For most of the twentieth century the law treated payments as a private matter between payer, payee and their banks, governed by the Negotiable Instruments Act, 1881 and the general law of contract. The arrival of electronic clearing, real-time gross settlement and card networks created a new kind of infrastructure — systemic, interconnected and capable of transmitting failure across the financial system in seconds — for which no dedicated statute existed. The Payment and Settlement Systems Act, 2007 (Act 51 of 2007), brought into force on 12 August 2008, fills that gap. It makes the Reserve Bank of India the designated authority for the regulation and supervision of payment systems, prohibits anyone but the Bank from operating a payment system without authorisation, and gives statutory force to the concepts of netting and settlement finality that keep clearing houses solvent. This chapter works through the Act provision by provision, grounding each in the bare text as amended up to the Payment and Settlement Systems (Amendment) Act, 2015, and in the controlling decision of the Supreme Court in the cryptocurrency litigation. Read it alongside the banking law hub, the introduction to the banking framework and the notes on the functions and powers of the RBI.
Why a Separate Payments Statute Was Needed
Before 2007 the regulation of payment and settlement systems rested on a patchwork of instruments. The Reserve Bank derived a general supervisory role from the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949, and it had constituted a Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) administratively under Section 58(2) of the RBI Act. But none of this gave the Bank an explicit power to license a payment system, to revoke that licence, or — crucially — to protect a completed settlement from being unwound by an insolvency court. The legal vacuum was most acute in two areas: the enforceability of netting (the practice by which a clearing house collapses thousands of gross obligations into a single net figure) and the finality of settlement once funds had been determined as payable.
The Act answers both. Its long title describes it as an Act to provide for the regulation and supervision of payment systems in India and to designate the Reserve Bank of India as the authority for that purpose. The statute is short — fewer than forty sections — but its architecture is deliberate: a definitions chapter, a chapter establishing the designated authority, an authorisation regime, a battery of supervisory powers, and then the two operative chapters on settlement and on offences. For aspirants, the Act repays close reading precisely because its scheme parallels the licensing-and-supervision logic of the RBI Act, 1934, but applied to infrastructure rather than to banks themselves.
The Definitional Core: Section 2
Liability under the Act turns on a cluster of defined terms in Section 2(1), and examiners reward precision here. A payment system under Section 2(1)(i) means a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange. The Explanation expressly brings within the definition the systems enabling credit card, debit card, smart card and money transfer operations — language broad enough to capture mobile wallets, UPI and card networks as the technology evolved.
A system provider (Section 2(1)(q)) is a person who operates an authorised payment system; a system participant (Section 2(1)(p)) is a bank or any other person participating in a payment system, and includes the system provider. Settlement (Section 2(1)(n)) means settlement of payment instructions and includes the settlement of securities, foreign exchange or derivatives or other transactions involving payment obligations. The pivotal term is netting (Section 2(1)(e)): the determination by the system provider of the amount of money or securities due, payable or deliverable as a result of setting off or adjusting the payment or delivery obligations among system participants — including claims and obligations arising from the termination, on the insolvency or winding up of any participant, of transactions admitted for settlement at a future date, so that only a net claim is demanded or a net obligation owed. This embedded reference to insolvency is what makes close-out netting legally robust in India. Section 2(2) adds that words used but not defined here carry the meaning given to them in the RBI Act or the Banking Regulation Act.
The RBI as Designated Authority and the BPSS
Section 3 is the keystone. Section 3(1) declares that the Reserve Bank shall be the designated authority for the regulation and supervision of payment systems under the Act. Section 3(2) empowers the Bank, by regulation, to constitute a committee of its Central Board to be known as the Board for Regulation and Supervision of Payment and Settlement Systems. Under Section 3(3) the Board is chaired by the Governor, with the Deputy Governor in charge of payment and settlement systems as Vice-Chairperson and not more than three nominated Directors of the Central Board. Section 3(5) deems the pre-existing BPSS — constituted under Section 58(2)(i) of the RBI Act, 1934 — to be the Board under the new Act until reconstituted, preserving continuity.
The significance of Section 3 is that it locates payments regulation firmly within the RBI rather than in a standalone regulator. This was reaffirmed when the Supreme Court, in Internet and Mobile Association of India v. Reserve Bank of India (2020 SCC OnLine SC 275; Writ Petition (Civil) No. 528 of 2018, decided 4 March 2020), surveyed the full range of the Bank's statutory powers and treated the PSS Act as one of the principal sources of the RBI's authority over the payment ecosystem, alongside the RBI Act and the Banking Regulation Act. The breadth of the designated-authority role flows directly into the supervisory powers discussed below and complements the general functions and powers of the RBI.
The Authorisation Regime: Sections 4 to 9
Chapter III erects a licensing wall. Section 4(1) provides that no person, other than the Reserve Bank, shall commence or operate a payment system except under and in accordance with an authorisation issued by the Reserve Bank. This is the operative prohibition: operating a payment system is not a freedom but a privilege conditioned on authorisation. Section 5 requires any person desirous of commencing or operating a payment system to apply to the Bank in the prescribed form, and Section 6 empowers the Bank to make an inquiry before deciding.
Section 7 governs the issue or refusal of authorisation. Section 7(1) allows the Bank to issue an authorisation if it is satisfied, after considering the application and the matters specified, that the proposed system would be consistent with the provisions of the Act and the regulations; the matters it must weigh include the need for the proposed system, the technical standards proposed, the security procedures, the terms and conditions of operation, and the procedure for netting of payment instructions. Section 7(2) prescribes the form and content of the authorisation, which continues in force until revoked. Where the Bank considers that authorisation should be refused, Section 7(3) requires it to give the applicant a written notice and an opportunity to be heard — a statutory embodiment of natural justice. Section 8 empowers the Bank to revoke an authorisation for contravention, breach of conditions, or where a system provider becomes insolvent or is wound up. Section 9 gives a right of appeal to the Central Government against refusal or revocation, providing the only external check on the Bank's authorisation decisions.
Supervisory Powers: Standards, Returns and Directions
The Act arms the Reserve Bank with a graduated toolkit of supervisory powers. Section 10 empowers the Bank to lay down standards for the existing and future payment systems, including standards relating to the format of payment instructions, the timing and processing of settlement, conditions of operation, and the criteria for membership. Section 11 requires a system provider to give notice of any proposed change in the system before effecting it. Section 12 confers the power to call for returns, documents or other information from a system provider, while Sections 14 and 16 confer powers to enter and inspect premises and to carry out audit and inspection respectively; Section 15 keeps information so obtained confidential.
The most potent powers are the directions powers. Section 17 empowers the Bank to issue directions to a system provider where it is of the opinion that the system or the system provider is engaging in conduct likely to result in systemic risk or to affect the payment system, the monetary policy or the credit policy of the country. Section 18 is a residuary power: without prejudice to the foregoing, the Bank may, if it considers it necessary in the public interest or in the interest of the operation of payment systems, lay down policies and give directions generally to system providers or participants, and every direction must be complied with under Section 19. It was Section 18 read with Section 10(2) that the RBI invoked in its directive of 6 April 2018 requiring all payment system operators to store payment data within India — the data-localisation mandate that reshaped the operations of global card networks and fintech firms, and which forms the regulatory backdrop to the WhatsApp Pay litigation.
Settlement Finality and Netting: Section 23
Section 23 is the commercial heart of the statute, and the provision most frequently examined. Section 23(1) provides that payment obligations and settlement instructions among system participants shall be determined in accordance with the gross or netting procedure, as the case may be, approved by the Reserve Bank while issuing authorisation. Section 23(2) gives the loss-distribution rules of a payment system effect notwithstanding anything to the contrary contained in any other law for the time being in force. Section 23(3) is the celebrated finality clause: a settlement effected under such procedure shall be final and irrevocable.
Section 23(4) supplies the insolvency override that the older law could not. Where a system participant is declared insolvent, dissolved or wound up, then notwithstanding anything in the Companies Act, 1956, the Banking Regulation Act, 1949 or any other law, the order of adjudication, dissolution or winding up shall not affect any settlement that has become final and irrevocable, nor the right of the system provider to appropriate collaterals contributed by the participant towards its obligations. The Explanation removes all doubt: a settlement, whether gross or net, is final and irrevocable as soon as the money, securities, foreign exchange or derivatives payable as a result of such settlement is determined, whether or not actually paid. This determination-not-payment test is the single most testable proposition in the Act. The protection it confers is what allows clearing corporations to manage default without the spectre of an insolvency court reaching back to claw funds out of a closed settlement cycle — the same systemic-stability logic that animates the RBI's regulation of currency.
The Central Counterparty and the 2015 Amendment
The Payment and Settlement Systems (Amendment) Act, 2015 (Act 18 of 2015) modernised Section 23 to reflect the rise of the central counterparty (CCP) — an entity that, by novation, interposes itself between participants so as to become the buyer to every seller and the seller to every buyer. Inserted Explanation 2 to Section 23 now defines the central counterparty in exactly those terms. New Section 23(5) provides that where an insolvency or winding-up order is made against a CCP, then notwithstanding anything in the Banking Regulation Act, 1949, the Companies Act, 1956, the Companies Act, 2013 or any other law, the payment obligations and settlement instructions between the CCP and its participants — including those arising from transactions admitted for future settlement — shall be determined forthwith by the CCP in accordance with the approved gross or netting procedure, and such determination shall be final and irrevocable.
New Section 23(6) bars the liquidator, receiver or assignee of a CCP from re-opening any determination that has become final and irrevocable, and obliges them, after appropriating collaterals, to return any excess to the participants. The 2015 Amendment also inserted the definition of a trade repository in Section 2(1)(r) and a new Section 34A extending the Act to designated trade repositories and issuers — provisions that brought derivatives reporting infrastructure within the RBI's payments mandate. Together these changes hardened India's framework for over-the-counter and centrally-cleared transactions, aligning it with the post-2008 global consensus on netting and clearing.
Protecting Customer Funds: Section 23A
The 2015 Amendment also inserted a wholly new Section 23A, directed not at clearing risk but at the protection of customers of designated payment systems — most obviously, the float held by prepaid wallet and prepaid payment instrument (PPI) operators. Section 23A(1) empowers the Reserve Bank, in the public interest or in the interest of customers, or to prevent a designated payment system from being conducted in a manner prejudicial to its customers, to require the system provider to deposit and keep deposited in a separate account with a scheduled commercial bank, or to maintain liquid assets, an amount equal to a specified percentage of the customer funds collected and remaining outstanding.
Section 23A(2) ring-fences that balance: it cannot be used for any purpose other than discharging liabilities arising from customers' usage of the payment service or repaying customers. Section 23A(3) goes further still — notwithstanding the Banking Regulation Act, the Companies Act, 1956 or the Companies Act, 2013, the customers entitled to receive payment have a first and paramount charge on the balance, and the liquidator or receiver of either the system provider or the bank cannot touch those balances until all customers are paid in full. This is the statutory foundation of the escrow and net-worth requirements that the RBI imposes on PPI issuers through its master directions, and it explains why a wallet user's money is, in principle, insulated from the wallet operator's insolvency.
Settlement of Disputes: Section 24
Section 24 establishes a self-contained dispute-resolution architecture that keeps payment disputes out of the ordinary courts in the first instance. Section 24(1) requires every system provider to make provision in its rules for a panel of not fewer than three system participants — none of them parties to the dispute — to decide disputes between participants connected with the operation of the payment system. Section 24(2) obliges the system provider to refer such inter-participant disputes to that panel.
Section 24(3) escalates harder cases: where a dispute arises between a participant and the system provider, or between system providers, or where a participant is dissatisfied with the panel's decision, the dispute is referred to the Reserve Bank. Under Section 24(4) the Bank disposes of it through an authorised officer, and the Bank's decision is final and binding. Section 24(5) addresses the conflict of interest that arises when the RBI itself acts as a system provider or participant (as it does for RTGS and certain securities settlement): such disputes are referred to the Central Government, which may authorise an officer not below the rank of Joint Secretary, whose decision is final. The scheme reflects a deliberate preference for expert, in-house adjudication over generalist litigation — a recurring theme in Indian financial-sector statutes.
Dishonour of Electronic Funds Transfer: Section 25
Section 25 is the PSS Act's answer to the Section 138 dishonour-of-cheque offence, extended to the electronic age. Section 25(1) provides that where an electronic funds transfer initiated by a person from his own account cannot be executed because the balance is insufficient, or because it exceeds an agreed limit, that person is deemed to have committed an offence punishable with imprisonment up to two years, or with fine up to twice the amount of the electronic funds transfer, or both. The offence is hedged by the same protective conditions familiar from cheque law: under the proviso, the transfer must have been for the discharge of a legally enforceable debt or liability; it must have been initiated per the system provider's procedural guidelines; the beneficiary must give written notice of demand within thirty days of learning of the dishonour; and the payer must fail to pay within fifteen days of that notice.
Section 25(2) raises a presumption that the transfer was for a debt or liability; Section 25(3) denies the defence that the payer did not believe his balance was insufficient; and Section 25(4) directs the court, on production of the bank's communication of dishonour, to presume the fact of dishonour unless disproved. Most significantly, Section 25(5) applies the provisions of Chapter XVII of the Negotiable Instruments Act, 1881 (Sections 138 to 142) to the dishonour of an electronic funds transfer so far as the circumstances admit, importing the entire procedural and evidentiary machinery of cheque-bounce prosecutions into the electronic domain. "Electronic funds transfer" is defined in Section 2(1)(c) to include point-of-sale transfers, ATM transactions, and transfers initiated by telephone, internet and card payment.
Offences, Penalties and Adjudication
Chapter VII creates the penal regime. Section 26 graduates offences by gravity: operating a payment system without authorisation, or in contravention of the terms of authorisation, attracts imprisonment (subject to a statutory minimum) and fine under Section 26(1); furnishing false information in an application or return is punishable under Section 26(2) with imprisonment up to three years; disclosure of confidential information in breach of Section 22 is separately punishable; and a residuary penalty provision covers other contraventions. Section 27 contains the standard offences-by-companies provision, fixing liability on persons in charge of and responsible for the company's business, subject to the usual due-diligence defence.
Section 28 regulates cognizance: no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the First Class may try an offence, and cognizance is taken only on a complaint by an officer of the Reserve Bank or, for the Section 25 offence, by the aggrieved beneficiary. The Act also empowers the Bank, under its penalty provisions, to impose monetary penalties for specified contraventions as an alternative to prosecution — a civil-penalty route that mirrors the enforcement design of other RBI-administered statutes and the RBI's broader regulatory toolkit. The combination of criminal sanction, corporate liability and administrative penalty gives the Bank flexibility to calibrate enforcement to the seriousness of the breach.
Judicial Review of Payments Regulation: IMAI v. RBI
The leading judicial pronouncement bearing on the RBI's payments powers is Internet and Mobile Association of India v. Reserve Bank of India (2020 SCC OnLine SC 275), decided on 4 March 2020 by a three-judge bench of Rohinton Fali Nariman, Aniruddha Bose and V. Ramasubramanian, JJ. The petitioners challenged the RBI's circular of 6 April 2018 directing regulated entities not to deal in or provide services facilitating any person dealing in virtual currencies. The Court conducted an exhaustive survey of the Bank's statutory armoury — the RBI Act, 1934, the Banking Regulation Act, 1949 and the PSS Act, 2007 — and held that the RBI did possess wide power to take pre-emptive action against activities that posed a threat to the payment and credit systems it regulates; it rejected the argument that the Bank lacked jurisdiction merely because virtual currencies were not legal tender.
The circular nonetheless fell. Applying the proportionality standard drawn from Modern Dental College & Research Centre v. State of Madhya Pradesh, the Court found that the RBI had not shown that any of its regulated entities had actually suffered harm from dealing with virtual-currency businesses, and that a complete prohibition on banking access was a disproportionate measure that violated the petitioners' right under Article 19(1)(g) of the Constitution. The decision is doctrinally important for two reasons: it confirms that the RBI's regulatory writ over the payment ecosystem is broad and pre-emptive, yet it firmly subjects the exercise of that writ to constitutional proportionality review. For aspirants it is the indispensable case to cite on the scope and limits of RBI power over payments.
Interface with the RBI Act and Other Statutes
The PSS Act does not operate in isolation. Its definitions borrow from the RBI Act and the Banking Regulation Act under Section 2(2); its Board originates in Section 58 of the RBI Act, 1934; and its overriding clauses in Sections 23(4), 23(5), 23(6) and 23A(3) expressly displace the Companies Act and the Banking Regulation Act so far as settlement finality and customer-fund protection are concerned. The Act's reach into electronic funds transfer also dovetails with the Negotiable Instruments Act, 1881, whose Chapter XVII Section 25(5) imports wholesale.
Two structural points deserve emphasis for revision. First, the Act is enabling rather than exhaustive: vast tracts of payments regulation — UPI, PPIs, tokenisation, the data-localisation mandate — exist as RBI directions and master directions issued under Sections 10, 17 and 18, not as primary legislation, which is why IMAI v. RBI matters as the template for challenging such subordinate action. Second, the Act preserves the RBI's monopoly position: under Section 4(1) the Bank itself may operate payment systems (as it does for RTGS) without authorisation, while every other operator is a licensee. This dual role as both regulator and operator is the very conflict that Section 24(5) addresses through Central Government adjudication. The result is a tightly integrated regime in which the Bank's payments powers reinforce, and are reinforced by, its functions under the RBI Act and the wider banking-law framework.
Frequently asked questions
Who is the designated authority for payment systems under the PSS Act, 2007?
Section 3(1) makes the Reserve Bank of India the designated authority for the regulation and supervision of payment systems. Under Section 3(2) the RBI constitutes a committee of its Central Board — the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) — chaired by the Governor, to exercise these functions.
Can anyone operate a payment system without RBI authorisation?
No. Section 4(1) prohibits any person, other than the Reserve Bank itself, from commencing or operating a payment system except under and in accordance with an authorisation issued by the RBI. Application is made under Section 5, and the RBI issues or refuses authorisation under Section 7 after considering matters such as technical standards, security procedures and the netting procedure proposed.
What does 'settlement finality' mean under Section 23?
Section 23(3) provides that a settlement effected under an approved procedure is final and irrevocable. The Explanation clarifies that a settlement, whether gross or net, becomes final and irrevocable as soon as the money or securities payable are determined, whether or not actually paid. Section 23(4) ensures that an insolvency, dissolution or winding-up order against a participant cannot unwind a settlement that has already become final.
What did the 2015 Amendment to the PSS Act change?
The Payment and Settlement Systems (Amendment) Act, 2015 (Act 18 of 2015) inserted Explanation 2 and new sub-sections (5) and (6) into Section 23 to give settlement finality to a central counterparty's determinations even on its insolvency, defined 'trade repository' in Section 2(1)(r), added Section 34A for designated trade repositories, and inserted Section 23A to protect customer funds held by designated payment systems through a first and paramount charge.
How does the PSS Act punish dishonour of an electronic funds transfer?
Section 25 deems it an offence where an EFT cannot be executed for insufficiency of funds, punishable with imprisonment up to two years or fine up to twice the transfer amount, or both — subject to conditions mirroring cheque-bounce law (debt or liability, demand notice within thirty days, failure to pay within fifteen days). Section 25(5) applies Chapter XVII (Sections 138–142) of the Negotiable Instruments Act, 1881 to such dishonour.
What is the significance of IMAI v. RBI (2020) for payment systems regulation?
In Internet and Mobile Association of India v. Reserve Bank of India (2020 SCC OnLine SC 275, decided 4 March 2020), the Supreme Court confirmed that the RBI has wide, pre-emptive power over the payment and credit systems under the RBI Act, Banking Regulation Act and PSS Act, but struck down its virtual-currency banking ban as a disproportionate restriction on Article 19(1)(g). It is the leading authority on both the scope and the constitutional limits of RBI payments regulation.