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The fintech space remains one of the fastest growing industries in India, with companies developing new business models to digitize more aspects of banking and financial services in the areas of payments, lending, insurance, asset management and brokerage, as well as to extend their offerings to foreign markets. A number of internet companies in India, including fintech companies, are also looking to go public, marking a new phase in which next-generation tech companies backed by Indian companies will, for the first time, be times, tested by public markets.
The regulatory focus on the fintech industry has three facets: consumer welfare, data security, and anti-money laundering. The former is often in conflict with the latter two, and the Indian government is working on policy development to balance these competing interests. To this extent, the cryptocurrency industry continues to face regulatory uncertainty and resistance from the Reserve Bank of India (“RBI“).
This newsletter highlights the main developments in the Indian fintech space from April 1, 2021 to June 30, 2021.
RECENT LEGAL DEVELOPMENTS
Prohibition on acquiring “significant influence” in jurisdictions that do not comply with the FATF
The RBI issued a circular1 specifying that investments in payment system operators (“OSP“) of the Financial Action Task Force (“FATF“) Non-compliant jurisdictions will not be treated the same as those of FATF compliant jurisdictions. To this extent, non-compliant jurisdictions are periodically identified by the FATF on the basis of inadequate anti-compliance measures adopted in those jurisdictions. money laundering (“AMLA“) and the financing of terrorism (“CFTThe RBI previously issued a similar circular2 on investments in NBFCs of non-FATF-compliant jurisdictions.
In its circular, the RBI further clarified that investors in existing PSOs, holding their investments prior to the classification of source or intermediary jurisdictions as non-FATF compliant, may continue to invest or make additional investments in accordance with applicable regulations. to support business continuity in India. However, new investors from or through non-FATF-compliant jurisdictions, whether existing PSOs or entities seeking PSO authorization from the RBI, should not directly or indirectly acquire a “significant influence” in the beneficiary PSO (that is, new investments (directly or indirectly) from these jurisdictions in total should be below the threshold of 20% of the voting rights (including potential voting rights) of the PSO).
Establishment of the Regulation Review Authority 2.0
The RBI has decided to set up a new Regulation Review Authority (RRA 2.0),3 which, based on internal reviews and feedback from industry stakeholders, will work to streamline RBI regulatory guidance and reduce the compliance burden for regulated entities. It is proposed to achieve this objective by simplifying procedures, streamlining the notification mechanism by allowing online submissions, revoking obsolete instructions and duplications, and suggesting changes to the process for disseminating circulars / instructions from the Commission. RBI. This is a welcome development by the RBI which, if successfully implemented, will make it easier for regulated entities to navigate the RBI regulatory framework.
KYC Relaxed Standards for Video Processes
The RBI modified4 his Master Direction on KYC (“KYC Itinerary“) to define certain minimum standards and operational compliances for regulated entities in order to take advantage of video-based customer identification processes (“KYC videoThese use facial recognition coupled with audio-video interaction, as an alternative method of customer identification.
In particular, to accelerate the use of KYC video, the RBI has: (a) extended the reach of KYC video and licensed its use to new categories of customers, including sole proprietorships, authorized signatories and beneficiaries headcount of legal entities, with the exception of individual clients only; (b) enabled its use to convert limited KYC accounts, opened on the basis of Aadhaar e-KYC, into fully KYC compatible accounts; and (c) authorized the use of the centralized KYC registry KYC identifier to validate identity during video KYC, including submission of electronic documents through DigiLocker. The RBI has also simplified and streamlined the process for periodically updating the KYC.
Centralized payment systems will be open to non-bank entities
Membership in the RBI’s centralized payment systems (“CPS”) – i.e. RTGS and NEFT – has so far been limited to banks and some specialized entities such as clearing houses. and financial development institutions. Recognizing the increased importance and role of non-bank entities in the payments space (as a prepaid payment instrument (“IPP“) issuers, card networks, white label ATM operators and trade receivables discount platforms), including their new technological offerings and personalized solutions for users, the RBI has proposed to allow operators of regulated payment systems to join CPS on a progressive basis (with the necessary instructions to be issued separately).5 However, these entities will not be eligible for any RBI liquidity facility to facilitate the settlement of their CPS transactions. The above proposal aims to encourage increased participation of non-bank entities in payment systems, to increase the reach of digital financial services to a greater number of user segments and to minimize the risk of settlement in payment systems. financial ecosystem.
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