Legal Requirements and Compliances for a Fintech Startup in India

Soniya Khanna

06 Jul, 2023

With the growth of start-ups in the Fintech industry, the future of fintech looks bright in India. Other factors such as penetration of mobile users, continuous build-up of digital networks and streamlining of financial processes in many industries have played a massive role in its expansion. Hence in this article, we shall discuss some of the legal requirements and compliances for a Fintech Startup in India.

What do you mean by Fintech?

Fintech refers to Financial Technology. It is an organization who through the digital medium, provide financial assistance, planning and management services to other organizations/companies and individuals. Fintech leverages the use of technology to enhance or automate financial services and processes.

Services provided by different types of online finance companies

• Payment services- mobile payments and e-wallets;
• Lending resources from P2P;
• Retail banking services, Customer to Business and Business to Customer;
•  Personal Consulting services for finance and savings

Fintech Startup in India: Legal requirements

There are certain legal requirements and compliances which should be fulfilled by the Fintech startup in India. They have been enumerated below:

• Choose the business structure-

The first step for a fintech startup is to determine the business structure. As a Fintech Startup, you can opt for any of the following business structure:

1. OPC- A One Person Company is where the company has one owner but operates as a business;
2. LLP- A Limited Liability Partnership is a mixture of partnership and a company. Here the limited liability of all partners is limited to their respective shares.
3. Private Limited Company- The directors and shareholders of the company doesn’t have any personal obligation to the creditors of the company. Many opt for this structure in the financial technology market.

• GST Registration-

An online finance business or a fintech startup should register for GST and get GSTN for the business.

• Contracts and Agreements-

One should get certain legal documents to start a fintech startup. An advocate can help you draft customized legal documents as per your business requirement. Some of the contracts and agreements are as follows:

1. Co-Founders Agreement;
2. IP Licensing Agreement;
3. Website user policy;
4. Privacy policy;
5. Terms of use for mobile users;
6. Product development agreement;
7. Vendor agreement;
8. Employment agreement.

• Intellectual Property Registration-

Intellectual Properties such as Copyright, Patent, Trademark and Design should be obtained. It will help in protecting your brand, website, mobile app etc. By registration, you will possess the right to seek remedy in case of IP infringement.

• Licensing–

Licensing and regulation will depend upon the type of service provided by the Fintech Startup in India. 

1. In case of payment services, they require registering with the Reserve Bank of India.
2. In case of retail service providers, licensing required for retail fintech to perform lending services and depositing services for MSMEs.
3. For financial management and investment, Fintech should be registered as NBFCs as prescribed by the Reserve Bank.

• Domain Registration-

A technology based company would want to have their presence on the internet therefore, it is a must to have a domain name and a fully developed website. If you are a small start-up, then consider setting up a mobile app.

Fintech Startup in India: Compliances

There are a slew of compliances required for fintech. To classify a startup in any one category would be a complex task as most of them provide an array of services. In this segment, we shall look at compliances for Fintechs.

• The payments market is the foremost member of the fintech industry. This sector has witnessed enormous growth, inviting a massive amount of investment. Close to 50% start-ups in the payment industry comprise of mobile/digital wallets, PoS systems and payment gateways. It may be noted that for using mobile/digital wallets, KYC compliance is necessary.
• Payments gateways and aggregators play a crucial role in payments sector due to the rise in digital transactions. All interactions are made through bank between payment gateway and RBI. Payments gateways are required to maintain certain requirements to protect and secure digital payments.
• In the fintech industry in India, digital lending platforms have flourished. The lending landscape in India was previously dominated by banks, but now it has been revolutionized by P2P lending and SME lending start-ups. Lending platforms provide easy loans approval with minimal paperwork. MSME companies have greatly benefitted from this as they can get loans easily. These platforms have leveraged the use of cutting edge technologies such as ML and AI.
• Providing insurance services online is still naive concept. These use IoT enabled services and track the individual requirements of the customer. IRDAI makes the policies and regulations to be followed by brokers. Further insurance web aggregators is a platform where customers get to know regarding various insurance products. They are like an online shopping interface for customers. They are regulated by the IRDAI (Insurance Web Aggregators Regulations, 2017). The web aggregators can’t promote a particular company.

Compliance with the IT Act 2000

Fintech companies operate on the internet therefore, they must comply with the directions set out in the Information Technology Act 2000^[1]. These companies rely on the individuals’ personal data therefore, to prevent legal complications, they are required to follow specified data security requirements.

Corporate bodies should get permission from the information provider to disclose any personal confidential data. Further, they must maintain security control structures and follow information security protocols. Certifications like IS, ISO and IEC 27001 are included.

Conclusion

With the advent of Fintech players, traditional financial market has been disrupted greatly. As they use modern technologies for providing financial services, their objective of financial inclusion is targeted. However, certain uncertainty with respect to regulations, customer mistrust and lack of a large customer base have caused complications to certain extent. There have been times when fintech players have been forced to adapt to the regulations that were designed for traditional financial institutions. However, the attitude of regulators is expected to change towards the fintech industry. If you are planning to start a fintech startup in India, then you should be aware of these information.

Read our article:Fintech and NBFC: Key differences