'The backbone of all financial transactions'


Arun Jaitley
I beg to move that the Payment and Settlement System (Amendment) Bill, 2014 be taken into consideration.

I have gone through the provisions of the Amendment and I have a written note which is ready and I could read out to explain what the amendment is about.

Sir, the payment and settlement system in commercial transactions is the backbone of all financial transactions. I issue a cheque in favour of somebody. It goes through a clearing house from my banker to the recipient bankers and, therefore, there is a payment and settlement system involved in this. Prior to 2007, this was all being managed through an executive notification and authorities created under that.

In 2007, the government at that time, and rightly so, enacted the Payment and Settlement Systems Act, 2007. I would just read from the preamble of that Act one sentence. It will be clear as to what the purpose of that Act was. "An Act to provide for regulation and supervision of payment systems in India and to designate the Reserve Bank of India as the authority, for that purpose and for the matters connected therewith and incidental thereto."

So, the payment systems are to be regulated by the Reserve Bank of India. Now, what does the Act say? The principal Act after definition says that it is only the Reserve Bank and whoever has an authorisation from the Reserve Bank, can run a payment system. In a payment system, you can have two kinds of actors involved. One is a system participant. My bank will be a system participant. In a private transaction, just as for instance today, this radio taxi service controversy is going on, how does a consumer pay for these radio taxies that are currently in controversy? These are not governmental transactions or banking transactions.

Earlier, the system was that he would register himself with the private taxi company and he would come on their WhatsApp. He would give his credit card number. Once he gave his credit card number, every time he wanted to hire a taxi, he would just press the WhatsApp of that taxi. They would locate where the passenger is and then they would pick him up. When he would leave the taxi, he would not pay, but it will be credited to his account.

Now, a violation was discovered that the payment gateway was outside India. So, the Reserve Bank told them to bring it within India. So, from December 1 this year, it appeared in the newspapers that Paytm, a local wallet has been created by one of these companies, which is in controversy. The payment is deposited in advance through a credit card or cash into that wallet. Every time you use the service, you have already paid in rupees. So that wallet becomes the service provider.

When this original Act was enacted, there is a provision that under Section 7, the Reserve Bank will permit an authorisation to any person. It could be a state agency; it could be a non-state agency. But without the authorisation of the Reserve Bank, you cannot become a service provider. That is a designated authority. That is how the commerce in this area is evolved. If you default, what are the consequences etc… the Act provides for it.

There is a provision under Section 23. Section 23 says and since Saugata Roy was raising a point of order, I could quite anticipate what he wanted to say. The amendment is very simple, though it is couched in a very complicated phraseology and unless you understand this commerce, it looks a little complicated. I myself yesterday had spent a lot of time before I could understand it simply. ... (Interruptions)

Mallikarjun Kharge: If we read the Objects and Reasons, we will not be able to understand it.

Jaitley: So far, I think, I am putting very simply. Our lady colleague and I just discussed along with Deepinder Singh Hooda. It took them two and a half to three minutes to follow as to what it is all about.

Section 23 says: "What if the system participant..." That is, suppose, I have to give money to somebody. What happens if either the recipient or I become insolvent? Now the sanctity of commercial transaction is to be respected. So, either of us becomes insolvent under ordinary law of the land and those for whose behalf we are transacting, that is, the bank becomes insolvent. Then under the Banking Regulations Act or the Companies Act, they owe money to me. I will have to stand in a queue. The old Companies Act had a provision under Section 529. First, the taxation authorities get the money after insolvency and liquidation. Thereafter, the workmen will get the money; thereafter, the secured creditors will get the money and in the last, the unsecured creditors will come. So, they are holding my money but I will stand last in the queue. So, the original Act has a provision under Section 23. If a system participant became insolvent, then Companies Act and the Banking Regulations Act will not apply. Under this Act, you first pay to the person on whose behalf you are holding the money. If anything else is left, then that procedure for the rest of the land will apply.

So, the Act in 2007 envisaged this. But the Act did not envisage a situation where not the participant but what if the system provider itself becomes insolvent. If the system provider becomes insolvent, the Companies Act will apply; if the system provider is a bank, the Banking Regulation Act will apply. So, we go back to the same problem. This amendment entirely is that even if the service provider, which is the clearing house, becomes insolvent, then first pay the money to those whose money you were clearing, and if anything is left, then the rest of the procedure will apply. This is entirely the amendment in simple language.

There are some editorial corrections in the original Bill in the language of this section. And then Section 23 is being replaced with those editorial language corrections to say that the procedure of insolvency, which applies to the system participants will also apply to the system provider. That is entirely the Bill.

With these few comments, Sir, I commend this Bill to this House for consideration.

Edited excerpts from Finance Minister Arun Jaitley's opening statement on the Payment and Settlement System (Amendment) Bill, 2014, Lok Sabha, New Delhi, December 9, 2014
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper

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First Published: Dec 13 2014 | 9:44 PM IST

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