Payment and Settlement Systems Act 2007: Authorisation and Finality

Until 2007 the electronic movement of money in India rested on contract. A clearing house was an agreement among its members, settlement was whatever the members had agreed settlement meant, and if a member went into liquidation on the afternoon of a settlement it was an open question whether the morning's netting could be unwound by a liquidator. The Payment and Settlement Systems Act, 2007 replaced that arrangement with a statute. It makes the Reserve Bank the authority for payment systems, requires an authorisation before any system may operate, and, most importantly of all, declares that a settlement once made is final and cannot be reopened by an insolvency.

1. What the Act regulates

A payment system, under Section 2(1)(i), is a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them. The definition expressly includes the operations of credit card, debit card, smart card and money transfer systems, and expressly excludes a stock exchange. A system provider is a person who operates an authorised payment system, and a system participant is a bank or any other person participating in it.

The architecture that follows is a licensing statute, and it can be read in five layers.

Figure 1: The five things the Act does

2. Who regulates, and how authorisation works

Section 3 designates the Reserve Bank as the authority for the regulation and supervision of payment systems, and provides for a board within the Reserve Bank to exercise those powers on its behalf. For most of the Act's life that body was the Board for Regulation and Supervision of Payment and Settlement Systems, a committee of the Central Board. Under Section 3 as amended, the Reserve Bank notified the Payments Regulatory Board Regulations, 2025 on 20 May 2025, and a six member Payments Regulatory Board has replaced the earlier committee.

Section 4(2) separately empowers the Reserve Bank to authorise a company or corporation to operate or regulate the clearing houses of banks, so that the country can have a common retail clearing house system. That provision is the statutory footing on which a single national retail operator could be authorised.

Figure 2: From application to supervision

Section 7 governs the grant or refusal of authorisation. The Reserve Bank considers the need for the proposed system, its technical design and security, the manner of transfer of funds and the netting arrangements, the financial standing, experience and integrity of the applicant, the interests of consumers, and monetary policy. A refusal must state reasons in writing and must be preceded by a reasonable opportunity of being heard, and the Reserve Bank is to endeavour to dispose of an application within six months. An authorisation states the date from which it takes effect, the conditions attached, the fee payable and any security to be furnished, and continues until revoked.

Section 8 allows revocation where the provider contravenes the Act, fails to comply with regulations or directions, or operates contrary to the conditions of its authorisation. A reasonable opportunity of being heard is required, except where the Reserve Bank considers it necessary to act at once in the interest of monetary policy or for the specified reasons, and the order must provide for the protection of the interests of persons affected. A provider that becomes insolvent or is wound up must inform the Reserve Bank, which then moves to revoke.

3. Netting and settlement finality: the heart of the Act

Netting is defined as the determination by the system provider of the amount of money or securities due or payable or deliverable, as a result of setting off or adjusting the payment obligations among the participants, including the claims and obligations arising out of the termination by the system provider of the transactions of a participant who has become insolvent, so that only a single net claim or obligation remains.

That last clause is the point of the definition. Without it, a liquidator could insist on paying nothing on the failed participant's obligations while collecting everything owed to it, which would turn a netted position into a one sided demand and destroy the arithmetic on which clearing rests.

Section 23 provides, in substance, as follows.

1. Payment obligations and settlement instructions are determined in accordance with the gross or netting procedure approved by the Reserve Bank while issuing the authorisation.
2. Where the rules of the system provide a procedure for the distribution of losses between participants, that procedure has effect notwithstanding anything to the contrary in any other law.
3. A settlement effected under the approved procedure is final and irrevocable.
4. An order of insolvency, dissolution or winding up made against a system participant does not affect a settlement that has already become final and irrevocable, nor the right of the system provider to appropriate the collateral contributed by the participant under the rules of the system.
5. Sub-sections (5) and (6), inserted in 2015, make corresponding provision where a central counterparty itself becomes subject to such an order: its determination of obligations under the approved procedure is final, and a liquidator may not reopen it.

The Explanation to the section provides that a settlement is final and irrevocable as soon as the money, securities or other transactions payable as a result of it are determined, whether or not they are actually paid at that time.

Three features of Section 23 are worth stating separately, because each displaces a rule of general law.

1. The loss distribution rules of a payment system operate notwithstanding any other law, which overrides the ordinary rules on contribution among co-obligants.
2. Finality overrides the ordinary rule that transactions in the twilight period before insolvency may be reopened.
3. The provider may appropriate the collateral of the failed participant under the system's own rules, which overrides the usual moratorium on enforcement against an insolvent person.

4. Dishonour of an electronic funds transfer

Section 25 creates an offence modelled closely on Section 138 of the Negotiable Instruments Act, 1881, and for the same reason: an instruction to pay is worth nothing commercially if its failure carries no consequence.

• The offence is committed where an electronic funds transfer initiated by a person from an account maintained by him cannot be executed for insufficiency of funds or because the amount exceeds the amount arranged to be paid under an agreement with the bank.
• The punishment is imprisonment up to two years, or a fine up to twice the amount of the transfer, or both.
• The conditions are cumulative: the transfer must have been made for the discharge of a legally enforceable debt or other liability; the transfer must have been initiated in accordance with the procedural guidelines of the system provider; the beneficiary must give written notice within thirty days of receiving information from the bank concerned that the transfer was returned unpaid; and the payer must fail to pay within fifteen days of receiving that notice.
• There is a presumption that the transfer was for a debt or liability unless the contrary is proved, and it is no defence that the person had no reason to believe that the funds would be insufficient. On production of a communication from the bank denoting the dishonour, the court presumes the dishonour unless it is disproved.
• Chapter XVII of the Negotiable Instruments Act, 1881 applies so far as the circumstances admit, which carries across the machinery of cognizance, summary trial and compounding.

5. Supervision, disputes and penalties

• Sections 12 to 16 give the Reserve Bank power to call for information, to enter premises and to inspect the books of a system provider or participant.
• Sections 20 and 21 oblige a provider to operate the system in accordance with the Act, the contracts with participants, the rules of the system and the conditions of authorisation, and to disclose the terms, the charges and the limitations of liability to existing and prospective participants, together with the netting arrangements and the system rules.
• Section 22 forbids disclosure of documents and information except as permitted, and breach carries imprisonment up to six months, or a fine up to five lakh rupees or twice the damages caused, whichever is higher, or both.
• Section 24 requires every provider to constitute a panel of not less than three system participants who are not parties to the dispute, to resolve disputes between participants. Disputes involving the provider, disputes between providers, and cases where a participant rejects the panel's decision go to the Reserve Bank, whose officer's decision is final and binding. Where the Reserve Bank is itself the provider or a participant, the dispute goes to the Central Government, which may appoint an officer not below the rank of Joint Secretary.

Section 26 sets out the penalties, and the structure is worth noticing. The two gravest contraventions, operating without authorisation and defying a direction, carry the same punishment: where the court imposes imprisonment it may not be for less than one month, which is unusual in a regulatory statute and reflects the systemic consequences of an unauthorised or uncontrolled payment system, though the court may impose a fine instead. The lesser contraventions are graded by whether they obstruct the Reserve Bank's supervision or merely fall short of it.

Section 30 allows the Reserve Bank itself to impose a penalty for contraventions of the nature referred to in Section 26(2) and Section 26(6), of up to five lakh rupees or twice the amount involved, whichever is greater, with a further twenty five thousand rupees a day for a continuing contravention. A show cause notice and a reasonable opportunity of being heard are required, the penalty is payable within thirty days, and on default it may be recovered on the direction of a civil court, or by debiting the defaulter's current account or selling its securities held with the Reserve Bank. Under Section 30(6), the Reserve Bank may not take penalty proceedings where a complaint has already been filed in a court for a contravention of the nature referred to in Section 26(2) or Section 26(4). Section 31 permits an authorised officer of the Reserve Bank to compound any offence under the Act, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, before or after the institution of proceedings, and once compounded no further proceedings may be taken.

6. Beyond the Act: authorisation of the newer intermediaries

The Act's authorisation requirement has been used to bring whole categories of intermediary into the regulatory net without fresh legislation, by treating them as payment systems or as parts of one.

• Payment aggregators, which collect money from a customer on a merchant's behalf and settle it to the merchant, require authorisation under the Act. Non-bank aggregators must meet a net worth requirement, maintain merchant funds in an escrow account with a scheduled commercial bank, and comply with governance, merchant onboarding and data storage requirements.
• Payment gateways, which only provide the technology to route a transaction and do not handle funds, are treated as technology providers and are covered by baseline requirements rather than by authorisation.
• Prepaid payment instrument issuers that are not banks are authorised under the Act.
• The regulatory sandbox, introduced in 2019, allows a new product to be tested with real customers in a controlled environment and under relaxations the Reserve Bank specifies, before authorisation is sought in the ordinary way.

7. Quick Revision

1. A stock exchange is excluded from the definition of a payment system, and Section 34 keeps stock exchanges and their clearing corporations outside the Act altogether.
2. An agent of the payee, and an intra group payment arrangement, need no authorisation.
3. A refusal of authorisation requires reasons and a hearing; a revocation requires a hearing except in the specified urgent cases.
4. The netting definition expressly covers obligations arising from the termination of an insolvent participant's transactions.
5. The loss distribution rules of a system override any other law.
6. Section 25 requires a legally enforceable debt, compliance with the system's procedure, notice in thirty days and default for fifteen.
7. Compounding is unavailable only where the punishment is imprisonment alone or imprisonment with fine, so a false statement under Section 26(2) cannot be compounded while operating without authorisation can.
8. Payment aggregators are authorised under this Act; payment gateways are treated as technology providers.

8. Frequently Asked Questions

Why does settlement finality need a statute at all?

Because the general law of insolvency would otherwise undo it. When a participant fails, a liquidator's ordinary duty is to collect everything owed to the estate and to prove in the insolvency for everything the estate owes. Applied to a netted clearing, that would mean collecting the gross receivables and paying only a dividend on the gross payables, which is a very different number from the net figure the other participants have already acted on. Section 23 removes that risk by making the settlement final at the moment it is determined and by declaring that an order of insolvency does not affect it. Every participant can therefore treat a settled position as money, which is what makes same day and real time settlement possible.

Is the unified payments interface a payment system under the Act?

Yes. It squarely satisfies the definition in Section 2(1)(i), since it enables payment to be effected between a payer and a beneficiary and involves clearing, payment and settlement. It is operated by an authorised system provider under an authorisation issued under Section 7, and every rule that governs it, from the transaction limits to the dispute resolution arrangements, takes effect either as a condition of that authorisation or as a direction under Section 17 or Section 18. The Act's age is no obstacle, because it regulates the category rather than any particular technology.

How does Section 25 differ in practice from Section 138 of the Negotiable Instruments Act?

The two are nearly identical in structure and punishment, and Section 25 expressly borrows Chapter XVII of the older statute. The practical differences are three. First, Section 25 requires that the procedural guidelines of the system provider have been complied with, which has no counterpart in the cheque provision. Second, proof of dishonour rests on a communication from the bank denoting the dishonour, on production of which the court presumes it, rather than on a paper return memorandum; the thirty day notice period itself runs, as under the cheque provision, from receipt of information from the bank. Third, and most importantly, Section 25 is very little used, because the ordinary electronic transfer is not permitted to leave the account at all when funds are short, so the factual situation the section addresses rarely arises.

Can the Reserve Bank prosecute and fine for the same contravention?

Not for the same contravention once a court is seized of it. Section 30(6) bars the Reserve Bank from taking penalty proceedings in respect of a contravention of the nature referred to in Section 26(2) or Section 26(4) where a complaint has already been filed in a court. The two routes are therefore treated as alternatives. The administrative penalty under Section 30 reaches false statements and the residuary contraventions under Section 26(6), and is faster; the criminal route remains the only one for operating without authorisation and for defiance of a direction, which fall outside the Reserve Bank's own penalty power, though those offences may be compounded under Section 31.

Which body inside the Reserve Bank regulates payment systems?

Section 3 makes the Reserve Bank the designated authority and provides for a board through which it exercises those powers. For most of the Act's life that body was the Board for Regulation and Supervision of Payment and Settlement Systems, a committee of the Central Board chaired by the Governor. Under Section 3 as amended, the Reserve Bank notified the Payments Regulatory Board Regulations, 2025 on 20 May 2025, and a six member Payments Regulatory Board now performs that function in place of the earlier committee. Neither body has an existence apart from the Reserve Bank, which is why the Act speaks throughout of powers exercisable by the Reserve Bank itself.

Why does the Act exclude a stock exchange from the definition of a payment system?

Because securities settlement is regulated by a different authority under a different statute. A stock exchange and its clearing corporation settle obligations arising from trades in securities, and they are regulated by the Securities and Exchange Board of India under the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992, with their own rules on margins, guarantee funds and default handling. Including them in the payments statute would have created two regulators for the same activity, and Section 34 accordingly provides that nothing in the Act applies to stock exchanges or to their clearing corporations. The funds leg of a securities transaction does pass through a payment system, and that leg is covered; what is excluded is the exchange and its clearing function themselves.

9. Related Topics and Provisions

• Reserve Bank regulation of non-banking financial companies and payment systems
• Retail payment systems and the National Payments Corporation of India
• Prepaid payment instruments, tokenisation and the digital rupee
• Dishonour of cheques under Section 138 of the Negotiable Instruments Act, 1881
• Electronic banking and customer liability for unauthorised transactions
• Cyber security, outsourcing and operational risk in banks