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The Article is written by Shreya Pandey from Banasthali University, Jaipur. The article deals with the Payment and Settlement Act, 2007 its objectives and features of the Act.


The Payment and Settlement Act System, 2007 (PSS Act, 2007) was set up by the Reserve Bank of India (RBI) which received the assent of the President on 20th December 2007. It came into force from 12th August 2008. The Act empowers RBI (apex institution) to deal with the matters relating to that purpose and other purposes for which RBI is authorized to constitute a central authority known as the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS). The Payment and Settlement Systems Regulations, 2008 was also made by RBI. Both the regulations also came into force on 12th August 2008.

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The objectives of The Payment and Settlement Systems Act, 2007 are:

  1. To provide regulation and supervision of payment methods in India. 
  2. To designate RBI, the apex institution as authority for purposes related to payment systems in India. 
  3. To constitute such regularities by RBI to exercise its power and perform its functions.
  4. To provide a legal basis for “netting” and “settlement finality”.

The two regulations made under the Act through RBI are Board for Regulation and Supervision of Payment and Settlement Systems Regulations, 2008 and the Payment and Settlement Systems Regulations, 2008.

The objective of the Board for Regulation and Supervision of Payment and Settlement Systems Regulation, 2008 are:

  1. To deal with the constitution of BPSS
  2. To deal with the composition, powers, and functions, its meetings, and quorum of BPSS
  3. To constitute sub-committees or Advisory Committees by BPSS
  4. To exercise its powers and perform its functions on behalf of the RBI.

The objectives of the Payment and Settlement Systems Regulations, 2008 are:

  1. It deals with matters relating to the form of application to authorize commencing/ carrying on a payment system and grant of authorization.
  2. It prescribes payment instructions and determines the standard of payment systems.
  3. It covers matters related to furnishing of returns or documents or other information. 
  4. It also deals with the furnishing of accounts and balance sheets by system providers.

Important definitions

Sec 2(1) deals with the definitions of the important words used in the Act.

Payment Obligation- It is an indebtedness which is owned by a participant of the system to the other resulting from clearing or settlement of payment instructions related to funds, securities or foreign exchange or derivatives or other transactions.

Payment Instructions- Payment Instruction can be an instrument or authorization or order in any form including an electronic means to carry out payment by a person to another in the payment system or by a participant to another participant in the payment system. The communication of the payment can be done either manually or through electronic means. Instruments such as cheque draft or payment order are manual means. 

Settlement- It means the settlement of payment instructions. It also includes the settlement of securities, foreign exchange, derivatives, or other transactions involving payment obligations. It can be either on a net basis or on a gross basis.

Payment System- It is a system which enables a payment between a payer and a beneficiary, including clearing, payment, or settlement service, but it does not include a stock exchange. It further explained that the payment system includes a system enabling credit card, debit card, smart card operations, or money transfer operations, etc. Section 34 of the PSS Act states that stock exchange or clearing corporations set up under stock exchange are not applicable under this Act.  

System Providers- The entities providing operations for clearing, settlement, or payment are referred to as system providers. The entities operating a money transfer system/card transfer system would also be referred to as system providers.

Authorization of payment system

According to Section 4 of the PSS Act, only RBI has an authority to operate or commence any payment system and if any person or system providers desire to operate or commence a payment system then he has to apply for authorization from RBI under Section 5 of the Act. The application of authorization shall be made according to Form A under Regulation 3(2) under PSS Regulations, 2008. The application should be filled and submitted along with the required documents and fee of 10,000/- to the RBI. The application fee can be submitted in cash, cheque, demand draft, payment order, or electronic fund transfer in favour of RBI. It can also be submitted through electronic mode. The system providers operating the payment systems or desires to set up such a payment system need to get authority from the RBI from this link. Any unauthorized operation through a payment system would be considered as an offence under this Act and would be liable for punishment.

Foreign Entities

The Act doesn’t differentiate or discriminate between domestic and foreign entities. It uses the expression “No Person” under Section 4 of the Act. Thus, foreign entities are allowed to operate the payment system in India. To commence a payment system in India, it is necessary to obtain license or approval from the RBI, irrespective of being a domestic or foreign entity. 

A foreign entity can provide any type of payment system or service. The PSS Act, 2007 does not put any restriction on the kind of payment system to be provided by a foreign entity. Provided, the payment system or service should be in accordance with the legal framework of the country. Foreign card networks like MasterCard, Visa WorldWide Pvt. Ltd., etc, have received authority from RBI and are operating card schemes in India. Foreign entity service providers like Western Union Financial Services Inc., USA, MoneyGram Payment Systems Inc, etc. have also received authority and are also providing remittance services.    

Financial Market Infrastructures (FMI)

It is a multilateral system among participating institutions including the system operator. This system is used for purposes of clearing, settling, or recording payments, securities, or other financial transactions. FMI refers to Central Securities Depositories (CSDs), Securities Settlement Systems (SSSs), Central Counter Parties (CCPs), and Trade Repositories (TRs) as “payment systems” under the Act, to facilitate the clearing, settlement, and recording of financial transactions. The Committee on Payment and Settlement Systems (CPSS) and International Organization of Securities Commissions (IOSC) issue the Principles for Financial Market Infrastructures (PFMIs). The FMIs are subjected to the rules and regulations of such PFMIs. On 26th July 2013, RBI issued a press report on “Policy Document for regulation and Supervision of Financial Market Infrastructures”. A foreign Financial Market Infrastructure can also operate in India. The PSS Act does not prohibit its operation. 

Factors and parameters for considering the application

The factors for considering the application for authorization are provided under Section 7 of the Act which states that the following factors should be considered while dealing with the application of authorization for commencing or operating a payment system:

  1. The need for the proposed payment system. 
  2. The technical standards and design of the proposed system.
  3. The security procedures of the system.
  4. The terms and conditions of operation of the proposed system.
  5. The procedure for netting of the payment instructions.
  6. The risk management processes.
  7. The financial status of the applicant.
  8. The applicant’s experience of management and his integrity.
  9. Interests of the consumers.
  10. Monetary and credit policies
  11. Any other relevant factor 

There are different criteria for different payment systems like an application for issuance and operation of PPI, it should be accessed against the Policy Guidelines on Issuance and Operation of Pre-Paid Instruments in India. Similarly, in an application of CCP, it would be accessed against the backdrop of the PFMI policy document. 

The RBI shall dispose of the application of authorization within six months from the date of receipt of the application. 

Section 6 of the Act states that RBI may make such inquiries as it thinks fit to satisfy itself the capacity and credential of the applicant or for any other valid purpose. 

If in any case the entity is already being regulated by any other authority then RBI may call upon such authority to take information about the entity

Power of RBI

The Reserve Bank has following powers related to an application for authorization of payment system:

  1. According to Sec 7(3) of the Act, RBI can refuse to grant authorization to the application by giving a written notice stating the reasons for refusal of the application also give a reasonable opportunity to the applicant.
  2. Section 8 of the Act empowers RBI to revoke the authorization granted by it. The revocation is done if the system provider contravenes any provision of the Act or regulation, or fails to comply with orders directions of the RBI, or violates the terms and conditions under which it has received the authorization.
  3. Section 7 empowers the RBI to collect authorization fees. RBI can also ask the applicant to submit a security deposit for the proper conduct of the applied payment system. 
  4. Sec 10 empowers RBI to determine the standards. RBI can prescribe the format of payment instructions, size and shape of the instrument, timings that are to be maintained by the payment system,  manner of transfer of fund in the payment system, criteria for membership of the system payment, condition to participate in fund transfers, and other standards to have complied with the payment system. 
  5. Section 12 and Section 13 empowers RBI to call for the system provider to furnish returns, documents, and other information relating to the operation of the payment system. It is the duty of all payment systems and system participants to provide access to all the information asked by the RBI.  
  6. Section 15(3) gives an authority to RBI to disclose any document or information obtained by it to any person or authority to whom it considers necessary for the protection of the integrity, effectiveness or security of the payment system, or it is necessary to disclose in the interest of banking or monetary policy or operation of payment system or it is in the interest of the general public.
  7. Section 14 of the Act empowers the RBI to ensure compliance with the provisions of the Act. The Regulations constituted under the Act are empowered to depute an officer to enter any premise where a payment system is being operated, inspect any equipment, call and inquire upon any employee of the system provider or participant to furnish any document or information.
  8. RBI is authorized to conduct an on-site inspection.
  9. Section 17 and Section 18 of the Act authorizes the RBI to issue directions to a payment system or system participant to cease or prohibit from committing any act or omission, or it can direct to perform any act, or it can also issue directions for smooth function of the payment system.

Settlement of disputes

Section 24 of the Act prescribes for the system provider to make provisions for the creation of a panel to decide the dispute between the system participants and if any dispute arises between two or more system participants then they shall refer the matter to the panel. If the system participants are not satisfied with the decision of the panel or the dispute arises between any system participant and system provider then the dispute shall be referred to the Reserve Bank. If the dispute is referred to Reserve Bank then an officer of Reserve Bank authorized on this behalf shall decide the matter and his decision shall be final and binding. When a dispute arises between Reserve Bank acting as a system provider or system participant and any other system provider or system participant then the matter shall be referred to the Central Government which authorizes an officer of a rank not below the rank of Joint Secretary whose decision shall be final.

Offences and Penalties

Section 26, 27, 28, 29, 30, and 31 deals with the provisions related to offences and penalties. Offences under the Act include the unauthorized operation of a payment system, failure to comply with the terms of authorization, failure to produce statements, return information, or documents providing false information, disclosure of prohibited information, violating the provisions of the Act, not acting in compliance of the directions given by the RBI. For committing any of the offences, RBI is empowered to initiate a criminal proceeding against the offender. RBI can even impose fines on the person for contravening certain provisions of the Act.


Payment and Settlement System is used to carry out financial transactions in the country which is covered by the Payment and Settlement Systems Act, 2007. The Act is regulated by the Reserve Bank of India and the Board of Regulation and Supervision of Payment and Settlement Systems. RBI is working to encourage effective alternative methods to establish security and efficiency in the payment system and make the entire working procedure easier for banks.  


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