Law Note: Substitution by Finance Act 2017, s. 152 (w.e.f. 09/05/2025) in the Payment and Settlement Systems Act, 2007

Bare Act : https://lawyerslibrary.in/books/khkk/

Overview

The Payment and Settlement Systems Act, 2007 (Act No. 51 of 2007) is a pivotal legislation in India aimed at regulating and supervising payment systems to ensure their stability and efficiency. The Act designates the Reserve Bank of India (RBI) as the authority responsible for overseeing payment systems and provides a framework for their authorization, operation, and regulation. A significant amendment to the Act was introduced through Section 152 of the Finance Act, 2017, effective from 09/05/2025, which substituted the provisions related to the Designated Authority under Section 3 of the Act. This law note focuses on the implications and details of this substitution, emphasizing its structural and functional changes.

Details of the Substitution

The Finance Act, 2017, under Section 152, replaced the original provisions of Section 3 (Designated Authority and its Committee) with a new framework, effective from 09/05/2025. The original and substituted provisions are outlined below for clarity:

Original Provision (Pre-Substitution)

Before the amendment, Section 3 of the Act, as outlined in the document, provided for:

1. RBI as the Designated Authority: The RBI was established as the primary authority for regulating and supervising payment systems under the Act.
2. Constitution of a Committee: The RBI could constitute a committee known as the Board for Regulation and Supervision of Payment and Settlement Systems, comprising:
   • The Governor of the RBI as the Chairperson.
   • Deputy Governors, with the Deputy Governor in charge of Payment and Settlement Systems as the Vice-Chairperson.
   • Up to three Directors from the RBI’s Central Board, nominated by the Governor.
3. Powers and Functions of the Committee: The committee’s powers, functions, meeting procedures, and quorum were to be prescribed by regulations under the Act.
4. Continuity of Existing Board: The existing Board under the Reserve Bank of India Act, 1934, was deemed to continue until reconstituted under the new provisions.

This structure allowed the RBI to delegate its regulatory and supervisory functions to a specialized committee, ensuring focused oversight of payment systems.

Substituted Provision (Post-Substitution, w.e.f. 09/05/2025)

The Finance Act, 2017, substituted Section 3 with a new framework, as follows:

1. RBI as the Designated Authority: The RBI continues to be the designated authority for the regulation and supervision of payment systems under the Act (Section 3(1)).
2. Establishment of the Payments Regulatory Board: The RBI is mandated to exercise its powers and duties through a newly constituted Payments Regulatory Board (Section 3(2)).
3. Composition of the Board: The Payments Regulatory Board consists of:
   • Governor of the RBI as the Chairperson (ex officio).
   • Deputy Governor in charge of Payment and Settlement Systems (ex officio).
   • One officer of the RBI, nominated by the Central Board of the RBI (ex officio).
   • Three persons nominated by the Central Government as members.
4. Powers and Functions: The powers, functions, meeting schedules, procedures, and quorum of the Board are to be prescribed by regulations (Section 3(4)).

The substituted provision is documented on Page 8 and Page 9 of the provided document, reflecting the legislative intent to enhance the governance structure for payment system regulation.

Key Changes Introduced by the Substitution

The substitution by the Finance Act, 2017, introduces several critical changes to the regulatory framework:

1. Replacement of the Committee with a Statutory Board:
   • The earlier Board for Regulation and Supervision of Payment and Settlement Systems was a committee constituted by the RBI at its discretion. The new Payments Regulatory Board is a statutorily mandated body, providing a more formalized and permanent structure.
   • This shift enhances the legal standing and authority of the regulatory body overseeing payment systems.
2. Inclusion of External Members:
   • The original committee comprised only RBI insiders (Governor, Deputy Governors, and nominated Directors). The new Board includes three members nominated by the Central Government, introducing external perspectives and potentially broader expertise.
   • This inclusion may foster greater accountability and alignment with national financial policies.
3. Streamlined Composition:
   • The new Board has a leaner composition compared to the earlier committee, which could include multiple Deputy Governors and up to three Directors. The fixed structure (Governor, one Deputy Governor, one RBI officer, and three Central Government nominees) ensures clarity and consistency in membership.
4. Enhanced Regulatory Framework:
   • By mandating the RBI to operate through the Payments Regulatory Board, the amendment centralizes and strengthens the regulatory oversight mechanism.
   • The Board’s powers and procedures, to be prescribed by regulations, allow for flexibility while maintaining a robust governance framework.

Implications of the Substitution

The substitution under the Finance Act, 2017, has several implications for the regulation of payment systems in India:

1. Strengthened Governance:
   • The establishment of a statutory Payments Regulatory Board signals a commitment to robust governance of payment systems, which are critical to India’s financial infrastructure.
   • The inclusion of Central Government nominees may enhance coordination between the RBI and the government, aligning payment system regulations with broader economic objectives.
2. Increased Accountability:
   • The involvement of external members nominated by the Central Government introduces a layer of external oversight, potentially increasing transparency and accountability in the RBI’s regulatory decisions.
3. Adaptation to Evolving Payment Systems:
   • The amendment reflects the need for a more dynamic regulatory framework to address the rapid evolution of payment systems, including digital and electronic modes (e.g., UPI, mobile wallets, and fintech platforms).
   • The Payments Regulatory Board is better positioned to address emerging challenges such as cybersecurity, systemic risks, and consumer protection.
4. Continuity with Existing Framework:
   • While the structure changes, the RBI retains its role as the designated authority, ensuring continuity in its supervisory mandate.
   • The transition from the earlier committee to the new Board is designed to be seamless, with regulations under Section 38 providing the necessary framework for operational details.

Context and Relevance

The substitution comes into effect on 09/05/2025, aligning with the growing importance of payment systems in India’s digital economy. The rise of digital transactions, fueled by initiatives like Digital India and the proliferation of fintech companies, necessitates a strong regulatory framework to mitigate systemic risks and protect consumers. The Payments Regulatory Board is poised to play a critical role in ensuring the stability, security, and efficiency of payment systems.

Additionally, the amendment aligns with other provisions in the Act, such as:

• Section 10A (inserted by Act 23 of 2019), which prohibits banks and system providers from imposing charges on electronic payments, promoting digital transactions.
• Section 23A (inserted by Act 18 of 2015), which protects customer funds in designated payment systems, enhancing consumer trust.
• Section 38 (amended by Act 18 of 2015), which empowers the RBI to make regulations for the Board’s operations, ensuring flexibility in implementation.

Conclusion

The substitution of Section 3 by Section 152 of the Finance Act, 2017, effective from 09/05/2025, marks a significant evolution in the regulatory framework of the Payment and Settlement Systems Act, 2007. By replacing the discretionary committee with the statutory Payments Regulatory Board, the amendment strengthens the RBI’s oversight of payment systems, introduces external expertise, and enhances governance. This change is particularly relevant in the context of India’s rapidly growing digital payment ecosystem, ensuring that the regulatory framework remains robust, adaptable, and aligned with national financial priorities.

Multiple Choice Questions (MCQs)

1. What is the primary purpose of the Payment and Settlement Systems Act, 2007?
   a) To regulate stock exchanges in India
   b) To provide for the regulation and supervision of payment systems in India
   c) To establish the Central Government as the authority for payment systems
   d) To govern international financial transactions only Answer: b) To provide for the regulation and supervision of payment systems in India
2. Under the Finance Act, 2017, which body replaced the Board for Regulation and Supervision of Payment and Settlement Systems?
   a) Monetary Policy Committee
   b) Payments Regulatory Board
   c) Financial Stability Board
   d) Central Board of the RBI Answer: b) Payments Regulatory Board
3. Who serves as the Chairperson of the Payments Regulatory Board established under the Finance Act, 2017 amendment?
   a) Union Finance Minister
   b) Governor of the Reserve Bank of India
   c) Deputy Governor of the RBI
   d) Nominee of the Central Government Answer: b) Governor of the Reserve Bank of India
4. How many members are nominated by the Central Government to the Payments Regulatory Board?
   a) One
   b) Two
   c) Three
   d) Four Answer: c) Three
5. When does the substitution of Section 3 by the Finance Act, 2017, come into effect?
   a) 12th August, 2008
   b) 1st June, 2015
   c) 9th May, 2025
   d) 1st November, 2019 Answer: c) 9th May, 2025
6. Which of the following is NOT a member of the Payments Regulatory Board?
   a) Deputy Governor in charge of Payment and Settlement Systems
   b) Officer nominated by the RBI’s Central Board
   c) Three nominees of the Central Government
   d) CEO of a public sector bank Answer: d) CEO of a public sector bank
7. What is the key difference introduced by the Finance Act, 2017, in the composition of the regulatory body?
   a) Removal of the RBI Governor from the Board
   b) Inclusion of Central Government nominees
   c) Exclusion of RBI officers from the Board
   d) Increase in the number of Deputy Governors Answer: b) Inclusion of Central Government nominees
8. Which section of the Payment and Settlement Systems Act, 2007, was substituted by the Finance Act, 2017?
   a) Section 10
   b) Section 3
   c) Section 23
   d) Section 38 Answer: b) Section 3
9. What is the role of the Reserve Bank of India under the substituted Section 3?
   a) It acts as a system provider only
   b) It is the designated authority for regulating payment systems
   c) It delegates all powers to the Central Government
   d) It oversees stock exchanges Answer: b) It is the designated authority for regulating payment systems
10. Which of the following systems is excluded from the scope of the Payment and Settlement Systems Act, 2007?
    a) Credit card operations
    b) Stock exchanges
    c) Electronic funds transfer
    d) Netting systems Answer: b) Stock exchanges

Frequently Asked Questions (FAQs)

1. What is the Payment and Settlement Systems Act, 2007?
   The Payment and Settlement Systems Act, 2007 (Act No. 51 of 2007) is an Indian legislation that provides for the regulation and supervision of payment systems in India. It designates the Reserve Bank of India (RBI) as the authority responsible for overseeing payment systems, ensuring their stability, security, and efficiency. The Act covers aspects such as authorization, operation, dispute settlement, and penalties for non-compliance.
2. What changes were introduced by the Finance Act, 2017, to the Payment and Settlement Systems Act, 2007?
   The Finance Act, 2017, through Section 152, substituted Section 3 of the Act, effective from 09/05/2025. The amendment replaced the discretionary Board for Regulation and Supervision of Payment and Settlement Systems with a statutory Payments Regulatory Board. The new Board includes the RBI Governor as Chairperson, the Deputy Governor in charge of Payment and Settlement Systems, one RBI officer, and three Central Government nominees, enhancing external oversight and governance.
3. Why was the Payments Regulatory Board established?
   The Payments Regulatory Board was established to provide a more formalized and robust governance structure for regulating payment systems in India. The inclusion of Central Government nominees introduces external expertise and accountability, aligning the regulatory framework with the evolving digital payment ecosystem and national financial policies.
4. Who are the members of the Payments Regulatory Board?
   The Payments Regulatory Board consists of:
   • The Governor of the RBI (Chairperson, ex officio).
   • The Deputy Governor of the RBI in charge of Payment and Settlement Systems (ex officio).
   • One officer of the RBI nominated by the Central Board (ex officio).
   • Three persons nominated by the Central Government.
5. How does the Finance Act, 2017, amendment impact the RBI’s role?
   The RBI remains the designated authority for regulating and supervising payment systems. However, it now exercises its powers through the Payments Regulatory Board, which includes external members. This change strengthens governance, introduces diverse perspectives, and ensures alignment with broader economic objectives while maintaining the RBI’s supervisory mandate.
6. What is the significance of the effective date (09/05/2025) for the Finance Act, 2017 amendment?
   The effective date of 09/05/2025 marks when the substituted Section 3 comes into force, replacing the earlier committee with the Payments Regulatory Board. This timeline allows for a smooth transition and the formulation of necessary regulations to operationalize the new Board, aligning with the growing importance of digital payment systems.
7. Does the Payment and Settlement Systems Act, 2007, apply to stock exchanges?
   No, the Act explicitly excludes stock exchanges and their clearing corporations from its scope, as stated in Section 34. The Act focuses on payment systems such as credit card operations, electronic funds transfers, and netting systems.
8. How does the Payments Regulatory Board differ from the earlier committee?
   The earlier Board for Regulation and Supervision of Payment and Settlement Systems was a discretionary committee constituted by the RBI, comprising only RBI insiders. The Payments Regulatory Board is a statutory body mandated by the Act, with a fixed composition that includes three Central Government nominees, introducing external oversight and a more formalized structure.
9. What types of payment systems are regulated under the Act?
   The Act regulates systems that enable payments between a payer and a beneficiary, including clearing, payment, and settlement services. This encompasses credit card operations, debit card operations, smart card operations, money transfer operations, and electronic funds transfers, but excludes stock exchanges.
10. How does the amendment align with India’s digital payment ecosystem?
    The establishment of the Payments Regulatory Board reflects the need for a dynamic regulatory framework to address the rapid growth of digital payments (e.g., UPI, mobile wallets). The Board’s structure, with external members, enhances its ability to tackle emerging challenges such as cybersecurity, systemic risks, and consumer protection, supporting initiatives like Digital India.