RBI’s Revised Penalty & Compounding Framework under the Payment and Settlement Systems Act, 2007: Strict yet Balanced

Introduction

The Reserve Bank of India (‘RBI’), through its recent Circular[i], has introduced a revised framework for imposing monetary penalties and compounding offences under the Payment and Settlement Systems Act, 2007 (‘PSS Act’). This framework aims to strengthen regulatory oversight in the payment systems sector. It supersedes the earlier guidelines issued on 10.01.2020[ii] and incorporates amendments introduced by the Jan Vishwas (Amendment of Provisions) Act, 2023, which came into effect on 22.01.2024. The revised framework seeks to rationalize enforcement actions while ensuring proportionality, transparency, and consistency.

Key Provisions of the Revised Framework

1. Contraventions and Penalties: S. 26 of the PSS Act enumerates various contraventions that attract penal consequences, including:

• Operating a payment system without authorisation or breaching authorisation terms [s. 26(1)].

• Wilfully submitting false statements or omitting material information in applications, returns, or other documents submitted to the RBI [s. 26(2)].

• Failure to furnish statements, returns, or documents to the RBI [s. 26(3)].

• Unauthorised disclosure of information prohibited under the Act [s. 26(4)].

• Non-compliance with directions issued by the RBI or failure to pay imposed penalties within the stipulated period [s. 26(5)].

• Breach of any provision of the PSS Act or any regulation, order, or direction issued thereunder [s. 26(6)].

The framework provides an illustrative list of contraventions subject to enforcement action, including failure to maintain minimum net worth requirements, non-compliance with Know Your Customer (KYC) and Anti-Money Laundering (AML) norms, and violations related to prepaid payment instruments (PPIs).

Penalties for such contraventions can go up to Rs. 10 lakh or twice the amount involved in the contravention, whichever is higher. In cases of continuing non-compliance, an additional penalty of Rs. 25,000/- per day may be imposed.

2. Compounding of Offences: Contraventions under ss. 26(1), 26(3), 26(4), 26(5), and 26(6) of the PSS Act are compoundable. The compounding amount may be up to 25% lower than the calculated penalty, but for repeat contraventions within five years, the amount may be increased by up to 50%. Compounding applications can be filed before or after the initiation of proceedings, though their acceptance remains at the RBI’s discretion.

3. Designated Authority: A Committee of three Executive Directors (for Central Office cases) or a Regional Director and two senior officers (for Regional Office cases) will adjudicate both penalties and compounding applications. This ensures a structured and impartial decision-making process.

4. Materiality of Contraventions: Enforcement actions will focus on material contraventions, assessed based on factors such as severity, frequency, monetary impact, and overall effect on the payment system. This approach ensures that significant breaches are prioritised for enforcement actions.

5. Procedure for Imposing Monetary Penalty:

• Issuance of Show Cause Notice (‘SCN’): The contravener will be served an SCN, providing an opportunity to respond.

• Personal Hearing: If requested in response to the SCN, the contravener will be granted a personal hearing.

• Speaking Order: The designated authority will issue a detailed order, providing the reasons for the decision based on submissions and evidence.

6. Determination of Penalty Amount: The quantum of the penalty will be determined based on principles of proportionality and fairness, taking into account:

• The financial benefit accrued to the contravener.

• The monetary loss caused to authorities or market participants.

• The impact of non-compliance or delayed compliance.

• Any mitigating factors that may warrant a reduction in the penalty.

7.  Payment and Consequences: Penalties or compounding amounts must be paid within 30 days of the order. Non-payment may result in criminal proceedings or other enforcement actions under the PSS Act.

8. Disclosure Requirements: Entities must disclose penalties in their Annual Financial Statements, and the RBI will publish summaries of penalty and compounding actions on its website. This ensures greater transparency and accountability.

Implications for Regulated Entities

The revised framework highlights the RBI’s commitment to ensuring robust compliance and enforcement in the payment systems sector. Regulated entities, including payment system operators, banks, and fintech firms, must:

• Strengthen internal controls to prevent contraventions.

• Ensure timely submission of accurate information and full compliance with RBI directions.

• Be prepared to address enforcement actions by adopting a proactive approach toward penalties and compounding.

Conclusion

The RBI’s revised framework for monetary penalties and compounding of offences under the PSS Act represents a significant step towards enhancing regulatory oversight in the payment systems sector. By introducing a structured, proportionate, and transparent approach to enforcement, the framework strikes a balance between deterrence and fairness.

Seen from a comparative lens, the revised framework introduces a more structured and proportionate approach compared to the 2020 circular that it supersedes. It refines the criteria for imposing penalties, introduces a formalized adjudication process with a committee-based decision-making structure, and enhances transparency through mandatory disclosures. Unlike the 2020 framework, which had broader discretionary powers, the revised framework emphasises materiality by considering severity, financial impact, and recurrence of violations. Additionally, the compounding provisions have been revised to include variable penalty reductions and increased penalties for repeat offenders, ensuring a fair yet deterrent enforcement mechanism.

Thus, the revised framework modernises the penalty structure by making it risk-based, proportionate, and adaptive to the evolving payment scenario. It ensures greater enforcement efficiency, faster resolution, and enhanced transparency, aligning regulatory actions with the growing complexities of digital payments and fintech innovations.

End Notes

[i] Circular No. EFD.CO.NO.1/02.08.001/2024-25, dated 30.01.2025.

[ii] Circular No. DPSS.CO.OD.No. 1328/06.08.005/2019-20, dated 10.01.2020.

Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.