The Payment and Settlement Systems Act, 2007 (PSS Act) is a major law that regulates payment systems in India. It ensures that all payment systems—such as card networks, money transfer systems, electronic funds transfer systems, and settlement systems—operate safely, efficiently, and under the supervision of the Reserve Bank of India (RBI).
The Act received Presidential assent on 20 December 2007 and came into effect on 12 August 2008.
Objective of the PSS Act, 2007
The main purpose of the Act is to provide a legal framework for:
- Regulation and supervision of payment systems in India
- Empowering the RBI as the authority responsible for payment systems
- Forming the Payments Regulatory Board (PRB) within RBI
- Ensuring settlement finality and legal recognition of netting
This is important because, except for RTGS (Real-Time Gross Settlement), most payment systems in India operate on a net settlement basis.
Regulations Issued Under the Act
Two regulations have been framed under the Act:
- Payment and Settlement Systems Regulations, 2008
(Came into effect on 12 August 2008) - Payments Regulatory Board Regulations, 2025
(Came into effect on 20 May 2025)
What these regulations cover
Payments Regulatory Board Regulations, 2025 explains:
- Structure and composition of the PRB
- Powers exercised by the PRB
- Meetings, quorum requirements
- Creation of sub-committees and advisory committees
Payment and Settlement Systems Regulations, 2008 covers:
- Application procedures for authorization
- Grant of authorization
- Payment instruction formats
- Standards for payment systems
- Submission of accounts, returns, documents, and other information by system providers
Key Definitions Under Section 2 of the Act
The Act clearly defines terms such as:
- Payment obligation
- Payment instruction
- Payment system
- Electronic fund transfer
- Gross settlement system
- Netting
- Settlement
- Systemic risk
- System participant
- System provider
Meaning of Important Terms
Payment Obligation
It is what one participant owes another in a payment system as a result of clearing or settlement of transactions involving funds, securities, foreign exchange, derivatives, etc.
Payment Instruction
Any order or authorization—manual or electronic—issued by a person or a participant to make a payment.
Settlement
The actual settlement of payment instructions, including securities, derivatives, FX transactions.
It may occur on a net basis or on a gross basis.
Payment System (Section 2(1)(i))
A system that enables payments between a payer and beneficiary by providing clearing, payment, or settlement services.
It includes card networks, smart card systems, money transfer systems, etc., but excludes stock exchanges.
Any entity performing clearing, settlement, or payment functions is treated as a system provider.
Authorization Requirements
Under Section 4, only RBI can operate a payment system unless authorization is obtained from RBI.
Those wanting to start a payment system must apply using Form A, along with required documents and a fee of ₹10,000 (plus GST).
Unauthorized operation is an offence.
Foreign Entities
- Foreign entities can operate payment systems in India.
- They must also apply for authorization from RBI.
- Examples include VISA, MasterCard, Western Union, MoneyGram etc.
Financial Market Infrastructures (FMIs)
FMIs are large systems used for clearing, settlement, or recording of financial transactions, such as:
- Systemically important payment systems
- Central Securities Depositories (CSDs)
- Securities Settlement Systems (SSSs)
- Central Counterparties (CCPs)
- Trade repositories (TRs)
These are governed by international standards called PFMIs (Principles for Financial Market Infrastructures).
Foreign FMIs can also operate in India with RBI authorization.
Factors Considered by RBI Before Granting Authorization
RBI examines:
- Need for proposed payment system
- Technical design and standards
- Security measures
- Netting and settlement processes
- Risk management
- Financial strength of applicant
- Integrity and experience of management
- Impact on consumers
- Monetary and credit policies
RBI aims to decide applications within six months.
Grounds for Refusal, Revocation, and Appeal
- RBI may refuse authorization but must provide written reasons and opportunity for hearing.
- RBI may revoke authorization if the system violates Act, regulations, or directions.
- Appeals against refusal or revocation may be made to the Central Government within 30 days.
Fees and Security Deposits
RBI can:
- Collect authorization fees
- Require security deposits for safe operation of the payment system
RBI’s Powers Over Payment Systems
1. Prescribing Standards
RBI may set rules for:
- Format and timing of payment instructions
- Membership criteria
- Operational terms and conditions
2. Collecting Information
RBI may require:
- Returns
- Documents
- Operational information
from system providers.
3. Sharing Information
RBI may share information with other regulators or authorities when necessary for national or systemic safety.
4. Inspection
RBI can inspect premises, equipment, systems, documents, and electronic records of system providers.
5. Inspection of Foreign Entities
RBI may inspect foreign entities operating in India (subject to cooperation with their home regulators).
6. Issuing Directions
RBI may direct system providers to:
- Stop certain activities
- Undertake specific actions
- Ensure smooth operation of payment systems
Netting and Settlement Finality
The Act gives legal finality to settlement.
Once settlement becomes final:
- It cannot be reversed
- No insolvency proceedings can undo the settlement
- System providers may appropriate collateral
Loss-allocation rules within systems are also legally recognized.
Duties of System Providers
System providers must:
- Follow the Act, regulations, authorization conditions, and RBI directions
- Comply with contracts among system participants
- Disclose charges, liabilities, and terms
- Provide rules and documents to participants
- Maintain confidentiality unless disclosure is permitted by law
(Sections 20–22)
Dispute Resolution Mechanism
- Systems must create a dispute panel for resolving issues among participants.
- If dissatisfied, disputes may be referred to RBI, whose decision is final.
- If RBI itself is a party, the dispute goes to the Central Government.
(Section 24)
Dishonour of Electronic Fund Transfer
Dishonouring an electronic fund transfer due to insufficient funds is an offence similar to cheque bounce under the Negotiable Instruments Act.
Criminal prosecution can be initiated.
(Section 25)
Penalties
Operating a payment system without authorization or violating provisions can lead to:
- Criminal prosecution
- Monetary penalties
- Directions from RBI
- Punishment for false statements, non-submission of information, or disclosure of confidential information
(Sections 26–30)