- A Cross-Border Merchant of Record (“MoR”) is an entity that offers and delivers services across national boundaries, entering contracts directly with overseas customers. Unlike marketplaces or facilitators, an MoR is the principal in a transaction, responsible for the service delivery, invoicing, taxation, and compliance with both domestic and international regulatory frameworks. While the customer purchases services from the service provider, MoR acts as a reseller of the services on behalf of the service provider to enter into a transaction with the customer. From the customers’ point of view, the MoR shall be a deemed service provider and be liable for all the liabilities, such as withholding tax, receipt of payment for services, payment of sales tax/GST, etc.
- Under the old regime, the MoRs conducted cross-border transactions for the import and export of goods and services through online payment gateway service providers, operating under the accounts held by AD Category-I scheduled commercial banks. However, recognising the evolution of international commerce and the increasing use of aggregators by Indian service providers, the RBI introduced a framework governing such cross-border transactions undertaken by the MoRs.
- Regulating PA-CBs: A New Framework for Digital Cross-Border Payments
- On October 31, 2023, the Reserve Bank of India (“RBI”) introduced a comprehensive regulation, bearing CO.DPSS.POLC.No.S-786/02-14-008/2023-24, for regulating payment aggregators facilitating cross-border transactions (“PA-CB Regulation”). The new framework builds upon existing domestic payment aggregator regulations while creating specialised provisions for cross-border transactions.
- Following the introduction of the PA-CB Regulations, an MoR has two alternatives: (i) obtain authorisation as an entity facilitating cross-border payment transactions for import and export of goods and services with the RBI (“PA-CB”) or (ii) delegate the facilitation of their cross-border transactions to another authorised PA-CB.
- This article analyses the PA-CB Regulations, focusing on their implications for the MoRs involved in and facilitating cross-border transactions, which now fall within the ambit of this regulatory framework.
- PA-CB Entity Classifications and Transaction Caps
- According to the PA-CB Regulation, the MoRs may be categorised in the following manner, based on their transactional role:
- PA-CB-E: For MoRs handling exports only;
- PA-CB-I: For MoRs handling imports only; and
- PA-CB-E&I: For MoRs facilitating both exports and imports.
- Authorisation and Compliance
- According to the PA-CB Regulation, the following MoRs, as of the date of the regulation, can be authorised to undertake the PA-CBs activity:
- Existing non-bank PA-CBs: Such MoRs must register with FIU-IND, notify RBI within 60 (Sixty) days of the PA-CB Regulation, and apply for RBI authorisation by April 30, 2024.
- New non-bank PA-CBs: Such MoRs must get RBI approval before the commencement of their business.
- Capital Requirements and Financial Stability
- The PA-CB Regulation provide that MoRs providing PA-CB activities shall maintain the following net worth thresholds:
- all the MoRs, at the time of their application for RBI authorisation, must have a minimum net-worth of INR 15,00,00,000/- (Indian Rupees Fifteen Crore Only);
- all the existing MoRs, providing PA-CB services as on the date of the PA-CB Regulation, must attain a minimum net-worth of INR 25,00,00,000/- (Indian Rupees Twenty Five Crore Only) by March 31, 2026; and all the new MoRs, which commenced their business pursuant to the date of PA-CB Regulation, must attain a minimum net-worth of INR 25,00,00,000/- (Indian Rupees Twenty Five Crore Only) by the end of the third financial year of grant of authorisation.
- Operational Requirements
- The PA-CB Regulation provide distinct operational frameworks for each category of PA-CBs, as identified in Para 3.1 above, as set out below:
- PA-CB-I: All the payments for imports should be received in an escrow account, from where such payments may be transferred to an ‘import collection account’, to be separately maintained with an AD Category-I scheduled commercial bank. Thereafter, such payment will be transferred to the relevant foreign merchants.
- PA-CB-E: All the payments for exports should be credited to an ‘export collection account’, to be separately maintained with an AD Category-I scheduled commercial bank. Thereafter, such payment shall be transferred to the relevant merchants.
- PA-CB-E&I: All the requirements applicable to PA-CB-I and PA-CB-E shall also be applicable to PA-CB E&I. Such PA-CBs shall maintain both import collection account and export collection account for processing cross-border transactions.
- This framework brings clarity to the movement of funds and helps MoRs ensure that they are receiving revenues through fully compliant channels.
- Further, the PA-CB Regulation impose a transaction limit of INR 25,00,000/- (Indian Rupees Twenty Five Lakh Only) on the value of each goods and/or services sold. MoRs with high-ticket service contracts must therefore ensure transactions are split or routed accordingly.
- Governance, Technology, and Reporting Standards
- The PA-CB Regulation mandates that all compliances applicable to payment aggregators shall also be applicable to MoRs registered as PA-CBs. Key compliances from the Guidelines on Regulation of Payment Aggregators and Payment Gateways, 2020 (“PA Guidelines”) have been outlined hereinafter:
- Security, Fraud Prevention and Risk Management Framework: To combat fraud and protect customers, the MoRs must establish strong risk management and data security systems. They are required to implement a Board-approved information security policy and adopt security measures aligned with it. The PA Guidelines also detail baseline technology recommendations that must be followed.
- Governance: The MoRs must be professionally managed, and promoters must meet the RBI’s fit and proper criteria. Any takeover, change in control, or management change in an MoR must be reported to RBI within 15 (Fifteen) days, along with full details and declarations from new directors. Further, the MoRs are required to disclose their merchant policies, grievance redressal mechanisms, privacy policy, and other terms on their website and/or mobile app.
- Grievance Redressal Mechanism: The MoRs must implement a formal, publicly disclosed grievance redressal and dispute management framework with a clear escalation matrix and an appointed nodal officer, whose details must be prominently displayed on their website. The complaint facility should be easily accessible via their website or app. They must also establish a binding dispute resolution mechanism covering transaction life cycles, dispute types, resolution processes, responsibilities, and turnaround times. Additionally, a Board-approved policy must be in place for complaint handling, dispute resolution, and refunds, in line with RBI’s Turn Around Time (TAT) guidelines and any future instructions.
- Safeguards Against Money Laundering: The MoRs must comply with the know your customer, anti-money laundering, and combating the financing of terrorism norms outlined in RBI’s Master Direction on KYC, as updated from time to time. Additionally, the provisions of the Prevention of Money Laundering Act, 2002, and its associated rules are also applicable to them.
- Conclusion: A Step Forward for Responsible Cross-Border Trade
- The PA-CB Regulation aligns with India’s broader objective of enhancing regulatory oversight while supporting the growth of cross-border digital commerce. It reflects the rapid evolution of the cross-border payments landscape and growing scrutiny by investigation agencies into complex business models, fund flows, and regulatory compliance within the payments ecosystem.
- With the growing adoption of digital payments and heightened regulatory focus, entities, including the MoRs requiring RBI authorisation, must obtain the necessary approvals, comply with the PA Guidelines and PA-CB Regulation, and begin the application process promptly. Proactive compliance and strategic adjustments will be crucial for these entities to effectively navigate the changing regulatory environment.
