establishes a set of checks and balances to ensure safety and compliance. As per the annual report of the RBI published in 2021, the total digital transaction volume in 2020-21 is 4371 crores as against 3412 crores in the financial year 2019-2020. The steep increase in the transaction volume is testimony to the growing reliance on digital modes of payment. The estimated value of digital payments in India is expected to be around INR 238 trillion by 2025. It explains why so many large fintech players wish to establish an NUE. From the framework that the RBI has put out, it is clear that the scope of activities of the NUE will be very wide. However, the RBI has not clearly explained in detail the purpose behind or the need for setting up an NUE. The primary reason that the RBI has provided is that it aims to foster a competitive environment and believes that it would make the digital payments system thrive.