Paytm’s best option would be a representation to RBI, say legal experts

On January 31, the RBI imposed major business restrictions on Paytm Payments Bank under Section 35 A of Banking Regulation Act, 1949.

Legal experts have opined that Paytm Payments Bank, which is currently facing regulatory action by the Reserve Bank of India (RBI), must first file its representation before the regulator before exploring any legal action.

“A litigation has the potential to antagonise the regulator, and may provide an immediate stay but continuing conflict with the regulator in the mid to long term. Hence cooperating with the requirements of the regulator and quickly putting processes in place to address the concerns of the regulator could prove to be the more prudent solution,” said Kinjal Champaneria, Partner at Solomon and Co, Advocates and Solicitors.

On January 31, the RBI imposed major business restrictions on Paytm Payments Bank under Section 35 A of Banking Regulation Act, 1949. RBI barred the banking company from on boarding new customers from immediate effect and furthermore directed it for stop accepting fresh deposits and doing credit transactions after February 29.

While RBI’s order does not mention why such a radical action was taken against the company, Moneycontrol has learned that RBI was miffed with Paytm Payments Bank’s non-compliance with regulatory requirements.

What the Banking Regulation Act says

Banking Regulation Act is a law that governs banking institutions in the country, RBI being India’s central bank and the regulator under the act can penalise banks for non-compliance . Section 35 A of the act empowers RBI to take action against any bank. The regulator can take action if it is satisfied that a banking company’s actions are detrimental to banking policy or public interest.

However, section 35 A also provides a mechanism for banks facing action. Manmeet Kaur, partner at Karanjawala and company said “Paytm can opt to approach authorities under Section 35A (2) of banking Regulation Act with representation while curing/undertake to cure any regulatory non-compliance and seek modification or cancelation of any direction on imposition of such condition(s) by RBI.”

According to section 35A (2) “The RBI may, on representation made to it or on its own motion, modify or cancel any directions and in so modifying or cancelling any direction may impose such conditions as it thinks fit.”

“Paytm can seek to engage directly with the RBI to address and clarify any regulatory concerns. This proactive engagement is often the first step, aiming to resolve issues through dialogue and compliance adjustments without resorting to legal challenges. This approach can include submitting detailed reports, compliance plans, and proposals for remedial actions to address the RBI's concerns,” said Sonal Alagh partner at Alagh and Kapoor law offices.

Some lawyers have however noted that this might be an uphill task since RBI has already penalised Paytm Payments Bank. Parag Srivastava, partner at Bombay Law Chambers said “considering some of the directions such as ban on onboarding new customers has been in effect for more than a year, getting RBI’s directions modified through representation is likely to be an uphill task.”

Litigation Options

In case, Paytm chooses not to file a representation before the RBI, they may have to file a writ petition in the Delhi high court since the company’s registered office is situated in its jurisdiction. Since writ petitions are filed to enforce fundamental rights under the constitution Paytm must establish that RBI’s action had affected public at large.

“They have a good case to take RBI to task on this as the public at large are also impacted by this decision, and this effectively means that they have to shut down substantial operations (which was being done in full public purview and with regulator knowledge),” said Nihas Basheer, Partner, Wadia Ghandy and Co.