Setting up of New Umbrella Entities

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Recently, various private companies have directed themselves towards setting up New Umbrella Entities (NUEs) for payment systems.

Background

• The idea of NUEs was floated by the Reserve Bank of India (RBI) to create an alternate mechanism to the existing National Payments Corporation of India (NPCI).
• The Reserve Bank of India (RBI) has proposed to set up a new pan-India new umbrella entity (NUE) or entities focussing on retail payment systems with a minimum paid-up capital of Rs 500 crore.

About New Umbrella Entities

• These will be non-profit entities that will set-up, manage and operate new payment systems, especially in the retail space such as ATMs, white-label PoS; Aadhaar-based payments and remittance services.
• These will also develop new payment methods, standards and technologies as well as operate clearing and settlement systems.
• Other Functions: Operate clearing and settlement systems, identify and manage relevant risks such as settlement, credit, liquidity and operational and preserve the integrity of the system, monitor retail payment system developments and related issues in the country and internationally to avoid shocks, frauds and contagions that may adversely affect the system and the economy in general.
• Such an entity will be a company incorporated in India under the Companies Act, 2013. The Company may be a ‘for-profit’ or a Section 8 company as may be decided by it.
• Application
  • It should contain a detailed business plan covering the payment systems proposed to be set-up or operated along with other documents to duly establish its experience in the payments ecosystem.
  • A proposed organisational strategy in terms of fulfilling its responsibility as an umbrella entity should also be given in the business plan.

Criteria

• The entity eligible to apply as a promoter or the promoter group for the NUE should be ‘owned and controlled by Indian citizens’ with 3 years’ experience in the payments ecosystem as Payment System Operator (PSO) or Payment Service Provider (PSP) or Technology Service Provider (TSP).
• Also, foreign investment is allowed in NUEs as long as they comply with the existing guidelines.
• No single promoter or promoter group should have more than 40 per cent investment in the capital of the entity. The promoters should upfront demonstrate a capital contribution of not less than 10 per cent (Rs 50 crore) at the time of making an application for setting up the entity.
• The promoter or the promoter group shareholding should be diluted to a minimum of 25 per cent after 5 years of the commencement of business.
• A minimum net worth of Rs. 300 crore should be maintained always.
• Any entity holding more than 25 per cent of the paid-up capital of the NUE will be deemed to be a promoter.
• The NUE should conform to the norms of corporate governance along with ‘fit and proper’ criteria for persons to be appointed on its board.
• The RBI retains the right to approve the appointment of directors as also to nominate a member on the board of the NUE.
• The RBI has set a deadline of 31st March for firms to submit their applications for setting up NUEs.

Major Participants

• Several companies have either tied up with banks or with major tech players to apply for NUEs.
• Domestic Companies
  • Reliance Industries, along with Facebook and Google (which have invested in Jio Platforms).
  • Tata Group in collaboration with HDFC Bank, Kotak Mahindra Bank, MasterCard and Bharti Airtel.
• Global Companies
  • e-commerce firm Amazon in a tie-up with Visa, ICICI Bank, Axis Bank, fin-tech startups BillDesk and PineLabs.
  • Softbank portfolio companies Paytm and Ola together, reportedly.

Need and Significance

• Various players in the payments segment have indicated that the NPCI being the only entity managing all retail payments systems in India, is unable to manage and handle everything with efficiency.
• The establishment of new NUEs will expand the competitive landscape in this area.
• The new players will aim to get an even bigger share in the digital payments sector.

Source: IE