On July 4, 2022, the Reserve Bank of India (“RBI”) clarified to all banks and non-bank payment system operators (“PSOs”) that its prior approval would be required for any (a) takeover/ acquisition of control, which may or may not result in change of management; and (b) sale/ transfer of payment activity to an entity not authorised for undertaking similar activity (“Circular”).
With this clarification, the approach to, and considerations involving M&A in the PSO space, which includes global card networks, MTSS players, PPI/ wallets, payment aggregators going forward, white label ATMs, TReDS platforms, BBPOUs, instant money transfer operators etc., will see a change.
Earlier, PSOs were required to only intimate the RBI upon a change of control, usually within 15 days. Transferring entities are now required to make an application to the Department of Payment and Settlement Systems (“DPSS”), RBI, for:
(i) acquisition of control (including for new directors and shareholders); and
(ii) sale/ transfer of payment activity to another entity.
Test for ‘Control’ is per SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. If the transfer is to an entity not already authorised for the same activity, the applicant (including a bank) will be treated as a fresh applicant. The RBI will ‘endeavour’ to respond within 45 days.
Currently, there are 8 categories of PSOs the RBI has notified (as above), aggregating to 74 licensed players – going forward, any M&A involving each of these players will be impacted, including new payment aggregator licensees (some accounts suggest more than 200 applications have been made, and a few licensed were issued recently) and any new players licensed as a PSO in future, either in the above categories or a new category, if created by the RBI.
The Circular (and the timing thereof) is raising interesting questions, including by market players. A school of thought suggests that the impending payment aggregator licenses were the trigger behind the Circular, and recent experience with PPI/ wallet M&A, where many global tech/ fintech players acquired smaller players, raising ‘backdoor’ entry concerns. In particular,
(i) there is no grandfathering provision in the Circular. What happens to PSO related transactions announced but yet to be closed as of July 4, 2022?
(ii) PSOs under the categories of ‘card networks’ and ‘MTSS’ need not have an India licensed entity – the Circular is silent on the treatment of such M&A, which would be at an offshore/ global level. The 45 day ‘endeavour’ to respond requirement qua the RBI under the Circular exempts MTSS players, who are globally headquartered/ licensed by the RBI.
(iii) What happens to ‘indirect’ change of control, say at a 2nd/ 3rd level up the holding chain, involving an Indian PSO or global PSO licensed with the RBI?
(iv) Given past experience with deal approval timelines, can one realistically expect the 45 day timeframe to hold, or must delays and ‘clock-stop’ risks be factored in while structuring a deal? If so, the latter may trigger a separate India ‘carve-out’ for global deals/ closing.
(v) For a business transfer, the Circular says the buyer (bank/ non-bank) PSO is required to comply with any RBI action taken before closing – this will require revisiting the approach to due diligence and the nature of representations/ warranties and indemnities discussion between parties.
(vi) The definition of ‘control’ is as per the SEBI Takeover Code, which had its own history qua SEBI and Indian courts on how to interpret ‘acquisition of control’ and absent an objective threshold, will raise interpretational issues on around when a ‘change of control’ is triggered.
(vii) Bank PSOs are exempt under the Payments and Settlements Systems Act, 2007 (“PSSA”), so why require them to comply with the Circular – as a PSO business transfer, where the acquirer is a bank, now also requires an approval from RBI under PSSA?
(viii) Also, a 15 day prior public notice requirement has been imposed, which involves not just a public notice, but also intimation to all stakeholders (agents, bankers, customers, merchants etc.) before closing – making this a more onerous obligation than even a bank/ NBFC ‘change of control’.
(ix) Declarations have been prescribed for new shareholders, which requires disclosure of:
(a) previous payment systems experience. What about non-strategic acquirers, including funds?
(b) manner in which the new investors will recover their investments/ earn income – this may require crystal-ball gazing: how does this response affect the approval process?
(c) details of the ultimate beneficial ownership (“UBO”) of each foreign investor in the acquirer, including director/ management details, shareholding/ ownership details, details of any other investments in India, etc. – this may require disclosure of confidential limited partner (LP) details for acquirers backed by global pools of capital/ funds.
Historically, and in other situation, especially banking M&A and under FDI situations and SBO disclosure under Companies Law, this has required subjective judgment on UBO disclosures, given global structures/ acquirer’s holding chain.
(x) The 15 day intimation to the RBI post change in management/ directors and detailed declarations prescribed may raise concerns around rejection of such directors by the RBI, including ‘fit and proper’ scrutiny post-appointment.
PSO M&A was the last remaining ‘free bastion’ in the RBI space, as prior approval requirements were so far prescribed only for change of control involving NBFCs (26% shareholding or 30% director change) and banks (more than 4.99% or 9.99% approval).
RBI FAQs on this Circular, addressing some or all of the above aspects, will be useful.