New IFSCA rules: Fintech firms now need separate licence to offer payment services in Gift City

Many startups, including Razorpay, Cashfree and PhonePe, besides over 10 foreign and 16 domestic banks, have been operating in the Special Economic Zone (SEZ) to offer services to merchants, facilitating cross-border payments. All this is, however, at a nascent stage.

For instance, Cashfree allows international collection service to exporters, who are account holders of Yes Bank, an IBU at Gift City. In January, Paytm announced it would invest Rs 100 crore in Gift City to build cross-border solutions.

The latest guidelines, called ‘IFSCA (Payment Services) Regulations, 2024’ are specified for five businesses—cross border money transfer, account issuance, merchant acquisition services, e-money issuance service and escrow services.

“The regulations would permit Indian fintech entities looking to offer their products globally to develop IFSC as their base from which to expand their offerings to jurisdictions across the world. The regulations have been benchmarked to international regulations governing payment services in jurisdictions like those in Singapore, United Kingdom and European Union,” IFSCA said in the circular dated February 1, 2024.

It further notes that the norms are intended to support the process of reverse-flipping, “as many of the Indian fintechs having holding companies in foreign jurisdictions are engaged in providing one or more of the payment services enabled by the regulations.”

Rule of the land

Currently, PSPs in India are regulated by the RBI’s ‘Payment and Settlement Systems Act, 2007’, while cross-border payments come under the recently-issued Payment Aggregators of Cross-Border Transactions (PA-CB) regulation.

Having an autonomous set of rules for entities operating or wanting to operate in Gift-IFSC makes sense, as it is treated as a separate international financial jurisdiction, distinct from the rest of India.

The entities set up there can transact in, retain, and repatriate foreign currencies without the limitations applicable in mainland India.

The separate regime is needed to provide legitimacy to the entities operating out of the smart city, besides enabling better transparency and customer protection, says Sharat Chandra, Co-Founder of India Blockchain Forum.

The idea of operating out of Gift City, however, is still evolving for many payments players, as they continue to offer domestic and cross-border payments services to their large base of merchants outside Gift City.

“Fintech players are still exploring and doing a sandbox. The opportunity will come eventually for e-wallets, accounts issuance, escrow etc. as more exporters set up shop in Gift City or international firms set up entities,” said Ritu Verma, Head of Compliance at PayGlocal, a payments firm.

Movin Jain, co-founder at Skydo, a cross-border B2B payments platform, says the new regulation will be a big motivation for payment players to expand to Gift City.

“We enable MSMEs to receive payments from overseas under the RBI’s OPGSP/PA-CB licence. For us, the benefit of the new licence could be to provide a similar service to Gift City-based exporters, or to power some new innovative value-added services in our existing business. Some of our Indian merchants might also expand their business to Gift City, which will again make it important for us to get the new IFSCA licence,” he said.

What the guidelines entail

Besides the basic net-worth criteria, PSPs would be required to undergo a “stress tests” on their net worth, which will be periodically reviewed, to assess their ability to withstand adverse economic scenarios.

The rules exempt banks (IBUs), and credit card issuers in IFSC from taking an authorisation.

A ‘fit and proper’ rule has also been set up for people leading the boards of PSPs, after evaluation of which ‘in-principle’ approval will be given.

The entity is required to start operations within six months from the date of issuance of authorisation.

Other than the above, the PSPs have been mandated to safeguard their applicable funds by clearly segregating them from any other type of funds they intend to hold.

They must also develop a risk-assessment framework to identify the nature of any data or information shared with Third-party Service Providers.

Additionally, they shall regularly be mandated to submit returns, furnish financial statements and comply with the International Financial Services Centres Authority (Anti Money Laundering, Counter-Terrorist Financing and Know Your Customer) Guidelines, 2022, and other provisions of the Prevention of Money Laundering Act, 2002.