Paypal: Not the RBI’s pal
Smrithi Punnoose December 6, 2015
The Payment and Settlement Systems Act, 2007 (“PSS Act”) prescribes certain conditions for companies to comply with, prior to setting up a payment system in India. As per the PSS Act, any system that enables a payment to be effected between a payer and a beneficiary is called a payment system; this would include credit and debit card operations, money transfer operations, smart card operations and other similar processes. While the PSS Act governs all types of payment systems, the Reserve Bank of India (“RBI”) has issued a set of specific guidelines for the issuance and operation of prepaid payment instruments in India. Instruments that have a value stored on them which represents the value paid for by the holders of such instruments, by cash, by debit to a bank account, or by a credit card are called prepaid instruments. Thus, smart cards, internet wallets, mobile wallets and internet accounts are all types of prepaid payment instruments. Further, the RBI has also issued circulars permitting AD Category I banks to offer facilities to repatriate export related remittances by entering into standing arrangements with online payment gateway service providers for the export of goods and services.
The RBI has continuously been trying to strike a balance between security and convenience with respect to payment systems and online payment gateways through its policies and regulations, while at the same time trying to keep up with technology that is constantly changing. Thus, a number of amendments in the regulations pertaining to payment systems arise only once it is brought to light that a potential security risk is created due to certain activities of the payment system provider or if a regulatory norm is flouted due to a loophole in the law. More often than not, these changes in policies or the introduction of new regulations lead to enraged customers and unhappy service providers.
Case in point: Paypal India’s operations. Paypal was first established in the United States of America as a payment system to facilitate financial transactions that take place on the online market place website, ebay.com. While buyers and sellers meet on ebay.com they can use their Paypal accounts, which are linked to their bank accounts, to accept money when selling goods and the same may be used to buy other goods or send money to other users with Paypal accounts. When Paypal began its operations in India the RBI noted, that one of the services offered by Paypal was the cross border transfer of money. As discussed above, money transfer operations fall under the ambit of the PSS Act, and Paypal had not obtained authorizations for the same from the RBI. Further, Paypal allowed Indian exporters to retain their export proceeds abroad without repatriation, resulting in violation of the provisions of Foreign Exchange Management Act, 1999. Paypal would have had to obtain a banking license to conduct such operations and thus the RBI issued a set of regulations in November, 2010 causing Paypal to tweak its Indian operations. As per the circular issued by the RBI, Indian exporters were permitted to accept payments into their Paypal accounts, however such amounts could not be used to make any more purchases and the same had to be transferred to their bank accounts within 7 days of receipt of the money. Further, this facility was available only for the export of
goods and services of a value not exceeding USD 500. Thus PayPal made changes to its user agreement for Indian users wherein it specified (in compliance with RBI’s directives) that no balance or future payments could be used by the seller in India to buy any goods or services outside India and that the money had to be transferred to an Indian bank account immediately. Further, PayPal disabled the option to send and receive personal payments to and from India as this violated the provisions of the PSS Act. Additionally, the RBI also stopped permitting domestic transfers between domestic Paypal users as this required registration under the pre-paid payment instrument guidelines and Paypal had not obtained the same.
In October 2011, the RBI increased the export limit to USD 3000, following which in July 2013, the limit was further increased to USD 10,000 and this is the current limit for the export of goods and services using any online payment system. In September, 2015 the RBI further liberalized the conditions for cross border e-commerce transactions by the release of a circular that allowed both the import and export of goods, thus Paypal users were now permitted to import goods and software upto a value of USD 2,000 from overseas websites. This relaxation came close on the heels of the RBI’s announcement of permitting 11 companies to start payment banks in India – we’ll cover the implications of this announcement in another blog post.
While today, Paypal operates as a payment platform in India, and allows users to purchase goods and services overseas as well as permits merchants to receive payments, the transfer of money between Paypal accounts of two users is still not permitted. Further, merchants in India are still bound by restrictions that require them to immediately transfer money from their Paypal accounts to their bank accounts within 7 days of receipt of such money. Similarly, immediately upon receipt of funds from an Indian importer and in no event, later than 2 days from the date of credit to the collection account, the sale / import proceeds is required to be remitted to the respective overseas exporter’s bank account.
Even though Paypal is one of the largest and most reliable payment systems in the world today, it has still not received a very welcoming response in India or garnered a large customer base, primarily due to the many restrictions and regulations that continue to be doled out by the regulatory authorities. One can only wait and watch to see what the next step of the RBI will be in its effort to strike a balance between convenience, security, and regulatory control.
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