The Reserve Bank of India (RBI), the central bank of our nation, regulates and oversees the functioning of the payments system in India. The Payment and Settlement Systems Act, 2007 (the Act) is the primary legislation regulating payment and settlement systems for transactions, with the RBI as the core regulator of these systems in India. As per the Act, no payment system can be established or can come into existence without the authorization of the RBI. Therefore, all the payment system operations that we use in our daily lives, including card payment systems, ATMs, and Prepaid Payment Instruments (PPIs), among others, are all authorized and regulated by the RBI. The RBI is statutorily authorized to regulate payment systems and the entities offering them, and therefore, it issues various directives from time to time laying down different rules and guidelines.
In a move to regulate certain Mergers and Acquisitions (M&A) transactions involving Non-Bank Payment System Operators (PSOs), the RBI, in July 2022 issued a notification containing directions relating to such transactions. This Directive makes it mandatory to seek prior approval of the RBI where- (a) there is a takeover or acquisition of control over a non-bank PSO or (b) the core activity of a non-bank PSO is being sold or transferred.
In these two scenarios, no transaction can be implemented unless prior approval of the RBI is sought and granted- this indicates an ex-ante system of regulating M&A transactions in the payments sector, as opposed to the previous ex-post facto mechanism.
As per the Directive, prior approval of the RBI is required for the following transactions-
- A takeover or acquisition of control of a non-bank PSO, irrespective of whether it leads to a change in its management or not;
- Selling or transferring the payment system activity of a non-bank PSO in favour of the other party that does not hold the authorization to pursue a similar activity.
Apart from the requirements relating to seeking prior approval for certain categories of transactions, the Directive also mandates a subsequent intimation to the RBI in the following cases-
- Change in Directorship or Management of a non-bank PSO
- Sale of a non-bank PSO’s payment system to an entity authorized to pursue a similar operation.
PRIOR APPROVAL OF THE RBI FOR CERTAIN TRANSACTIONS INVOLVING NON-BANK PSOs
The mandatory provisions of the Directive which require seeking prior approval of the RBI lay down the following procedure(s) for such notification-
- In case of a takeover or acquisition of control over a non-bank PSO that might or might not lead to a change in the management, the non-bank PSO needs to file an application with the Department of Payment and Settlement Systems (DPSS) of the RBI coupled with relevant information of the proposed directors and the new shareholders. The term ‘control’ in this directive is as per its definition under Regulation 2(1)(e) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
- When there is a sale/transfer of the payment activity to a non-authorized entity, then approval must be obtained from the DPSS of the RBI by way of an application by the Non-bank PSO. Thereafter, the purchaser of the payment activity needs to seek the proper authorization through an application, to undertake the activity it proposes to take over. Post approval, the proposed transaction can be executed. Furthermore, the non-bank PSO needs to relinquish its license and authorization relating to the payment activity that has been transferred.
- Upon receipt of information regarding the proposed transaction, the RBI will try to reply to the same, with its decision of approval/disapproval of the proposed deal, within 45 days.
- Post approval by the RBI, a public notice of at least 15 days (either jointly by both parties or separately) needs to be published in one national daily newspaper and one newspaper in vernacular, which must contain relevant information regarding the objective behind the proposed transaction and details of the parties, among others. Furthermore, an additional responsibility of the seller non-Bank PSO is that minimum 15 days before the implementation of the proposed transaction, it is required to notify all its relevant stakeholders of the proposed transaction and changes brought about by it.
SUBSEQUENT INTIMATION TO THE RBI IN CASE OF CERTAIN CHANGES AND TRANSACTIONS
When there is an RBI-authorized non-bank PSO undergoing any of the following changes, it is obligatory to intimate the RBI of the same within 15 days of such change-
- When there is an alteration in the management or the directors of a non-bank PSO, naturally such change will have implications on the decision-making, administration and overall functioning and management, which therefore needs to be intimated to the RBI. On receipt of such information, the RBI will evaluate the probable implications and weigh the pros and cons of such change, and decide accordingly whether it wants to intervene and impose certain conditions or restrictions.
- When a non-bank PSOs core payment activity is transferred in favour of an entity that holds the RBI authorization to conduct similar nature of activities, then the prior approval of the RBI is not required. Some of the provisions relating to mandatory prior approval of the RBI will apply mutatis mutandis in the present scenario. Prior notification through a public notice and notification to the non-bank PSO’s stakeholders, 15 days prior to the actual implementation of the transaction will be required- the only difference being that here, the RBI will have to be intimated, within 15 days post the transaction. The seller non-bank PSO will also have to voluntarily give up its license or authorization concerning the payment activity that is being transferred/sold.
This Directive marks a shift from a post-transaction intimation system to now a prior approval one, which is very similar to the approach taken by certain other regulators such as the Competition Commission of India (CCI). This indicates a strict approach by the RBI for M&A and corporate restructuring transactions relating to non-Bank PSOs, and it would be interesting to see what the future holds for the RBI as a regulator, and for the non-bank PSOs. The introduction of this Directive adds RBI to the entire list of regulators and bodies whose prior approval is required for a transaction- every M&A transaction in India needs the approval of different regulators- be it an over-arching antitrust regulator (the CCI), or sector-specific regulators (if applicable), like the RBI and the Insurance Regulatory and Development Authority of India (IRDAI). This Directive will affect deal timings for transactions in the Payment System Operators’ space. This will also impact the due diligence process for M&A transactions involving non-Bank PSOs. The buyer will have to consider the validity of the target non-bank PSO’s license/authorization. There is also a possibility that this Directive adds to the risks and uncertainty of transactions involving non-Bank PSOs. Therefore, parties will now have to factor in the risk of RBI’s approval/disapproval of the transaction as well. Certain issues such as insufficient and onerous timelines for certain obligations under the Directive, and the lack of clarity regarding the recourse available to enterprises aggrieved by RBI’s rejection to approve a proposed transaction, among others are still pending and need to be addressed.
One of RBI’s primary responsibilities is to oversee the payments and settlements system in India, for various transactions. A smooth and well-structured payments system in an economy is a prerequisite for the financial and economic growth and development of a nation- as part and parcel of its responsibility to supervise and oversee the payments system in India, the RBI is empowered to regulate the payment systems, to ensure their stability and effectiveness. Part of this regulatory function also includes dealing with M&A transactions in this space, thereby making the RBI a crucial sectoral regulator whose laws and directives need to be complied with by the parties.
The proposed Directive will lead to a much-needed regulation of transactions in the non-bank Payment System Operators’ market, and with the introduction of the prior approval requirement, it is a great step in the right direction to regulate such transactions. It is now in RBI’s hands to decide what approach it adopts for dealing with transactions involving non-Bank PSOs. In the future, we may witness some enterprises raising objections to not receiving RBI’s approval of certain proposed transactions that they plan to enter into, and it would be interesting to see what subsequent recourse (perhaps in the form of an appellate mechanism) they might have (if any). There is also a possibility of a potential jurisdictional tussle between two regulators- the RBI and the CCI for the approval of such transactions, in which case a higher authority, like a Court, will be required to intervene and settle the dispute.
Author(s) Name: Jai Hindocha (Symbiosis Law School, NOIDA)