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  • Raashi Sanjay Sarupria

Crossing Borders, Crossing Compliance: The Indian PA-CB Revolution

[Raashi is a student at Gujarat National Law University.]

In its recent action on 31 October 2023, the Reserve Bank of India (RBI) introduced fresh regulatory measures known as the Payment Aggregators of Cross-Border Transactions (PA-CB Regulations). This framework applies to entities, including AD banks, involved in processing, or settling cross-border payment transactions for the import and export of goods and services.


Cross-border transactions involve financial exchanges between parties in different countries, encompassing both large-scale and small-scale payments, such as remittances. The increased global movement of goods, services, capital, and people has significantly amplified the economic significance of these transactions over the past few decades. Before this announcement, RBI's circulars governed payment aggregators, allowing online payment gateway service providers (OPGSP) to establish ongoing arrangements with AD banks for the repatriation of import and export-related remittances.


With the advent of the PA-CB Regulations, all entities facilitating cross-border payments for goods and services will fall directly under RBI regulation. These guidelines are pivotal for capital regulation, enhancing financial integrity, and ensuring transparency in regulatory and cross-border payments.


The regulation categorizes service providers into 3 types: export-only PA-CB (PA-CB-E), import-only PA-CB (PA-CB-I), and export and import PA-CB (PA-CB-E&I). These entities facilitate online cross-border payment transactions for permissible goods and services, with specific conditions outlined for each type of service.


Key Aspects of the Regulation

The PA-CB Regulations outlines essential elements requiring non-banking entities offering PA-CB services at the circular's date to seek RBI authorization before 30 April 2024. Pending authorization, these entities are allowed to continue their services. It's crucial for current operators to comply with governance guidelines, merchant onboarding, customer grievance redressal, dispute management, technology standards, security, fraud prevention, and risk management guidelines specified in the 17 March 2020 circular within 3 months from this circular's issuance and maintain compliance continuously. Failure to comply might result in refusal of authorization.


For RBI authorization, existing non-bank PA-CBs at the circular's date must register with the Financial Intelligence Unit-India (FIU-IND). Approval from the Department of Payment and Settlement Systems (DPSS), RBI, and Central Office (CO) must be sought within 60 calendar days from this circular's date or before starting operations for new entities. Any change in activity category should be communicated to DPSS, RBI, and CO at least 60 calendar days in advance.


Furthermore, the guidelines stipulate net worth criteria: non-banking entities offering PA-CB services at this circular date must have a minimum net worth of ₹15 crore upon RBI application and increase it to ₹25 crore by 31 March 2026. New non-bank PA-CBs must maintain a ₹15 crore net worth upon RBI application and reach ₹25 crore within the third financial year post authorization.


PA-CB Compliances for Import Transactions

For entities exclusively handling import transactions (PA-CB-I), several compliance requirements are mandated. First, they must maintain an import collection account (ICA) through an AD Category-1 scheduled commercial bank. All payments received need to funnel through an escrow account before being transferred to the ICA. This process facilitates crediting the respective foreign merchants. Import-only PA-CBs are allowed to process import payments using authorized payment systems within India, with the exception of small payment instrument issuers.


PA-CB Compliances for Export Transactions

In contrast, entities specializing in export transactions (PA-CB-E) have their own set of compliance obligations. They are obligated to maintain an export collection account (ECA), which can be denominated in Indian Rupees or foreign currency. This account, held in an AD Category-1 scheduled commercial bank, is crucial for crediting the proceeds from exports in the relevant currency. The transfer of payments from the ECA is directed to the account of the Indian merchant. Notably, settlements in currencies other than Indian Rupees are permissible solely for merchants who are directly onboarded.


Additionally, all payment aggregators handling cross-border transactions (PA-CBs) are required to conduct thorough customer due diligence for merchants directly onboarded by them. This mandate extends to encompass e-commerce platforms engaged in both import and export activities. Furthermore, for import transactions involving goods or services valued at more than INR 2,50,000 per unit, PA-CBs must perform buyer due diligence. Another crucial obligation for PA-CBs involves ensuring that they do not facilitate payments for importing or exporting goods and services that are prohibited or restricted under the prevailing foreign trade policy.



The evolution of cross-border payment modes unified under the PA-CB Regulations marks a significant shift in the landscape. Before this regulation, businesses engaging in import-export e-commerce transactions were constrained by limited settlement options. Correspondent banks, money transfer service scheme, Rupee drawing arrangement, and postal channels were the go-to methods for cross-border payments.


The emergence of PA-CB Regulations aimed to streamline and regulate these disparate payment methods under a single framework. It was a strategic move to counter the challenges posed by varied payment facilitation methods. By mandating all entities involved in cross-border payments to operate under the PA-CB framework, the regulation aimed to bring cohesion and regulatory oversight to this diverse landscape.


Furthermore, the regulation was crafted not just to streamline payments but also to combat illegal cross-border transactions. The requirement for compulsory registration with the FIU-IND coincided with the exposure of the Mahadev betting app scam, which highlighted cross-border payments routed through unconventional channels. This mandate echoed the compliance directives outlined in the RBI's revised KYC norms, emphasizing the identification and reporting of accounts facilitating illicit cross-border transactions.


Additionally, recent judicial pronouncements, like the Delhi High Court's interim order in the case of Paypal Payments Private Limited v. Financial Intelligence Unit India, expanded the compliance scope to include fintech entities. In the given case, Paypal was held to be covered under the definition of 'payment system operators' under the Prevention of Money Laundering Act 2002. This highlighted the imperative for these entities to adhere to anti-money laundering statutes and reinforced the significance of regulatory compliance in the fintech sector.


A pivotal facet of this revamped regulatory landscape was the RBI's emphasis on pre-authorization. Non-bank entities providing PA-CB services were mandated to seek authorization from the RBI by 30 April 2024. This marked a departure from previous provisional guidelines, signifying the RBI's commitment to directly regulate these entities in acknowledgment of the evolving complexities within cross-border payments.


The requisites for authorization under these regulations were stringent. Entities aspiring to engage in PA-CB services needed to undertake a series of steps, including registration with FIU-IND as a preliminary measure. Financial benchmarks were also set high, demanding a substantial minimum net worth of ₹15 crores at the application stage, escalating to ₹25 crores by 31 March 2026.


Prior to the PA-CB Regulations, fintech entities involved in cross-border transactions were subject only to due diligence from AD banks, with transactions reported exclusively to these banks. However, the implementation of these regulations extended the purview of scrutiny to all PA-CBs, subjecting them to direct RBI oversight, thereby providing greater transparency and regulatory control.


The revised tax collected at source rates introduced under the Liberalised Remittance Scheme from 1 October 2023, faced heightened monitoring with the onset of PA-CB Regulations. This initiative aimed to reinforce robust oversight to track cross-border remittances comprehensively and ensure adherence to tax compliance.


For Indian businesses, the PA-CB Regulations offered a direct avenue for transaction facilitation without the necessity of involvement from AD banks. Nonetheless, this privilege came hand in hand with stringent RBI governance and compliance requirements, akin to those faced by domestic payment aggregators. Notably, the regulations expanded the scope of cross-border payments to encompass services beyond software. While enhancing transparency and accountability for PA-CBs, the mandatory registration with FIU-IND served as a deterrent to illicit money laundering activities.


The revamped system, integrating separate escrow accounts and transparent transaction settlements, instilled confidence within cross-border businesses. However, amid the reception of these guidelines by Indian businesses, fintech companies encountered the challenge of meeting extensive compliance standards to operate in this highly regulated domain.


Way Forward and Conclusion


In these guidelines, the RBI meticulously tailors requirements for different PA-CBs. Import-only PA-CBs must maintain an import collection account with an AD Category-I bank, while export-only PA-CBs handle funds through an ECA in INR or foreign currency. This meticulous process ensures transparent transactions, with a ₹25,00,000 limit per transaction to mitigate risks. These rules reshape cross-border payments, shifting PA-CBs into a clear regulatory framework under direct RBI supervision. While compliance demands rise, the outcome promises a secure path ahead. These innovations go beyond rule-setting; they bolster the global payments system, pivotal for India's economic presence.


The new PA-CB Regulations overhaul cross-border payments, centralizing and regulating them. They streamline processes and combat illicit transactions through mandatory checks. Non-bank entities now face stringent RBI oversight, ensuring compliance despite challenges. The focus on import-only and export-only PA-CBs exemplifies meticulous planning, while transaction limits safeguard fiscal health.


Ultimately, these regulations fortify India's global economic standing by securing international payment methods and steering cross-border transactions towards transparency and regulation.


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