RBI Notification

RBI Tightens Norms for Imposing Penalty under PSS Act, 2007

On January 30, 2025, the Reserve Bank of India (RBI) released a notification on its official website regarding the Framework for Imposing Monetary Penalty and Compounding Offenses under the Payment and Settlement Systems Act, 2007.

Under this new framework, the RBI has the authority to impose a penalty of up to ₹10 lakh or twice the amount involved in the violation, whichever is higher, if the amount can be quantified. This marks a shift from the previous framework, strengthening enforcement measures. To know more about what this penalty is all about, read this article thoroughly for a better understanding and to avoid potential penalties in the future, if any.

Revised Framework Under the Payment and Settlement Act

The Reserve Bank of India (RBI) has recently tightened the rules for imposing monetary penalties and compounding offenses under the PSS Act, 2007. In response, the Central Bank of India has decided to streamline and consolidate enforcement procedures.

The primary goal of this new framework is to ensure compliance and accountability among payment system operators and banks in India. However, only serious or significant violations will be subject to enforcement actions, such as monetary penalties or compounding of offenses. Additionally, the framework outlines the procedures for imposing penalties and determining their amounts.

The licenses issued under the Payment and Settlement Systems Act, 2007 are payment aggregator licenses, payment gateway licenses, and other significant licenses.

The Payment and Settlement Systems Act, 2007

The Payment and Settlement Systems Act, 2007 regulates and supervises the payment systems in India. The authority behind this regulation is the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) as constituted by the Reserve Bank of India (RBI) in order to discharge its obligations under the said statute.

According to the PSS Act, 2007, the payment system includes Real-time gross settlement (RTGS), Electronic Clearing Services (ECS Credit), Electronic Clearing Services (ECS Debit), Credit Cards, National Electronic Fund Transfer (NEFT) System, Immediate Payment Service, Unified Payments Interface (UPI).

Know About Offences Under the PSS Act, 2007

The offences under the PSS Act, 2007 are clearly outlined in Section 26, which specifies the penalties for violations that impact the integrity and security of India’s financial ecosystem. The key offences under the Payment and Settlement Systems (PSS) Act, 2007 include: 

1. Unauthorised Operation

In case the entities are operating a payment system without obtaining authorization or failing to comply according to the authorization conditions.

2. False Information

Whenever any false statements are given or omit any crucial information in applications or returns.

3. Non-Disclosure

In case of failure to submit required statements and significant information or documents to the RBI (Reserve Bank of India)

4. Compromised on Information Security

Whenever any unauthorized or prohibited information is disclosed or circulated.

5. Disobeyance

It refers to non-compliance with RBI directions, such as failure to pay the imposed penalties.

6. Violations related to data storage

When there is a violation related to data storage, KYC or AML norms, and escrow account maintenance.

What are the New Guidelines under PSS Act, 2007?

Here given below are some of the glimpses of the new guidelines under the PSS Act, 2007:

• It has established procedures on how penalties are to be imposed.
• These procedures include how to send a show-cause notice and allow entities the opportunity for a personal hearing.
• A settlement mechanism on how to handle certain violations and how such entities can resolve such issues without engaging in criminal proceedings before Indian courts.
• Entities must apply for compounding in order to avail of a settlement option along with the necessary documents.
• It is also stated that the compounding amount may be up to 25% lower than the corresponding monetary penalty and must be paid within 30 days of the order.

Quantum of Penalty Under the New Framework of PSS Act, 2007

Well, the amount of penalty may be based upon the principles of proportionality, intent, and mitigating factors if any. Given below are the conditions to be considered while deciding the amount of monetary penalty:

1. The amount of gain or unfair advantage by the violators due to the violation as per the PSS Act, 2007.
2. Depending upon the amount of loss caused to any other authority or agency or exchequer and or to any other market participant.
3. When the violators obtain a monetary gain due to the delay or non-compliance as per the rules and regulations.
4. The amount of monetary penalty may vary depending upon the impact on account of various factors.
5. The amount of penalty shall not exceed Rs.10 lakh or twice the amount involved in the violation or whichever is more. In case of a continuing offense, the additional penalty is up to Rs.25,000/- for every day until the case is resolved.
6. If the penalty amount is unfair, disproportionate, or affects the violator’s viability, the authority may use its discretion to adjust or reduce the penalty, ensuring fairness while staying within legal limits.

Consequences of Failure to Pay the Monetary Penalty

The list of consequences of failure to pay the monetary penalty as per the PSS Act, 2007 are as follows:

1. The monetary penalty or compounding amount shall be payable within the period of thirty days from the date of receipt of the penalty or compounding order as the case may be.
2. In case of failure to pay the penalty amount Reserve Bank of India (RBI) shall take Action under section 8 or 30 (3) or section 33 of the PSS Act.
3. If the violator fails to pay the compounding amount within 30 days, the violation will not be considered compounded. As a result, the applicant may face criminal proceedings before the appropriate court. Additionally, they cannot submit another application for compounding the same violation once a compounding order has been issued.

Conclusion

The Reserve Bank of India has tightened the enforcement framework under the PSS Act, 2007, which marks a significant step toward ensuring compliance and accountability in India’s financial ecosystem. By establishing clear guidelines on monetary penalties, compounding offences, and enforcement procedures, the RBI aims to create a more transparent and structured regulatory environment for payment system operators and banks.

With strict penalties for violations and a well-defined process for compounding offences, entities must now exercise greater diligence in adhering to regulations. Failure to comply can lead to severe financial penalties and legal consequences, making it crucial for businesses to stay informed and compliant.

This revised framework reinforces RBI’s commitment to safeguarding the integrity of the payment system while ensuring fairness and proportionality in enforcement actions.

To get expert assistance in understanding the PSS Act and get the desired licenses, visit www.enterslice.com.

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