Union Finance Minister Nirmala Sitharaman during an interaction with Start-Up and Fintech Entities, in New Delhi, on February 26, 2024.
| Photo Credit: PTI

Finance Minister Nirmala Sitharaman nudged India’s financial sector regulators to hold monthly meetings with fintechs to address their concerns and mooted a day-long workshop with law enforcement agencies for such firms to raise any issues they may be facing.

Moreover, the Reserve Bank of India (RBI), and the Department for Promotion of Industry and Internal Trade (DPIIT) will work with the Ministry of Finance to examine issues relating to change of ownership holdings and control of listed fintech companies to enable them to be in sync with regulatory compliance requirements.

These were among the key action points that emerged after an interaction with India’s top fintech entities and the Payment Council of India chaired by the Minister on Monday, in the presence of top officials from the ministries of Finance, DPIIT and Electronics and IT, as well as the RBI.

Sources said that fintech entities and start-up founders appeared unfazed by the challenges facing the Paytm Payments Bank Limited and its parent entity. “No Paytm-related anxiety or concerns were shown by industry representatives at the meeting,” said an official aware of the deliberations.

While efforts to simplify and digitise Know Your Customer (KYC) norms across the fintech segments were mooted, the need to rationalise cost of funds for critical areas, including priority sector loans was also raised.  DPIIT Secretary Rajesh Kumar Singh informed that new patent examiners have been added to reduce the turn-around-time of patent applications. India has over 10,200 fintech entities.

“The Finance Minister noted the rapid growth of the Start-up and Fintech sector of India, especially in the last decade, and welcomed suggestions from the  FinTech leaders to achieve greater Ease of Doing Business and Ease of Living for consumers,” an official statement said, noting that issues relating to cybercrime will be suitably addressed in the new Digital India Act.

Rajeev Chandrasekhar, File.
| Photo Credit: Handout E Mail

The Reserve Bank’s regulatory action on Paytm Payments Bank has drawn the attention of fintech firms to the importance of complying with laws, Union Minister Rajeev Chandrasekhar has said.

The Minister stressed that regulatory compliance cannot be “optional” for companies, rather it is an aspect every entrepreneur must pay full attention to.

In an interview to PTI, Mr. Chandrasekhar — the Minister of State for Electronics and IT — said the issue of Paytm Payments Bank is a case where a hard-charging and aggressive entrepreneur has failed to realise the need for regulatory compliance, and that no company can get away if it is non-compliant with law.

Also Read | Enforcement Directorate questions Paytm executives; gets documents on latest RBI action

Any company, be it from India or abroad, big or small, has to abide by the law of the land, the Minister asserted amid the unfolding Paytm Payments Bank Ltd (PPBL) crisis.

The Reserve Bank of India (RBI) has barred PPBL from accepting new deposits from March 15, and ruled out any review of its action against the company.

Mr. Chandrasekhar said the notion that RBI action on PPBL had rattled fintechs, was not a correct characterisation. The politician, entrepreneur and technocrat disagreed that the Paytm Payments Bank issue had raised worries about detrimental consequences for the entire fintech industry.

“And this notion that RBI… the regulator’s action against Paytm Payments Bank has rattled fintech is… I don’t think that’s a correct characterisation.”

“I think it has drawn the attention of fintech entrepreneurs, to the fact that you also have to know how to comply with the law. Regulatory compliance is not an optional thing for any country in the world, certainly not in India, and it is something that they (entrepreneurs) should pay more attention to,” he said.

Mr. Chandrasekhar further said that entrepreneurs typically tend to get so sharply focused on what they’re building, that at times, they may lose sight of rules that have been laid down by regulators.

PPBL is an associate of One97 Communications Limited.

One97 Communications holds 49% of the paid-up share capital (directly and through its subsidiary) of PPBL. Paytm Founder and CEO Vijay Shekhar Sharma has a 51% stake in the bank.

RBI has advised customers and merchants of PPBL to shift their accounts to other banks by March 15, giving 15 more days to the embattled company to close most of its operations, including deposit and credit transactions.

RBI has cited persistent non-compliances and continued material supervisory concerns, for the regulatory action.

RBI in the list of FAQs (frequently asked questions), issued on Friday, clarified that Paytm QR code, Paytm Soundbox or Paytm POS terminal will continue to work after March 15, if it is linked to other banks instead of PPBL.

Fintech firm One97 Communications — owner of the brand Paytm — meanwhile said it has shifted its nodal account to Axis Bank from Paytm Payments Bank — a move that will allow continuity of Paytm QR, Soundbox, card machine after the March 15, deadline set by the central bank. The nodal account of Paytm is like a master account in which all its customers, merchant transactions are settled.

Mr. Chandrasekhar said he himself was a startup once and an entrepreneur once.

He said entrepreneurs and startups have a ‘genetic flaw’ that they get focused on what they’re building and sometimes forget to understand there are some rules that have been laid down by the regulators.

“So I will put this down to that type of an error where a hard-charging entrepreneur, believes in himself, is building a company successfully (but) fails to realise that there are some regulatory do’s and don’ts and there can never be a situation whether it’s a social media company, or a fintech company, where somebody is not compliant with the law and expects to get away with it,” the Minister said.

Also Read | ED finds no FEMA violation in Paytm Payments Bank case

An engineer by qualification, Mr. Chandrasekhar has worked in a team at PC chip maker Intel that developed pentium processors. In 1994 he started his journey as entrepreneur with his telecom services company BPL Mobile and exited from the company in 2005. Thereafter he set-up his investment and financial services firm Jupiter Capital.

“I have said all along and this is a position of the government of India, regardless of where you come into the digital economy from India or abroad, whether you have a big or a small firm in the digital economy, FinTech or AI, the rules in the law of the land has to be complied with.”

“In the FinTech space, the regulator who lays down the rules is the RBI. So, you have to listen to the RBI and you have to comply with the RBI,” the Minister said.

According to sources, as there is no PMLA scheduled offences involved in the case of PPBL, money laundering investigation cannot be done. File.
| Photo Credit: Reuters

The Enforcement Directorate (ED) has not found any violation under the Foreign Exchange Management Act (FEMA) during the inquiry of Paytm Payments Bank Limited (PPBL) transactions. The Reserve Bank of India (RBI) has the authority to take action against certain other instances of alleged non-compliance, according to the sources privy to the matter.

On January 31, the RBI had issued a circular barring PPBL from taking further deposits, top-ups or undertaking credit transactions into its customer accounts, wallets, FASTags, and National Common Mobility Cards (NCMC) after February 29. The deadline has now been extended till March 15. 

Also read: Paytm Payments Bank meltdown, its meaning | Explained

The action was taken on the basis of the Comprehensive System Audit report and a subsequent compliance validation report of the external auditors’ reports disclosing “persistent non-compliances and continued material supervisory concerns in the bank, warranting further supervisory action”.

The ED was also asked to scrutinise the financial transactions under the scanner. The agency investigates suspected violations or offences under the FEMA and the Prevention of Money Laundering Act (PMLA).

According to sources, as there is no PMLA scheduled offences involved in the case of PPBL, money laundering investigation cannot be done. “If no crime is made out, there is also no generation of ‘proceeds of crime’ and so, PMLA does not apply,” said a government official. Therefore, the ED looked into the transactions to determine if there was any violation under the FEMA provisions.

KYC compliance

It is learnt that the ED examined more than 50 lakh wallets/accounts, largely having small deposits, which did not reveal any foreign exchange rule contravention. The other alleged violations mainly pertained to Know Your Customer (KYC) compliance and other issues, on which the RBI is empowered to take action. The ED findings have been reported to the RBI with certain observations as regards some other payment banks, apart from PPBL, third party application providers, and payment aggregators as well, a source said. The RBI may take appropriate action in this regard.

The areas of concern flagged by the agency include slackness in adherence to KYC norms such as the processes involving user or merchant onboarding, document collection and authentication, anti-money laundering measures, merchant category code assignment, and National Payments Corporation of India’s regulatory compliance.

Among the other aspects are processes for identification of ultimate beneficial ownership, politically exposed persons, KYC adherence related to setting up of virtual accounts, strict monitoring and periodic reporting of suspect transactions to the authorised agencies such as the Financial Intelligence Unit.

Given that vulnerabilities like possible misuse of Application Programming Interfaces (API) keys and URL spoofing may lead to financial fraud, full-fledged adoption of Information Technology audit framework as prescribed by the agencies concerned has also been recommended.

A QR code for the Paytm digital payment system at a road side stall in Mumbai.
| Photo Credit: EMMANUAL YOGINI

Reserve Bank Governor Shaktikanta Das on Thursday said there are no systemic worries and the action on Paytm was driven by a “lack of compliance” at Paytm.

Deputy Governor Swaminathan J. said the actions against the fintech have been taken due to “persisted non-compliance”.

The Governor declined to specify the specific shortcomings resulting in the RBI action, but made it clear that it is driven by a “lack of compliance” at Paytm.

Stressing that the Reserve Bank of India (RBI) is a responsible regulator, Das asked why should the central bank act against a regulated entity if it has complied with all the requirements.

The RBI works with entities on a bilateral basis, nudges them to comply by giving sufficient time, and imposes business restrictions or supervisory actions only when the entity does not take necessary actions, Das said.

“When constructive engagement doesn’t work or when the regulated entity does not take effective action, we go for imposing business restrictions,” Das said, adding that the actions are “proportionate” to the gravity of the situation.

The actions are driven by systemic stability or protection of depositor or customers’ interests, he added.

The Governor also affirmed the Reserve Bank’s commitment to support innovation in the financial sector, saying there should not be “any doubt” around it.

Acknowledging that the RBI has received feedback from the wider public, Das said the RBI will be coming out with a set of FAQ (frequently asked questions) to assuage the concerns.