A. Introduction

The Reserve Bank of India (“RBI”), on January 30, 2025, has issued the ‘Framework for imposing monetary penalty and compounding of offences under the Payment and Settlement Systems Act, 2007’ (“New Framework”). The objective of the New Framework is to rationalize and consolidate the enforcement actions by RBI under the Payment and Settlement Systems Act, 2007 (“PSS Act”) and it supersedes the ‘Framework for imposing monetary penalty on authorized payment system operators/ banks under the Payment and Settlement Systems Act, 2007’ dated January 10, 2020 (“Erstwhile Framework”).

B. Amendments/ Changes

Key features of the New Framework inter alia include:

1. Compoundable Offences: Section 31 of the PSS Act empowers RBI to compound contraventions except for offences punishable with imprisonment only/ imprisonment and fine. Accordingly, consistent with the Erstwhile Framework, contraventions referred in Sections 26(1), 26(3), 26(4), 26(5) and 26(6), PSS Act are compoundable. However, unlike the RBI’s ‘Directions – Compounding of Contraventions under FEMA, 1999’ dated October 1, 2024 whereunder only contraventions involving quantifiable amounts are compoundable, both the Erstwhile Framework and the New Framework envisage compounding of contraventions where amount involved is non-quantifiable as well.
2. Materiality for Contraventions: Per the New Framework, “only material contraventions will be taken up for enforcement action in the form of imposition of monetary penalty or compounding of offences”. The New Framework also prescribes the factors basis which the materiality of a contravention will be determined – these inter alia include the amount involved, seriousness of contravention, percentage of amount involved vis-à-vis total transaction value, period and frequency of similar contraventions during the past five years, etc.
3. Designated Authority: The designated authority prescribed under the Erstwhile Framework was pegged to the nature of amount involved in the contravention (i.e., whether quantifiable, non-quantifiable or partly quantifiable). However, under the New Framework, the designated authority will be determined basis the office of the Enforcement Department which would handle the case i.e., for cases handled by the central office, the designated authority is a committee comprising three executive directors and for cases handled by a regional office, it is a committee comprising the regional director and two senior officers of the regional office of Enforcement Department – However, the New Framework does not specify the contraventions that are to be handled by the central office and regional offices respectively.
4. Procedure for Imposing Penalty: The process flow under the Erstwhile Framework has been modified inter alia to exclude: (i) the RBI calling for additional information from a contravener, and (ii) RBI issuing a letter to contravener (once identified) calling for explanation (in each case, prior to issuance of a show cause notice (“SCN”)). Under the New Framework, the SCN issuance is the first step. Additionally, per the New Framework, quantum of penalty may be based on principles of proportionality, intent and mitigating factors. The New Framework elucidates additional factors which may be considered for determining quantum of monetary penalty viz. amount of gain or unfair advantage accruing to contravener (where quantifiable), amount of loss caused to any other authority/ agency/ exchequer and/ or other market participants and monetary benefits accruing to contravener from delayed/ non-compliance. Notably, the indicative matrix for determining the quantum of penalty under the Erstwhile Framework is omitted under the New Framework.
5. Procedure for Compounding: Whilst the procedures set out under the New Framework and the Erstwhile Framework are substantially similar, the New Framework expressly clarifies that where RBI compounds a contravention, no proceedings/ further proceedings are to be initiated/ continued. Additionally, unlike the Erstwhile Framework which required the compounding application to be submitted to the chief-general-manager, Department of Payment and Settlement Systems, the New Framework requires submission to the chief-general-manager, Enforcement Department.
6. Compounding Amount: Whilst the basis for calculation of compounding amount is the same as for penalties under both the Erstwhile Framework and the New Framework, worthwhile to reiterate that the matrix for computation of penalties/ compounding amount under the Erstwhile Framework has been omitted under the New Framework. Consistent with the Erstwhile Framework, the New Framework prescribes that the compounding amount may be 25% less than the calculated amount of fine/ penalties that would have otherwise been imposed in relation to the contraventions, provided that, for repeated contraventions within a five-year period for which compounding has been done earlier, calculated compounding amount may be increased by 50% subject to limits under the PSS Act.