MEMORANDUM

I. BACKGROUND

We understand that in the first business model Legal Technologies Pvt. Ltd. has decided to
issue World Wise Coins (WWC) as a reward for good behaviour to incentivize students. The
value of the coins that would be credited into the account of a student expressing good
behaviour then can be redeemed at Nike, Myntra, or Amazon. (Also, 1 WWC = 1 INR)

In the second business model, A B2B Buyer enters into an agreement with World Wise
Points (WWP), another arm of Legal Technologies Pvt. Ltd. to distribute WWP to its
employees as a reward for their good behaviour, which can be redeemed to get an equivalent
Nike/Amazon/Myntra voucher that is an employee can exchange the 500 WWP which the
B2B Buyer gives them for a 500 rupee Nike/Amazon/Myntra voucher, the WWP are not used
to transact on the previously mentioned online platforms directly. In this model, World Wise
has bought vouchers from Nike/Amazon/Myntra and sold the same to the B2B Buyer.

With regard to the two Business models, World Wise has asked the following question –

(1) What regulations would potentially cover such kind of business structures and how the
structures are affected by the same.

(2) What licenses/permits World Wise needs to enter into such business structures.

For the purpose of this memorandum, we have only analyzed licenses/permits specific to
the two business models. General licenses/permits have not been covered. That can be
done separately if required
 II. APPLICABLE LAW

II(A)Payment and Settlement Systems Act, 2007 (PSS Act), (RBI Master
Direction on Issuance and Operation of Prepaid Payment Instruments.) 

PSS act 2007 provides for the regulation and supervision of payment systems in India and to
designate the Reserve Bank of India as the authority for that purpose and for matters
connected therewith or incidental thereto.
 Section 2(1) (I) of the PSS Act 2007 defines a “payment system” to mean a system that
enables payment to be effected between a payer and a beneficiary, involving clearing,
payment or settlement service or all of them, but does not include a stock exchange (Section
34 of the PSS Act 2007 states that its provisions will not apply to stock exchanges or clearing
corporations set up under stock exchanges). It is further stated by way of an explanation that
a “payment system” includes the systems enabling credit card operations, debit card
operations, smart card operations, money transfer operations or similar operations.
Section 2(1)(p) and Section 2(1)(q) of PSS Act 2007 defines “system participant” means a
bank or any other person participating in a payment system and includes the system provider.
“system provider” means a person who operates an authorised payment system.
Sections 20 to 22 of the PSS Act lays down the duties of the system provider. The system
provider is required to operate the payment system in accordance with the provisions of the
Act and the Regulations, the terms and conditions of authorization and the directions given
by the Reserve Bank from time to time. The system provider is also required to act in
accordance with the contract governing the relationship among the system participants and
the rules and regulations which deal with the operation of the payment system. The Act
requires the system provider to disclose the terms and conditions including the charges,
limitations of liability etc., under the payment system to the system participants. The Act also
requires the system provider to provide copies of all the rules and regulations governing the
operation of the payment system and other relevant documents to the system participants. The
system provider is required to keep the documents and its contents, provided to it by the
system participants, as confidential and is prohibited from disclosing the same, except in
accordance with the provisions of law.
Sections 26 and 30 of the PSS Act, 2007) lays down penalties under the act which reads as
Under the PSS Act, 2007, operating a payment system without authorization, failure to
comply with the terms of authorization, failure to produce statements, returns information or
documents or providing false statement or information, disclosing prohibited information,
non-compliance of directions of Reserve Bank violations of any of the provisions of the Act,
Regulations, order, directions etc., are offences punishable for which Reserve Bank can
initiate criminal prosecution. Reserve Bank is also empowered to impose fine for certain
contraventions under the Act.
II(B) Master Circular – Policy Guidelines on Issuance and Operation of Pre-paid
Payment Instruments in India
Section 2.3 of the master circular defines “pre-paid instruments” as Pre-paid payment
instruments are payment instruments that facilitate purchase of goods and services,
including funds transfer, against the value stored on such instruments. The value stored
on such instruments represents the value paid for by the holders by cash, by debit to a
bank account, or by credit card. The pre-paid instruments can be issued as smart cards,
magnetic stripe cards, internet accounts, internet wallets, mobile accounts, mobile wallets,
paper vouchers and any such instrument which can be used to access the pre-paid amount
(collectively called Prepaid Payment Instruments hereafter). The pre-paid payment
instruments that can be issued in the country are classified under three categories viz. (i)
Closed system payment instruments (ii) Semi-closed system payment instruments and
(iii) Open system payment instruments.
Section 2.5 of the master circular defines “Semi closed payment instruments” as These
are payment instruments which can be used for purchase of goods and services, including
financial services at a group of clearly identified merchant locations/ establishments
which have a specific contract with the issuer to accept the payment instruments. These
instruments do not permit cash withdrawal or redemption by the holder.
Section 2.4 of the master circular defines “Closed system payment instrument” These
PPIs are issued by an entity for facilitating the purchase of goods and services from that
entity only and do not permit cash withdrawal. As these instruments cannot be used for
payments or settlement for third party services, the issuance and operation of such
instruments is not classified as payment systems requiring approval / authorisation by the
RBI.
Section 2.6 of the master circular defines “Open system payment instrument” These PPIs
are issued only by banks and are used at any merchant for purchase of goods and services,
including financial services, remittance facilities, etc. Banks issuing such PPIs shall also
facilitate cash withdrawal at ATMs / Point of Sale (PoS) / Business Correspondents
(BCs).
Section 3 deals with the eligibility requirements for the issuance of prepaid instruments
3.1 Banks which comply with the eligibility criteria, including those stipulated by the
respective regulatory department of RBI, shall be permitted to issue semi-closed and open
system PPIs, after obtaining approval from RBI.
3.2 Non-bank entities which comply with the eligibility criteria, including those stipulated
by the respective regulatory department of RBI, shall be permitted to issue only semi-
closed system PPIs, after obtaining authorization from RBI.

Banks and Non- Bank Finance Companies (NBFC), which meet the eligibility criteria,
could issue all categories of prepayment instruments. Only banks can launch mobile
prepayment instruments (mobile wallets and mobile accounts) with mobile banking
 transactions. Other entities may only issue prepaid payment instruments for closed
systems and prepaid payment instruments for semi-closed systems.

3. ANALYSIS

3.1 Analysis of Product 1

In the first Business model the kind of PPIs that are being issued are “Semi Closed Payment

Instruments” and Legal Technologies Pvt. Ltd. Will have to abide by a particular, authorization

process to issue the same. For the issue of these instruments an application will be made by each

non-bank element looking for endorsement for permit in Form A as mentioned under Regulation

3(2) of the Payment and Settlement System Regulations, 2008. Further, the 'fit and legitimate'

status of the candidate and the administration will be evaluated after receiving feedback from

controllers, government specialists and so on. In the event that the candidate substance doesn't

meets the qualification rules, the application will come back with no refund of the fees. On the

satisfaction of each condition, the in-head endorsement is allowed by the Reserve Bank of India,

whose legitimacy is of six months. Within six months of the in-principal approval, the substance

is required to present an agreeable System Audit Report, bombing which the on a fundamental

level endorsement will lapse naturally. The elements which have been conceded last endorsement

will initiate their activities inside a half year of the endorsement bombing which the approval will

slip by naturally. A one-time augmentation of a half year can be acquired by making a solicitation

in writing in advance to the RBI with legitimate reasons. The RBI maintains whatever authority is

needed to acknowledge or reject such application for augmentation. For recharging of permit, the

application to the RBI will be submitted three months before the expiry of the permit, submitting

which RBI claims all authority to acknowledge or reject such application for reestablishment.
3.2 Analysis of Product 2

In the Second Business model the kind of PPIs that are being issued are “Closed Payment

Instruments”. Entities issuing closed system Prepaid payment instruments are exempted from the

scope of the guidelines and shall not seek authorization from the Reserve Bank of India for the

issuance of the following payment instruments. Only the maximum value of a closed system payment

instrument is Rs 5000/-.These instruments cannot be used to purchase another prepaid payment

instrument. The amounts collected under the scheme shall be exempt from the deployment provisions

provided that the value of the outstanding instruments does not exceed Rs 50 lacs or 10 percent of the

net owned funds of the issuers, whichever is lower. Entities issuing these instruments must inform

RBI when such schemes begin to operate. A half-yearly audited statement shall be submitted by such

entities to the Reserve Bank indicating the total value of the instruments issued during the period and

the outstanding value at the end of the period.