The Reserve Bank of India (“RBI“) has introduced a new framework for imposing monetary penalties and compounding of offences under the Payment and Settlement Systems Act, 2007 (“PSS Act“) on January 30, 2025 (“New Framework“) ¹. The New Framework supersedes the erstwhile framework which was implemented by the RBI in 2020 (“2020 Framework“) ². This Article highlights the key differences between the New Framework and the 2020 Framework.
Key changes in the New Framework:
- Enhanced Penalty: The quantum of the monetary penalty imposed by the RBI has been increased from the cap of Rs. 5,00,000/- (Rupees Five Lakh Only) or twice the amount involved in such contravention or default where such amount is quantifiable, whichever is higher, under the 2020 Framework to Rs. 10,00,000/- (Rupees Ten Lakh Only) or twice the amount involved in such contravention or default where such amount is quantifiable, whichever is higher, under the New Framework.
- Designated Authority: In the 2020 Framework, the designated authority for imposing penalties and compounding contraventions was appointed based on the nature of the contravention depending on whether the contravention was quantifiable, non-quantifiable, or partly quantifiable and partly non-quantifiable. However, under the New Framework, the designated authority is appointed based on whether the contravention falls under the jurisdiction of either the central office or one of the regional offices of the Enforcement Department (“ED“). For the contraventions falling under the jurisdiction of the central office of the ED, the designated authority will comprise of 3 (three) executive directors, whereas, for the contraventions falling under the jurisdiction of one of the regional offices of the ED, the designated authority will comprise of the regional director and 2 (two) senior officers of the relevant regional office.
- Penalisation and/or Compounding of Material Contraventions: The New Framework has limited the scope of the contraventions that may be penalised and/or compounded by the designated authority to only material contraventions determined on the discretion of the designated authority. The designated authority will consider the following factors to determine the materiality of the contravention:
- Severity of contravention in terms of degree of breach of norms/ limits (i.e. isolated, localised, extensive, widespread);
- Period and frequency of a similar contravention during the past 5 (five) years;
- Seriousness of the contravention, percentage of amount involved in the contravention vis-à-vis total value of transactions handled by the contravener during the period under consideration;
- Amount involved in the contravention; and
- Submission of wrong / false / incomplete compliance.
- Procedure for Imposing a Monetary Penalty: Under the New Framework, the designated authority can directly issue a show cause notice to the contravener, bypassing the first two steps prescribed in the 2020 Framework, which allowed the RBI to request information from the contravener, and required an explanation letter to be issued by the contravener. Additionally, where the 2020 Framework determined the quantum of the monetary penalty on the basis of various factors, including the amount of gain and/or unfair advantage, amount of loss caused, and the monetary benefits accruing to the contravener from such noncompliance, the New Framework determines the quantum of the penalty based on the principles of proportionality, intent and mitigating factors, if any alongside other facts that may be considered for determining the amount of the penalty. While the factors outlined in the 2020 Framework have been reproduced under the New Framework, the RBI has further added that in the case the amount of resultant penalty affects the viability of the contravener, or is disproportionate or unfair, or where neither the extent of impact nor the intent of committing the contravention is clearly established, the designated authority may exercise discretion and take a fair view to either reduce or impose an appropriate amount of penalty, subject to statutory limits.
- Compounding of Contraventions: While the procedure for compounding contraventions under the New Framework and 2020 Framework is similar, the RBI has included a clarification regarding the effect of the compounding application in the New Framework. As per the New Framework, once the contravention has been compounded, no further proceeding shall be initiated or continued, as the case may be, against the contravener, with respect to the contravention that has been compounded.
- Payment and Consequences of Non-Payment: Under both the frameworks, the amount specified in the compounding order must be paid within a period of 30 (thirty) days from the date of the receipt of the compounding order. While both the frameworks provide that in case the contravener fails to pay the penalty/compounding amount within the stipulated time, it will be deemed as if the contravention has not been compounded, under the New Framework, the contravener may also face criminal prosecution. Additionally, the contravener would also not be entitled to file another application for compounding of the contravention in respect of which the compounding order was passed.
Conclusion:
With its focus on material contraventions and increased monetary penalties, the New Framework aims to strengthen the RBI’s enforcement mechanisms under the PSS Act. The New Framework will ensure that the financial institutions process digital payments smoothly and in accordance with the applicable laws.
¹ Available at: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12773&Mode=0.
² Available at: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11785&Mode=0.
English
Chinese (Simplified)
Japanese