Recently, there was some hullabaloo around the cash-on-delivery (COD) model adopted by e-commerce players being illegal, and companies such as Flipkart and Amazon violated the Reserve Bank of India's (RBI's) regulations. The media hype was prompted by a Right to Information (RTI) application filed by one Mr. Dharmendra Kumar before the RBI.
Under the RTI application, confirmation was sought on whether payment collection and disbursement to merchants by e-commerce marketplaces like Flipkart and Amazon is covered under the definition of ‘payment system’ and ‘system provider’ under the Payments and Settlement Systems Act (PSS Act), 2007, by acting as intermediaries. The RBI responded by clarifying that it had not issued any specific instruction in this regard and referred to certain earlier directions (defined hereinafter) issued by it. The directions for opening and operation of accounts, and settlement of payments for electronic payment transactions involving intermediaries dated November 24, 2009 (directions), defines the term ‘intermediaries’. The RBI did not specifically opine on whether or not the e-commerce entities adopting the COD model would be treated as intermediaries or as payment system or system provider.
Under the said directions, ‘intermediaries’ (subject to certain exceptions) include all entities that collect monies received from customers for payment to merchants using any electronic/online payment mode for goods and services availed by them, and subsequently facilitate the transfer of these monies to the merchants in final settlement of the obligations of paying customers. From the definition, it appears that intermediaries are entities that use electronic or online payment mechanisms.
The next clarification sought under the RTI application was whether these payment systems are authorised as per Section 8 of the PSS Act. The RBI clarified that aggregators/payment intermediaries like Amazon or Flipkart are not authorised under the Act. It is interesting to note that Section 8 does not deal with the requirement of authorisation at all, but the consequences of contravention of the Act and regulations there under, including revocation of authorisation.
Under the PSS Act, a ‘payment system’ is defined as a system that “enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement services or all of them, and includes the systems enabling credit card operations, debit card operations, smart card operations, money transfer operations or similar operations.”
Section 4 of the PSS Act talks about the requirement of RBI authorisation for operating a payment system, which interestingly finds no mention in the RTI application. One of the exceptions to this provision is ‘any person acting as the duly appointed agent of another person to whom the payment is due’. In other words, such agent is not required to obtain an RBI authorisation under the PSS Act.
Whether or not the e-commerce marketplace entities are in fact acting as duly appointed agents of the vendors/merchants, and therefore exempt from the requirement of obtaining RBI authorisation (even if the e-commerce entities were to be regarded as payment systems) would depend on the facts and contracts governing the relationship between the e-commerce marketplace entities and the merchants. However, it would not be imprudent to presume that e-commerce entities are authorised by merchants to collect payments on behalf of merchants, including under a contract.
From the RBI’s responses, it becomes clear that the regulator chose not to specifically analyse the application of the PSS Act and guidelines in COD transactions being carried out by e-commerce entities in response to the RTI. Having said that, nothing in the RBI’s reply to the RTI application indicates that e-commerce entities like Flipkart and Amazon are in violation of the PSS Act or any RBI guidelines in carrying out COD transactions.
Therefore, concluding that e-commerce entities are in violation of the applicable legal framework based on the RTI responses by the RBI is certainly jumping the gun, if not misplaced. Whether any further legal action like a public interest litigation is undertaken to further probe this matter remains to be seen.
(Rabindra Jhunjhunwala (partner) and Aakash Dasgupta (senior associate) are lawyers with the corporate and M&A practice at Khaitan & Co. The views are personal)