Simplifying FinTech and FinTech Laws: Key Takeaways for Indian FinTech Industry

The significant advancements in Fintech are directly impacting on the traditional financial sector. The regulators had to be cautious in order to not miss the train and should jump on the wagon of promoting financial innovation and stiff competition in the sector. The newcomers in the sector should be provided certain leniency in form of exemptions from a number of strict compliances which are used to curb the malpractices of the big corporations, for the sake of promoting competition in the market. This post is dealing with key takeaways from reports of different regulators’ committees in India. This is the last post in the series of ‘Simplifying FinTech and FinTech Laws’.

Fintech charged firms and businesses must work in tandem with the regulated entities, e.g. banks and regulated finance providers. The businesses that a bank can undertake are provided under Section 6 of the Banking Regulation Act, 1949 and there is no business outside Section 6 that can operate as the bank. Such provisions, therefore, incentivize banking companies to make fintech innovations in a narrower scope relevant to their operations. The archaic laws make it difficult for banks to undertake fintech innovations that can be of significant utility but are beyond the scope of financial regulation.

The Watal Committee Report noted this, that:

“The current law does not impose any obligation on authorised payment systems to provide open access to all PSPs. This has led to a situation where access to payment systems by new non-bank payments service providers, including FinTech firms, is restricted. Most of them can access payment systems only through the banks, which are also their competitors in the payments service industry. This, according to the Committee, has restricted the fast-paced expansion of digital payments in India by hindering competition from technology firms.”

Forming a comprehensive and non-discriminatory regulatory approach

Regulators and legislators are required to realign their legal approach to the Fintech services. There is a requirement of developing a deeper understanding of various Fintech services and their interaction in a financial environment with other fintech services. To provide the fintech space to work utmost to its potential, it is needed that it gets a level playing field in relation to the traditional banking and non-banking players. The practise of restricting the access of non-bank institutions to payment infrastructure, such as AEPS, has to be reevaluated and the proper steps to be taken. It is required from the end of Government and Regulatory bodies that they should adopt necessary measures in order to provide accessibility to national payment infrastructure and facilities to all fintech firms without any discrimination.

Providing Standards for Data Protection and Privacy

All the fintech companies are required to invest significantly in self-regulating policies to prevent privacy risks. Fintech companies should be provided with the standards of data protection as soon as possible by government and regulators. It is evident that the provisions of the Personal Data Protection Bill, 2019 can significantly affect the growth of Fintech companies. Therefore, the standards adopted for fintech companies by regulators should be reviewed with respect to data protection and privacy concerns. The government and regulators specific to finance of the country should start focusing on the valuation of data that is processed by banking companies and recommend practices to safeguard consumer interests.

Open Data principles should govern the financial sector in order to enhance Competition

The regulators should pay heed to the open data policy among participants of a fintech sector. The regulators should begin with the mandatory norms directing financial service companies to encourage banking institutions to enable participants to access the databases of their rejected credit applications on a specific platform on a consensual basis. The practice of the UK with respect to Open Data Regulations in Banking can be adopted, where banking institutions on the basis of consent framework allow data to be available to banking partners in order to foster competition. Even the RBI Steering Committee on Fintech recommended:

“It also recommends that all financial sector regulators study the potential of open data access among their respective regulated entities, for enhancing competition in the provision of financial services.”

The KYC process should be reformed with respect to the Supreme Court’s Judgment on Aadhaar’s validity

Fintech businesses are the most affected entities due to the striking down of Section 57 of the Aadhaar Act as it invalidated the online KYC process. The online KYC and authentication provided the required efficiency and convenience to fintech firms with respect to their endeavours of on-boarding as many as consumers on their digital platform. It is recommended that alternatives to the mandatory linking to Aadhaar should be adopted in the form of possible video-based KYC, such that the documents as verified must be protected and processed with the prior consent of the consumer.

Other key recommendations

1. It is recommended that the adequate cybersecurity, anti-money laundering and fraud control measures should be adopted by investing in technologies and guidelines that can prevent fraud.

2. Technical innovations should be monitored with respect to the potential risk that innovation carries in operation under the contemporaneous legal landscape of the country.

3. A self-regulatory body to facilitate the needs of fintech is much needed as for the RBI it is still turning out to be difficult to replace the existing regulatory structure. A regulatory mechanism allowing the broader participative consultation approach should be adopted.

4. Regulators should invest in Reg-Tech (“Reg Tech is a sub-set of FinTech that focuses on technologies that facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities. In July 2015 the FCA issued a call for input entitled ‘Supporting the development and adoption of Reg Tech’.”)

5. The majority of economies have adopted the practice of setting up of the regulatory sandboxes catalyzing the fintech innovations. It is recommended that RBI should continue with the introduction of the mechanisms, like regulatory sandboxes, enabling the adaptation of regulatory initiatives which will play a key role in maintaining India’s competitive edge.

The tax methodology dilemma in India for eGaming companies

The indirect tax department is questioning some of the major online fantasy gaming companies to ascertain whether goods and services tax (GST) is applicable on the entire transaction value (the amount players deposit or escrow for a particular game) or the commission/platform fees (revenues) that accrue to these gaming companies and operators for facilitating transactions.

As reported by ET, the tax official wants to determine if there is any revenue leakage due to the methodology that is adopted by these platforms to calculate and pay goods and services tax (GST). The report states that the tax department has questioned several officials from different online gaming companies.

Currently most of the online skill gaming companies are paying GST on the commissions/platform fees that company accrues from players’ contribution.

To give backdrop, online skill gaming companies like Dream 11, Fantain, etc collect a certain contribution to a prize pool or escrow account from players who want to lay bet on the outcome of a match. The online gaming platforms deduct commission from the pool or escrow account as a service fee, which amounts to 20% of the total contribution by a player. As of now the gaming companies are reportedly paying 18% GST on this service fee, whereas the tax authorities are questioning whether the GST should be applicable on entire contest entry amount (the amount that player deposits in the prize pool).

Even the online gaming companies are divided over the issue as certain leading companies like Dream11 (that recently turned unicorn in latest funding round receiving more than $1Bn) is already paying GST on the entire transaction value instead of the margins (commissions/revenues). As Dream 11’s co-founder Harsh Jain told to ET, We pay GST on the gross consideration collected by our platform and not on our margins. Levying GST on user deposits would mean that it’s paid only once when users make their deposits and not every time they play in our contests with t heir winnings as well, which is when Dream11 provides a service to them. This is the same practice followed globally in every mature GST-following country. GST for online gaming companies is charged on their Gross Gaming Revenue,”

The tax authorities referred to the valuation rules that favors tax imposition on the entire consideration.

The report says with reference to a tax official that, “The valuation rules (under GST framework) are quite clear that GST is levied on the consideration and currently there is no clarity as to whether the revenue charged by these companies be considered consideration or the total pool. In March some companies were asked to explain why they shouldn’t be paying GST on the total pool”.

The Rule 31A of the Central Goods and Services Tax Rules, 2017 provides that the GST is to be paid on total consideration for the supply of actionable claim in the form of betting, gambling or horse racing. Meanwhile, online skill gaming companies claim that these rules are not applicable to them as their activities cannot be categorized as gambling or betting. These companies pay tax at the rate of 18% and not under the 28% tax slab of gambling, betting or lotteries, as their activities fall under the ambit of ‘games of skill’.

Further, online skill gaming companies believe that ‘deposit’ is exception to the valuation rules and therefore the entire contribution could not be taxed as it is a deposit. However, tax experts maintains that ‘deposit’ is defined as a sum of money paid by and returned to the same individual- which is not the case with online skill based gaming companies. As it is not at all clear that whether the contribution to prize pool received initially is ‘deposit’ or transaction, the authorities will closely scrutinize these transactions.

Fantasy sport is relatively a new industry with no precedent to determine tax. In the absence of similar model of business there is no precedence, and hence the tax authorities want clarity on the issue of methodology that should be adopted. In response, an industry body of eGaming companies, Indian Federation of Sports Gaming (IFSG) has reached out to the Ministry of Finance and GST council for clarity on the issue. If there will be no clarification from the government, the matter will lead to litigation.

If authorities decide to change the metric of calculation and ascertainment of tax, the difference could be significantly huge between the tax on commission and the tax on total deposit and it could lead to ‘shut down’ of businesses.

Facebook’s Clampdown on the business of generating fake likes and followers: ‘Inauthentic Behavior’ on Instagram

Facebook has announced in a blog release titled “Preventing Inauthentic Behavior on Instagram” that Facebook and Instagram have sued a company and three individuals based in New Zealand for making a business of selling fake likes, views and followers on Instagram. It has filed a lawsuit in US federal court alleging that “the company and individuals used different companies and websites to sell fake engagement services to Instagram users”.

It said it issued warnings to the company and suspended company’s associated accounts for violating Facebook’s Terms of Use, but the activities persisted. By filing the lawsuit Facebook wants to send a message that fraudulent activity is not tolerated and it will protect the integrity of its platform.

The lawsuit

The lawsuit asks the Court to prevent the defendant company from “engaging and profiting in the sale of fake likes, views and followers on Instagram”. It also seeks to prevent a “violation of its Terms of Use and Community Guidelines”. Further, it aims to prevent a “violation of the Computer Fraud and Abuse Act and other California laws for distributing fake likes on Instagram in spite of Facebook suspending their accounts and revoking access”.

The Lawsuit details that company called Social Media Series has various websites and services to generate fake likes and followers for Instagram users who wanted to inflate their followers. Customers paid ranging $10 to $99 per week depending on the number of likes they want to purchase for their accounts which then generate almost within seconds of posting a new photo.

The lawsuit says that “through their business, Defendants [Social Media Series Limited and its directors] interfered and continue to interfere with Instagram’s service, create an inauthentic experience for Instagram users, and attempt to fraudulently influence Instagram users for their own enrichment”.

As the lawsuit further claim, the company and its directors has “unjustly enriched themselves at the expense of Facebook and Instagram in the amount of approximately $9,430,000”, since July 2018.

Inauthentic experience

Facebook said in the blogpost that “Inauthentic activity has no place on our platform”. It claims that the social media giant “devote significant resources” to detect and stop the inauthentic behavior. This includes “blocking the creation and use of fake accounts, and using machine learning technology to proactively find and remove inauthentic activity from Instagram”.

It further said that, “today’s lawsuit is one more step in our ongoing efforts to protect people and prevent inauthentic behavior on Facebook and Instagram”. Facebook expects to be paid unspecified damages for manipulating Instagram’s platform.

Clamping down on “Inauthentic Behavior”

Facebook now has multiple lawsuits in the works relating to individuals or companies that sell fake engagement on its social media platforms. Facebook recently removed or unpublished over 1,000 Facebook pages and Instagram accounts from India and Pakistan for ‘inauthentic behavior’. It filed a lawsuit in March 2019  against several companies and individuals based in China claiming that they are engaged in selling of fake accounts, likes, and followers on Facebook and Instagram. In November 2018, Instagram warned users to avoid inauthentic follows and likes generated by third-party apps and services, as reported by Cult of Mac.

Para of the Consolidated FDI Policy (e-commerce activities): A Work in Progress


The Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry, Govt. of India has recently issued a Press Note No. 2 (2018) (“P.N.2”) on 26 December 2018 providing clarificatory amendments to the para. (related to e-commerce sector) of the Consolidated Foreign Direct Policy (“FDI”) of 2017. Para. incorporates the substance of the Press Note 3 (2016) dated 29 March 2016 under which DIPP allowed the Foreign Direct Investment (FDI) up to 100% in entities enagaged in e-commerce activities under the marketplace model of e-commerce, subject to certain conditions. The same note has expressly prohibited the FDI in entities undertaking the activities of inventory-based model.

However, the e-commerce giants in India are constantly engaging in the inventory-based model to the extent that they are now making huge investments in expansion of it. Considering such developments, the DIPP realised that the wordings and intentions of Press Note 3 lacked in stringency that is needed to achieve the intended goal. Therefore, through the Press Note 2 of 2018, that will be in effect from 1st February 2019, the DIPP is bringing in certain significant clarifications and modifications regarding the provisions that govern functioning and availing of FDI benefits by the e-commerce entities. The DIPP has issued these changes with an aim to ensure level playing field for e-commerce entities as well as the brick and mortar retailers.


Significant Developments:

The P.N.2 mainly reflects the clarifications related to following four significant points:

  1. Ownership and Control of the e-commerce entity over the inventory;
  2. Equity participation in seller or vendor entities;
  3. Fair and non-discriminatory business dealings by the e-commerce entities on the platform;
  4. Exclusivity Sale Arrangements.

DIPP in the note has explicitly clarified that the P.N.2 intends to ensure the comprehensive implementation of the policy in letter and spirit.


Control of the e-commerce entity over the inventory

Setting forth the clear definitions of the Marketplace-based model and Inventory-based model of the e-commerce, the P.N.2 introduces the test of ‘ownership’ or ‘control’ over the inventory of sellers. This test determines the distinction between a marketplace-based model and inventory-based model.  As given in the note, a marketplace-based model provides an Information Technology platform by the e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller. Whereas the inventory-based model provides the inventory of goods and services owned by the e-commerce entity and is sold to the consumers directly.

In the present scenario, entities providing an online marketplace platform to various sellers for selling their products online are prohibited from:

  1. Holding the actual ownership over the inventory;
  2. Permitting total sales value from one seller or such seller’s group companies to exceed the 25% of such marketplace’s sales value in a financial year.

The previous clarifications of DIPP provides that the ‘group companies’ include two or more companies that are owned and/or controlled by a common parent company (either directly or indirectly). Further, ‘group companies’ also includes two or more enterprises which have power to directly or indirectly: (a) exercise 26% or more of voting rights in other enterprise, or (b) appoint more than 50% of the strength of Board of Directors in the other enterprise.

Pursuant to P.N.2, inventory of a seller or vendor will be deemed to be in ‘control’ of an e-commerce entity if more than 25% of purchase of such seller or vendor is from the e-commerce entity or its group companies. Therefore, such an ‘ownership’ or ‘control’ will render the e-commerce marketplace-based entity into inventory-based entity.

Therefore, ‘ownership’ has been clearly demarcated now under the changed para This will impact on the e-commerce entities that sell goods or sell goods through a group of companies to sellers such that the sellers then put that goods on the entity’s online platform for sale to retail customers. It will further also impact the vendors of inventory that have no contribution from any foreign element as they have to seek multiple sources for acquiring their inventory. This will put an additional capital burden on such sellers.


Equity participation of the e-commerce entity in seller’s entity

The P.N.2 has brought in a new restriction under which sellers are not permitted to sell their goods on a platform run by an e-commerce entity, if such entity or its group companies have equity participation in the seller or have control over their entity. This brings in effect a prohibition that any entity related directly or indirectly to the e-commerce entity will be prohibited from selling on a platform. However, there is a further clarification needed from DIPP on this point as it is unclear about including direct participation only or including both i.e. direct and indirect participation.

DIPP on January 03, 2019 provided a ‘Response to comments reported in the media on Press Note 2 (2018), wherein DIPP stated that various concerns have been raised that Press Note prohibits sale of private label products through marketplace. However, it was clarified that the Press Note does not impose any restriction on the nature of products which can be sold on the marketplace. There is no further clarification have been made on this stand by the DIPP which is in contradiction to what can be inferred from the P.N.2, but it is the final law. This means that no equity participation in suppliers selling on the platform but no ban on private label sales.


Fair and non-discriminatory business dealings

In order to maintain level playing field, it is stated in the present FDI policy that the marketplace-based entity will not directly and indirectly influence in determining the sale prices of goods or services that are provided by the sellers on their platforms. The P.N.2 has taken a step forward by introducing various restrictions in the business dealings.

It has specifically provided that services should be offered by an e-commerce marketplace entity to vendors on an online platform at an arm’s length and in a fair and non-discriminatory way. Such services will include logistics, warehousing, fulfilment etc. and should be provided in similar terms as provided to other vendors in similar circumstances. Another restriction, that has been introduced to ensure to bring local retailers at par with their e-commerce counterparts, is on the cashback facility provided to buyers. By disallowing irrational discount and cashback schemes for providing undue benefit to a section of vendors, DIPP is aiming for promotion of fair competitive practices.

However, with the kind of wordings used in this part of P.N.2, DIPP has continued the legacy of confusing notifications on account of certain vagueness. The P.N.2 is not at all clear about what ‘similar circumstances’ mean for determining the fair and non-discriminatory terms of services provided to various sellers. Further, as there is no restriction on various sellers who may want to independently provide huge cashbacks through these platforms, it will be practically difficult to ensure the fair and non-discriminatory nature of offers and discounts.


No exclusivity in sale arrangements

Through the P.N.2, the DIPP has clarified that all the marketplace entities are prohibited from mandating the sellers to sell their products exclusively on their platform only. However, the wordings of the provision related to this doesn’t provide anything related to the situation in which a vendor voluntarily wants to sell exclusively on one platform. Further there is absence of any clarification from the DIPP, that the restriction is only on positive exclusive sale arrangements or the arrangement between entity and seller is also included in it.


Some other significant changes

Compliance Certificate

The P.N.2 provides the stipulation that the e-commerce marketplace entities have to get a certificate with a statutory auditor’s report. This is to be submitted to Reserve Bank of India by September 30 of every year for preceding financial year, indicating the fulfilment of the compliances of all the guides as introduced by the P.N.2.

Removal of the aforementioned 25% restriction cap on total sales value

The aforementioned condition has been omitted.



The introduction of amendments to the FDI policy related to e-commerce activities would have impacted on e-commerce giants highly if the sale of the products under private label has been restricted. The DIPP’s response to media reports has provided a huge relief to e-commerce entities like Amazon and Flipkart which are bullish on growth of their private label brands and investing heavily for its expansion. The P.N.2 has brought in various restrictions on the marketplace entities with an intent to ensure the fair and non-discriminating business dealing such as to make a level playing field for e-commerce entities and local retailers. However, most of the f introduced changes still need additional clarifications relevant to their applicability and scope.

To read the Press Note 2, Click Here

To read the Press Note 3, Click Here

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(This is the first blog of the series of two blogs discussing the impact of DIPP’s Press Note 2 on regular special Offer, Discount and Cashback schemes given by various e-commerce entities. This blog has explained all the law behind the press note 2. In the next blog, we will understand the impact of this law on the market by talking in terms of the practical instances. Keep checking for the next blog, it will be interesting)