Regulating the regulators: Assessing regulation-making frameworks in India's financial sector

by Natasha Aggarwal and Renuka Sane.

Indian regulators, like the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI), routinely wield quasi-legislative powers. For example, Section 30 of the Securities and Exchange Board of India Act, 1992 empowers the SEBI Board to make regulations. According to its 2024-25 annual report, SEBI issued 104 consultation papers, 61 amendments to its regulations, one new set of regulations, 14 master circulars, and 154 "policy measures." Such regulatory interventions can significantly influence markets and affect economic outcomes. Yet the processes by which regulators design, consult on, and review delegated legislation have been fragmented and, in large part, left to each regulator's discretion.

Traditional safeguards on delegated legislation in India, i.e., parent statutes requiring regulations to be laid before Parliament, prior publication requirements under the General Clauses Act, 1897, and judicial review, provide important accountability functions, but do not regulate the internal process by which a regulator formulates its regulations. They do not require a regulator to identify the problem warranting intervention, weigh alternatives, or assess costs and benefits.

In 2013, the Financial Sector Legislative Reforms Commission proposed provisions to govern regulation-making and, through the Financial Sector Development Council Resolution of 24 October 2013, financial sector regulators agreed to comply with these procedures. Since then, six financial sector regulators (the Insurance Regulatory and Development Authority of India (IRDAI), Insolvency and Bankruptcy Board of India (IBBI), International Financial Services Centres Authority (IFSCA), Pension Fund Regulatory and Development Authority (PFRDA), SEBI and RBI) have each adopted some form of instrument governing how they make regulations, ranging from non-binding concept notes to regulations. More recently, the Economic Survey (2024-25) recommended strengthening regulatory impact assessment; the Securities Markets Code, 2025 proposes statutorily mandating public consultation and periodic review at SEBI; and in March 2026 the Standing Committee on Finance recommended a mandatory regulatory impact assessment framework for the IBBI.

In this backdrop, our paper, 'Regulating the regulators: Assessing regulation-making frameworks in India's financial sector', evaluates the regulation-making frameworks adopted by these six regulators against three principles of good regulation-making - consultation, evidence-based regulation-making, and periodic review - and then assesses a randomly selected 2025 consultation paper issued by each regulator against indicators derived from these principles and from each regulator's own framework.

We find that while all six financial regulators have adopted some form of instrument, these instruments vary considerably in legal form, substantive scope, and analytical ambition. Regulators operating under more demanding frameworks are more likely to clearly identify the regulatory problem in their consultation documents. However, this relationship is not linear: stronger frameworks do not consistently produce stronger performance on more analytically demanding requirements. No regulator, including those whose frameworks expressly require it, included a cost-benefit analysis in its consultation paper, and no regulator assessed available alternatives to direct regulation. Every regulator failed to comply with at least one of its own procedural requirements.

Indian legal frameworks

From 2016 onwards, Indian regulators have progressively formalised how they make their own regulations: IRDAI led the way with a concept note in 2016, followed by IBBI in 2018, IFSCA in 2021, and PFRDA in 2024. In 2025, IFSCA issued an updated and expanded framework for making regulations and subsidiary instructions, SEBI adopted regulations for making, amending, and reviewing regulations, and RBI opted for a non-binding policy framework rather than enforceable regulations.

While all regulators now subject regulation-making to some framework, they diverge along two axes: legal form and substantive scope. On legal form, IBBI, PFRDA, IFSCA, and SEBI have adopted regulations, signalling a commitment to enforceable constraints; RBI and IRDAI, by contrast, have adopted non-binding approaches, suggesting either a desire to retain discretion or a reluctance to subject internal processes to enforceable standards. On scope, PFRDA's framework is narrowly confined to the making of regulations; IBBI, SEBI and IRDAI expand this to include amendments; IFSCA moves further by bringing "subsidiary instructions" within its fold; and RBI adopts the broadest scope, extending its framework to directions, guidelines, notifications, and other instruments. In this context, IFSCA stands out as the strongest: it uses binding regulations, rather than non-binding frameworks, to govern its regulation-making process, and their applicability extends beyond regulations and amendments to subsidiary instructions.

On consultation specifically, most regulators (IRDAI, IFSCA, SEBI, RBI and IBBI) make public consultation mandatory, typically for a minimum of 21 days; PFRDA alone makes it optional, albeit with a longer 30-day window. IRDAI, IFSCA, IBBI and PFRDA publish stakeholder comments and provide responses to them, while SEBI and RBI provide responses but do not publish comments, limiting external visibility into the range of views considered.

On evidence-based regulation-making, the picture is fragmented: IRDAI and IFSCA require both a problem statement and a statement of regulatory intent; SEBI requires only regulatory intent; PFRDA and IBBI require a problem statement but not regulatory intent. Only RBI's framework requires an impact assessment, and only PFRDA and IBBI mandate cost-benefit analysis.

On periodic review, IBBI has the most frequent cycle (three years), followed by IFSCA (five years) and RBI (five to seven years); SEBI and PFRDA require review but specify no timeline, and IRDAI's concept note is silent on review altogether.

Evaluation of consultation papers

We evaluated one randomly selected 2025 consultation paper (for IRDAI, an exposure draft) issued by each regulator, against indicators drawn from the principles of good regulation-making and from each regulator's own framework. Notably, the RBI did not issue a formal consultation paper in the relevant period; the document evaluated for RBI is a circular proposing amendments to its directions, reflecting a broader pattern of the RBI using directions and circulars to make substantive regulatory changes.

The IRDAI Exposure Draft states the objective of its proposal and describes the key features of the framework, but does not clearly explain the problem it seeks to address, does not consider alternative approaches to regulation, and does not include a cost-benefit or impact analysis.

The IBBI Discussion Paper, for each of its three proposals, includes a statement of the problem, a proposed solution, and the draft regulation, but does not identify and assess available alternatives to direct regulation, does not include a cost-benefit analysis, and does not comply with the IBBI Regulations' requirement of an economic analysis, guidance from international standard-setting bodies, or the statutory provision enabling the proposed regulations.

The IFSCA Consultation Paper does not comply with any of the principles of good regulation-making, other than relying on market data as evidence of growth; it refers to fund management entities facing unspecified "operational hassles" without elaborating on what these are, and does not specify the statutory provision enabling the amendments or include guidance from international standard-setting bodies, both required under its own regulations.

The PFRDA Consultation Paper performs comparatively better: it identifies the problem to be addressed, assesses how existing frameworks contribute to the problem, and relies on evidence. However, it does not identify and assess available alternatives to direct regulation or include a cost-benefit analysis, and does not comply with several of its own regulations; it does not specify the statutory provision enabling the proposed regulations, attach a draft of the proposed regulations, include the required economic analysis, include guidance from international standard-setting bodies, or specify the manner of implementation.

The SEBI Consultation Paper does not comply with any of the principles of good regulation-making other than identifying the problem to be addressed; it does not assess how existing regulations contribute to the problem, identify alternatives, or include a cost-benefit analysis, an outcome that closely mirrors the design of SEBI's own framework, which requires only a statement of regulatory intent.

The RBI Circular likewise does not comply with any of the principles other than a rather broad articulation of the problem, and does not comply with the RBI Policy because it does not specify the statutory provision enabling the proposed regulations, or include an impact analysis or guidance from international standard-setting bodies.

Analysis

The results reveal a gap between the formal existence of regulation-making frameworks and their actual operationalisation in consultation documents. There are failures at two levels: compliance with general principles of good regulation-making and compliance with each regulator's own procedural requirements.

More broadly, regulators operating under more developed procedural frameworks, particularly IBBI and PFRDA, which explicitly require problem identification, perform better on basic problem-definition indicators. Both clearly identify the regulatory problem, and PFRDA goes further by examining whether existing regulations contribute to it. In contrast, SEBI and RBI, whose frameworks impose minimal analytical obligations, produce consultation documents that are largely limited to statements of regulatory intent, with little substantive justification. Second, there is inconsistent articulation of the regulatory problem, even at a basic level. While some regulators - such as IBBI, PFRDA, SEBI, and RBI - identify a problem, others (notably IRDAI and IFSCA) fail to do so clearly. Even where a problem is identified, it is often thinly specified and not linked to evidence or to failures in the existing regulatory framework.

However, stronger frameworks do not necessarily translate into stronger performance on more analytically demanding requirements. Despite formal mandates, both IBBI and PFRDA fail to include the economic analysis required by their own regulations. IBBI omits cost benefit analysis, while PFRDA fails to provide economic analysis, draft regulations, international benchmarking, and implementation details. No regulator assesses alternatives to direct regulation or conducts a cost benefit analysis. The absence is uniform and not explained by framework design alone: even regulators whose own frameworks require economic analysis (IBBI, PFRDA, and RBI) fail to provide it. Their universal absence suggests that regulators do not treat regulation as one option among many, but as the default response. As a result, consultation processes are narrowed: stakeholders are invited to comment on how to regulate, but not whether regulation is justified in the first place. This significantly weakens accountability and the quality of regulation-making.

Moreover, every regulator, without exception, fails to comply with at least one of its own procedural requirements. The most consistent gap is the failure to specify the statutory provision enabling the proposed regulation - a basic transparency requirement met only by IRDAI. This omission raises concerns about the legal legitimacy of the proposed regulation, as stakeholders are not informed of the source of regulatory authority. IBBI omits the economic analysis mandated by its framework. PFRDA fails to include draft regulations, economic analysis, implementation guidance, and international benchmarks. IFSCA omits both the problem statement and international benchmarks required under its framework. RBI, similarly, does not provide the impact analysis or international benchmarking contemplated by its policy. These are not merely formal deficiencies. The absence of draft regulatory text, as in the case of PFRDA, prevents stakeholders from engaging with the legal substance of the proposal, limiting consultation to broad regulatory intent. The absence of economic or impact analysis means that the regulatory choice cannot be independently assessed.

Across all six regulators, consultation papers ostensibly function as instruments for presenting pre-determined regulatory proposals, rather than as vehicles for reasoned, evidence-based decision-making.

Reforms

We propose five reforms: (i) legislative amendments to parent statutes that clearly define the scope of regulators' quasi-legislative powers and the processes governing their exercise; (ii) regulatory impact assessment should be made mandatory and comprehensive; all consultation papers should be required to identify the problem or market failure to be addressed, assess whether existing regulations contribute to it, consider available alternatives including non-intervention, and include a cost-benefit analysis; (iii) constituting Regulations Advisory Committees of domain experts, legal scholars and market participants at all regulators; (iv) requiring periodic review of regulations at defined intervals with a clear methodology specifying which regulations are to be reviewed, against what criteria, and within what timeframe; and (v) leveraging technology (for instance, dashboards tracking active consultations and regulators' responses, and automated tools that flag missing elements in consultation papers before publication).

The authors are researchers at TrustBridge Rule of Law Foundation.

The curious case of definition and adjudication of front running in India

by Natasha Aggarwal, Amol Kulkarni and Bhavin Patel.

One of the core legislative mandates of the Securities and Exchange Board of India (SEBI) is to prohibit fraudulent and unfair trade practices (FUTP) relating to securities markets. A practice commonly classified as FUTP is front running. It is generally understood as a set of two trades or positions: first, a trade or position taken in advance of a large order, and second, a squaring off of the initial trade or position after the large order, to benefit from the price movement it causes.

SEBI issued the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (the PFUTP Regulations) to deter and sanction front running and other FUTPs.

Neither the SEBI Act nor the PFUTP Regulations define front running. SEBI has, however, defined it elsewhere: in guidelines, glossaries, master circulars and consultation papers, and in a number of adjudicatory orders.

In our working paper, Front running: The law and enforcement of an ill-defined violation, we set out the legal elements that a violation under the PFUTP Regulations requires: fraud, manipulation and unfair trade practice. These elements should inform any definition of front running. We find that the characteristics of front running laid down by SEBI in its other regulatory instruments and adjudicatory orders are inconsistent with these legal requirements.

Through an empirical study of 33 SEBI adjudicatory orders on front running between 2019 and 2024, we show that SEBI's enforcement practice is also disconnected from the codified law, and does not engage with its key requirements.

This proliferation of inconsistent definitions and interpretations causes a range of problems:

• It creates confusion, and weakens the certainty and predictability of the law.
• It gives the regulator untrammelled discretion in deciding whether a violation has taken place.
• It raises concerns about separation of powers: the boundary between the regulator's law-making and adjudicatory functions is erased and re-drawn erratically, at cost to the integrity of each function.

The result is a lack of doctrinal clarity about what front running means, and a set of conflicting articulations of the violation with no clear grounding in the codified law.

We suggest that the term be defined clearly, either in the parent statute or in the PFUTP Regulations. There is now a nearly three-decade history of enforcement, which should be enough to identify the ingredients of this violation.

The Securities Markets Code Bill, 2025 (the SMC) is an opportunity to write such a definition into the parent law. This would take the power to define the violation away from the regulator, restore the integrity of SEBI's separate functions, and meet the requirements of separation of powers. In its present form, though, the SMC may fall short: we show the gaps and confusions that remain in its treatment of fraud, and its failure to define fraudulent or unfair trade practice, or front running, explicitly.

Part of the problem may lie in the absence of separation of powers within SEBI. The regulator can write subordinate legislation, investigate alleged violations, and adjudicate and sanction them, all without a strict separation between its quasi-legislative, investigative and adjudicatory arms.

This may incentivise SEBI to write broad, all-encompassing regulations in its quasi-legislative capacity, and then to widen their scope further to suit its quasi-judicial needs.

The regulator might defend this by pointing to the constantly changing methods used by fraudsters. International experience suggests otherwise: methods change, but the key constituents of securities fraud stay broadly constant.

In India, a lasting solution may require Parliament, not SEBI acting under its delegated powers, to define terms such as front running in the parent legislation.

Front running is only one example of an inconsistently defined and adjudicated practice within the broader category of FUTP. There are likely others. This points to the need for a wider review of how fraud, manipulation and unfair trade practice are defined and adjudicated under Indian securities law, with the aim of achieving consistency and certainty in interpretation and enforcement.

References

Front running: The law and enforcement of an ill-defined violation, TrustBridge working paper.

SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, Securities and Exchange Board of India.

Securities Markets Code Bill, 2025, Bill No. 200 of 2025.

Natasha Aggarwal, Amol Kulkarni and Bhavin Patel are researchers at TrustBridge Rule of Law Foundation.

Comments on the Securities Market Code Bill, 2025

by Natasha Aggarwal, Pratik Datta, K. P. Krishnan, Bhavin Patel, M. S. Sahoo, Renuka Sane, Ajay Shah and Bhargavi Zaveri-Shah.

Finance is the brain of the economy. It dictates allocative efficiency. The financial system chooses which industries and firms receive capital. This efficiency determines the extent to which investment translates into GDP growth. Getting finance right is critical. The prioritisation of financial reform must be absolute.

The Securities Market Code Bill, 2025 (SMC) marks a substantial advance over the existing Securities and Exchange Board of India Act, 1992, particularly in strengthening governance arrangements and formalising the processes of regulation-making. Importantly, it makes a serious attempt to end the ''circular raj'' by confining the issuance of subsidiary instruments to the Chairperson or senior members of the Board, rather than dispersed internal authorities. Further, it has introduced timelines for investigations and attempted to separate the investigation function from the adjudication function, making the first effort towards a clearer separation of powers. That said, the SMC can make further strides if it focuses on the issues described below.

We now address the issues in relation to specific provisions drafted within the current SMC.

Separation of powers

The SMC raises three related concerns, which demonstrate a concentration of powers at SEBI.

Issue 1: Excessive delegation of essential legislative functions

Clause 96 prescribes imprisonment, a fine, or both as penalties for market abuse (an offence defined under Clause 93). However, Clause 93 also grants the regulatory authority to define new offences within the 'market abuse' category, which would carry the same criminal sanctions. This raises concerns around excessive delegation: the identification of criminal offences is a core legislative function and cannot be delegated. Moreover, such excessive delegation is subject to being struck down in judicial review.

Issue 2: Regulation-making on adjudication

Clause 146(2)(j), read with Clause 17(4), permits SEBI to make regulations on the manner of conducting adjudication proceedings. This should not be done by SEBI itself. SEBI is the agent, and the Parliament is the principal. The Parliament must define the checks and balances on the coercive power of the agent. Otherwise, the agent always has incentives to appropriate more arbitrary power.

Issue 3: Ineffective separation of investigative and adjudicatory functions

Clauses 17 and 27 introduce limited separation of investigative and adjudicatory functions for specific matters. Investigation is an executive function, and adjudication is a quasi-judicial function. A conflation of these two functions in the same individual raises concerns about the separation of powers.

In summary, there is no clear separation of power between the three functions of the regulator. The same regulator is empowered to define the scope of violations and offences, investigate them, enforce them, adjudicate upon them, and impose sanctions for their violations, all under regulations of its own design. This combination blurs the distinction between legislative, executive, and adjudicatory functions and concentrates powers in the same persons.

Proposal:

Remove Clauses 17(4), 92(f), 93(g), and 146(2)(j) from the SMC. Implement strong structural separation between the investigative and adjudicatory functions. One way to do this is to create a distinct career track for adjudicatory officers as Administrative Law Officers (ALO). One SEBI board member should also be designated as an Administrative Law Member, who oversees the functions of ALOs. These officers should be solely responsible for adjudication and must have no involvement in investigative or quasi-legislative functions. Introduce extraordinary safeguards to mandate arm's length operation between investigation and adjudication.

Timelines for investigation and adjudication

Issue: Clauses 13, 16, and 27 introduce timelines for investigation and interim orders. However, provisos allow these timelines to be extended (Clause 27(4), proviso to Clause 13(2)). Additionally, the SMC specifies no timelines for the completion of adjudication proceedings. This allows investigations and adjudications to continue indefinitely, rendering the statutory limits ineffective.

Proposal: Remove the power to extend timelines for investigation. If extensions are retained, mandate the publication of written reasons, subject to mandatory review by the SEBI governing board. Introduce a strict statutory timeline for the conclusion of adjudicatory proceedings. These timelines should be part of the Parliament-specified regulations on the manner of conducting adjudication proceedings that we recommend in our preceding suggestions.

Methodology for calculating unlawful gains

Issue: The SMC requires the determination of unlawful gains by an investigating officer under Clause 13(3), but provides no calculation methodology. This virtually guarantees arbitrary and inconsistent determinations. It defeats the rule of law.

Proposal: Codify standard methods or guidelines for calculating unlawful gains within the SMC. Operationalise these through detailed regulations. Reference the Competition Commission of India (Determination of Monetary Penalty) Guidelines, 2024, as a baseline.

Sanction determination factors

Issue: The SMC lists factors for adjudicating officers to consider while imposing sanctions. Some mirror Section 15J of the SEBI Act, which are unimplementable in practice. Terms like 'impact of the default or contravention on the integrity of the securities markets' (Clause 19(b)(v)) lack precision and invite arbitrariness.

Proposal: Base sanctions strictly on the quantifiable extent of harm caused to specific persons. Codify this methodology. Alternatively, publish binding guidelines detailing specific aggravating and mitigating factors, expanding upon the approach in the SEBI (Settlement Proceedings) Regulations 2018.

Criminal enforcement

Issue: The SMC retains criminal liability, including imprisonment, for some offences. Establishing guilt in Indian criminal law requires proof beyond a reasonable doubt, typically coupled with the requirement to establish intention. This is an inefficient tool for complex financial markets. The boundary between aggressive trading and market manipulation is thin. The threat of criminal sanctions deters contrarian strategies. This reduces market liquidity and harms price discovery. Traditional fraud is adequately covered by the Bharatiya Nyaya Sanhita.

Proposal: Remove all criminal liabilities. Structure sanctions as punitive civil penalties or restorative remedies, scaling to a multiple of the illicit gains. Retain debarment for systemic misconduct.

Power to issue directions

Issue: Clause 23 vests SEBI with open-ended direction-making powers. Moreover, the requirement to record reasons in writing (currently included in Section 11(4) of the SEBI Act) has not been included in Clause 23.

Proposal: Delete Clause 23. Confine non-penal measures to specific, narrowly defined statutory triggers (e.g., immediate asset freezing powers under strict procedural safeguards). All adjudicatory actions must be justified by reasons in writing.

Nominee directors on the SEBI board

Issue: The SMC retains government nominee directors on the SEBI board. Nominee directors prioritise the perspective of their parent departments over market efficiency. They exercise disproportionate influence. Inter-agency coordination should not occur via board representation.

Proposal: Appoint mid-career professionals for fixed terms until a mandatory retirement age. Bind them statutorily to SEBI's specific objectives. Address inter-agency concerns externally through the Financial Stability and Development Council (FSDC).

Commodities markets

Issue: Clause 49 empowers the government to determine commodities eligible for trading. The market must decide which commodities warrant hedging instruments. State determination of eligible commodities is equivalent to the government deciding which firm is permitted to issue equity.

Proposal: Delete Clause 49. Empower SEBI to draft regulations defining objective eligibility criteria for commodity derivatives, identical to the framework for eligible scrips.

Ombudsperson

Issue: Clause 73 empowers SEBI to designate an Ombudsperson. This creates a conflict of interest. The SMC lacks an appeals mechanism for decisions made by the Ombudsperson.

Proposal: Mandate statutory independence for the Ombudsperson. Ensure job security separate from SEBI management. Define a clear appellate process.

Exemptions for PSUs

Issue: Clause 65(2) empowers the Central Government to exempt listed public sector companies from listing and disclosure requirements. This violates Article 14 of the Constitution. State-owned enterprises must face the identical market discipline applied to private enterprises.

Proposal: Delete Clause 65(2). Mandate equal treatment for all market participants.

References

Natasha Aggarwal and others, "'Balancing Power and Accountability: An Evaluation of SEBI's Adjudication of Insider Trading'" (Working Papers, TrustBridge Rule of Law Foundation, 2025).

In Re: The Delhi Laws Act, 1912 (AIR 1951 SC 332).

M S Sahoo and V Anantha Nageswaran, 'Regulatory architecture 2.0: Securities Markets Code marks a decisive shift' (Business Standard, 25 December 2025).

M.S. Sahoo and Sumit Agrawal, "Reimagining SEBI's Consent Settlement Framework" (Chartered Secretary, January 2026).

C.K. Takwani, Lectures on Administrative Law (7th edition, 2023) at page 100.

Bhargavi Zaveri-Shah, 'SEBI does not need unlimited powers – here's what's wrong with the Securities Markets Code' (ThePrint, 5 January 2026).

Bhargavi Zaveri-Shah and Harsh Vardhan, 'Ghost of the Commodities Controller—why India's new financial law feels like the 1970s' (ThePrint, 19 January 2026).

LRS TCS and Overseas Travel: A Policy Design Critique

by Anirudh Burman.

Transaction taxes introduce frictions in transactions. Sometimes these frictions are in the larger public interest, for example, the interests of protecting government revenue ex ante because of the difficulty of ex post tax collection. In other cases, transaction taxes operate primarily to constrain transactions and their costs outweigh their benefits. A useful test is whether the tax (a) solves a genuine enforcement or information problem relative to ex post assessment, (b) is broadly designed and relatively neutral across comparable transactions, and (c) has stable, predictable parameters so that individuals can plan and comply without disproportionate costs. In addition, withholding taxes can be levied when there is a clear problem with ex post collection. However, the design of such taxes must still be proportionate to the objective and should not create large, avoidable liquidity and compliance frictions.

This post argues that the Union Government's Tax Collection at Source (TCS) on outward remittances under the Liberalised Remittance Scheme (LRS) and on purchase of an overseas tour programme packages fails these tests. It introduces a large, transaction-specific friction on outward remittances under LRS and on the domestic purchase of overseas tour programme packages. It does so without a clear statement of objective or a stable instrument design.

Introduction: TCS on LRS and overseas travel

TCS on LRS and on overseas tour packages was first introduced in the 2020 Union budget and the Finance Act, 2020. The Finance Act, 2020 inserted section 206C(1G) into the Income Tax Act, 1961 ( See Finance Act 2020 amendment here). The legal architecture in section 206C(1G) has two components. One is tied to an authorised dealer who "receives an amount for remittance from a buyer...", who intends to remit money out of India under the LRS. The other is a receipt-trigger tied to a seller of an overseas tour programme package. The second trigger is not a "remittance", which is conceptually confusing, since the move is primarily aimed at taxing cross-border movement of capital: LRS, a scheme under the Foreign Exchange and Management Act, 2000, allows overseas remittances up to USD 250,000 per annum, and the first component introduces a TCS on this, whereas the second component imposes TCS on overseas tour packages, independent of LRS. The second component introduces frictions for domestic purchases routed through Indian sellers.

Since the 2020 Finance Act, the Union government has tweaked this provision multiple times, adjusting tax rates, thresholds and exemptions. This years Union budget proposes to rationalise these further, but leaves the basic architecture intact.

Brief chronology of events

The table below shows that the instrument has been repeatedly redesigned along: (i) rates/thresholds and (ii) scope/coverage/definitions. This makes compliance and planning difficult for affected transactions.

Title of document (1)	Type of instrument (2)	Date (3)	What Changed (4)	Provision in the regulatory instrument (5)	Change type (6)
Finance Act, 2020	Law	March 2020	(a) introduced TCS on LRS remittances above INR 7 lakh per financial year (general rate 5%) (b) set concessional TCS rate of 0.5% for education remittance financed by an education loan (c) introduced TCS at 5% on sale of an overseas tour programme package (no threshold in the section text) (d) created exemptions where buyer is Government/embassy etc., or where buyer deducts TDS on the amount (as specified in the provisos)	Income-tax Act, 1961: s.206C(1G)	Rate/ threshold; Scope/ definitions; Exemptions
Notification No. 20/2022 (S.O. 1432(E))	Notification	March 2022	(a) created exemption from TCS for an individual who is non-resident and visiting India	Income-tax Act, 1961: s.206C(1G) (Notification No. 20/2022)	Exemptions
Notification No. 99/2022 (S.O. 3878(E))	Notification	August 2022	(a) superseded previous notification and replaced the exemption category: TCS not applicable to a non-resident buyer who does not have a permanent establishment in India	Income-tax Act, 1961: s.206C(1G) (Notification No. 99/2022)	Exemptions
Finance Act, 2023	Law	February 2023	(a) continued TCS at 5% on LRS remittances for education and medical treatment in excess of INR 7 lakh (b) continued concessional TCS at 0.5% on education remittances financed by an education loan in excess of INR 7 lakh (c) proposed increasing TCS rates from 5% to 20% for other LRS purposes and purchase of overseas tour programme packages	Income-tax Act, 1961: s.206C(1G)	Rate/ threshold
Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023 (G.S.R. 369(E))	Regulation	May 2023	(a) removed exemption in FEMA Current Account Transactions Rules, bringing international credit card usage while outside India within Rule 5 (and therefore within LRS accounting), which can expand the practical ambit for TCS.	FEMA CAT Rules, 2000: Rules 5, 7	Scope/ definitions
Press Release (Ministry of Finance): Clarification regarding applicability of TCS to small Debit/Credit Transactions under LRS	Press Release	May 2023	(a) clarified that international debit/credit card payments by an individual up to INR 7 lakh per financial year are excluded from LRS limits and will not attract TCS	MoF Press Release	Scope/ definitions
Press Release (Ministry of Finance): Important changes w.r.t LRS and TCS (deferral and thresholds)	Press Release	June 2023	(a) superseded the 19 May 2023 clarification and postponed implementation of the 16 May 2023 FEMA amendment, keeping overseas international credit card spends outside LRS (and outside TCS) until further order (b) restored INR 7 lakh annual threshold for TCS across all LRS categories irrespective of purpose (c) specified post-threshold LRS TCS rates: 0.5% for education loan, 5% for education/medical, 20% for other purposes (d) specified overseas tour programme package TCS: 5% up to INR 7 lakh and 20% above, INR 7 lakh (e) deferred the increased TCS rates to October 1, 2023.	MoF Press Release: LRS/TCS	Implementation/ deferral; Rate/ threshold
CBDT Circular No. 10 of 2023 (Guidelines to remove difficulty in implementation of changes relating to TCS on LRS and overseas tour packages)	Circular	June 2023	(a) clarified that overseas international credit card spending is not treated as LRS for now, so no TCS on such spends till further order (b) clarified that the INR 7 lakh LRS threshold for TCS applies per remitter (not separately per purpose or per authorised dealer) (c) clarified category boundary for overseas tour programme package, standalone international air ticket or standalone hotel booking is not a "package" (package must include at least two specified components)	CBDT Circular 10/2023	Scope/ definitions
Circular No. 11 of 2023	Circular	July 2023	(a) no change to TCS rates/thresholds/categories/exemptions.	CBDT Circular 11/2023	Scope/ definitions
Foreign Exchange Management (Current Account Transactions) Amendment Rules, 2023 (re-insertion of Rule 7)	Regulation	June 2023	(a) reinstated exemption in FEMA Current Account Transactions Rules, excluding overseas international credit card use from Rule 5 (and therefore from LRS accounting), reversing the 16 May 2023 omission	FEMA CAT Rules, 2000: Rule 7	Scope/ definitions
Finance Act, 2024	Law	February 2024	(a) Inserted a sixth proviso to s.206C(1G) governing TCS collection based on the pre-amendment position (as on 01-04-2023.	Income-tax Act, 1961: s.206C(1G) (sixth proviso)	Implementation/ deferral
Finance Act, 2025	Law	March 2025	TCS thresholds increased.	Income-tax Act, 1961: s.206C(1G) (threshold amendment)	Rate/ threshold
Finance Bill, 2026	Law	February 2026	(a) proposed reducing TCS rate for LRS remittances for education/medical treatment (above INR 10 lakh) from 5% to 2% (b) proposed reducing TCS on sale of overseas tour programme package to 2% and removing the threshold/slab so 2% applies irrespective of amount (c) retained 20% TCS rate for LRS purposes other than education/medical.	Finance Bill, 2026: s.206C(1G)	Rate/ threshold

Regulatory uncertainty

A predictable, stable regime is important for economic freedom. Economic freedom implies the ability to plan properly, and planning requires foreseeability and predictability. The table above discusses frequent regulatory changes to the LRS and overseas travel framework since 2020. The government has revised thresholds, exemptions, rates frequently, set different TCS rates for different categories of spends and revised them, exempted non-residents, included or excluded foreign credit and debit-card spends, clarified what purchasing an overseas tour package means, and so on.

This matters for economic freedom: individuals cannot reliably forecast the cost of lawful foreign transactions, intermediaries cannot standardise compliance processes, and the effective burden depends on the tax rate, on exclusions and exemptions, as well as whether refunds are timely.

TCS on LRS and overseas travel as a hindrance to economic freedom

LRS was introduced in 2004 as part of a broader liberalisation of Indian finance in 2004. Since then, the LRS limit has been increased gradually from USD 25,000 to USD 250,000. This liberalisation reduced frictions in the ability of Indians to transact abroad, purchase foreign goods and services, and contributed to India's global integration.

In 2020, the Finance Act introduced a friction of a 5 percent TCS, which it increased to 20 percent in 2023 for purposes other than education and medical expenses. The budget speeches of the Finance Minister in Parliament ( 2020-21 and 2023-24 ) do not provide any reasons for introducing this friction. TCS is collected at the time of transaction, regardless of eventual tax liability. TCS imposes a significant friction on such activity. By doing this, the TCS changes the set of choices individuals have by making certain specific uses and transactions costlier from the perspective of both compliance and financial liquidity. In addition, if refunds are delayed, the private cost is not 20%, it is the aggregated cost of the time value of money, the opportunity cost of having made other choices had this liquidity constraint not been imposed, as well as the friction and uncertainty of Indian tax compliance.

Finally, the effect of the TCS is distributional regressive. Individuals facing the highest liquidity constraints are hit the hardest (young professionals, small business owners, families with recurring expenses, etc.). While lower frictions for educational and medical purposes alleviate some of this, the remaining frictions impose invisible opportunity costs on many other types of potential activities.

Paying advance TCS on overseas travel

While the TCS on LRS taxes foreign remittances, the TCS on overseas travel taxes even domestic transactions.

It is important not to equate foreign remittances with domestic transactions. The state regulates cross-border outflows under FEMA and other regulations and has articulated some objectives for this (e.g., managing outflows, monitoring, national security), even if one disagrees with the choice of objective or the proportionality of the instrument. By contrast, domestic transactions already sit within a general indirect tax architecture (GST), whose design objective was precisely to subsume transaction taxes into a broad-based system.

The issue here is not whether cross-border remittances can ever be regulated or taxed, but whether a narrow, high-variance transaction friction outside the GST framework, where the tax is collected upfront regardless of eventual tax liability, represents a coherent and proportionate policy design.

CBDT Circular 10/2023, Question 8, states that "overseas tour program package" includes expenses for "travel" or "hotel stay" etc., and then clarifies that purchase of only an international travel ticket or only hotel accommodation "by in itself is not covered."

Though two of three conditions need to be fulfilled for this to be triggered, it effectively brings domestic payments within its ambit. If one buys an international flight ticket from a domestic airline or a domestic travel aggregator as part of an overseas tour, such domestic expenditure in INR will also be included within the threshold of the TCS. As drafted, this requirement seems to collect an advance tax on individuals spending within India's domestic economy for foreign travel, as well as any spends outside India. This is novel, as earlier prohibitions, even in the license-raj era focused on foreign transactions and remittances, not domestic consumption of goods and services for foreign travel. The use of tax-based frictions serves to reduce the average Indian individual's integration with the globalised economy. In addition, the continual changes discussed above also affect the predictability and forecasting of decisions within the domestic economy because domestic spends on foreign travel are also included within the ambit of TCS.

One possible defence of this TCS is that it is intended to reduce certain outflows, analogous to a Tobin-tax style tax on foreign exchange transactions. The analogy is limited. Tobin's proposal was to cushion exchange-rate fluctuations. It was also designed to disincentivise very short-term speculative round-tripping transactions through a small uniform charge on foreign exchange conversions. The TCS regime is significantly broader in coverage (household remittances and even a domestic purchase trigger for overseas tour packages) and has been set at rates (e.g., 20 percent for many categories) that are far from marginal.

The Finance Minister in her budget speech of 2026 has proposed to rationalise many of the tax rates under the TCS regime. The proposal to reduce TCS to 2 percent for certain categories moves the rate closer to the range conceptually associated with a low-rate transaction tax. The current budget proposal is welcome. However, the deeper concern is the instrument design: a transaction-specific levy that is collected upfront irrespective of final liability, without sectoral neutrality and predictability. A better course of action will be to only pursue those cross-border transactions where the Indian state has clearly articulated objectives in a neutral, low-friction, predictable manner. Absent this, the core concerns remain about the design, and the consequent inability for households to plan and execute their economic activities.

Anirudh Burman is a research at XKDR Forum.

Dealing with fraud in consumer finance

by Renuka Sane.

There is great ire among consumers about financial fraud. Fraud is the deliberate deception of one party by another for the purpose of unlawful gain, typically involving the misrepresentation or concealment of material facts. When fraud occurs, the key question is: who ends up paying for it? The answer to this is not so obvious. Consider the recent incident involving Falcon, an online bill discounting platform now defunct. This platform was promoted since 2021 as a peer-to-peer invoice finance platform. It had about 7000 investors and had raised Rs.1,700 crores by 2025. Retail investors lent money against invoices supposedly issued by reputable companies, earning high returns over short tenures. Until suddenly they didn't. Consumers realised one day that Falcon had closed its offices and cut off all communication. The ensuing cascade of chargebacks for services not rendered, their denial by financial firms, a subsequent Bombay High Court interim order which continued the freeze on chargeback requests illustrates how the existing system leaves consumers in a precarious position. There is no easy answer when it comes to dealing with fraud, but understanding the options is a good place to start.

The case

Falcon operated an online platform for short-term invoice/bill discounting. Payments to Falcon were routed through a payment aggregator called Worldline ePayments India Pvt. Ltd. Worldline had pooling accounts with various banks and cards, including the State Bank of India through which such transactions would be facilitated.

Falcon ceased its operations owing to allegations of fraud. Once customers figured that Falcon was no longer operational, they started asking for reversals of their transactions, or chargebacks, on the basis of services not rendered. As a result Worldline's pooling account with SBI started to get debited. Worldline requested SBI not to debit their pooling account, and SBI initially agreed for a limited period. This essentially meant that SBI would not be able to honour customer requests on chargeback. Once the limited period got over, SBI began to debit Worldline's account again. A Vacation Court order on May 19, 2025, temporarily stopped SBI from continuing to debit Worldline's pooling account to cover chargeback requests related to Falcon's transactions.

The dispute continued. SBI didn't want to be the only bank which was temporarily stopped from debiting Worldline's pooling account and to risk its funds getting debited. Other banks (or card companies) wanted a simpler life by not having to deal with chargeback requests. Worldline didn't want any debiting from any account - according to them if the customer was defrauded by Falcon, they had nothing to do with it.

All of these parties were given relief by the interim order of the Bombay High Court which ordered that no bank or credit card company will now debit Worldline's account on chargeback requests. The Court appears more sympathetic to shareholders of the intermediaries and banks relative to customers, as they have lost their money, at least until there is a final order in this case.

Who should the burden be on?

While the Bombay high court seems to have bought into the argument that the intermediary is just a pass-through, the critical question in markets remains, "who bears the burden?" A standard response in India is to increase licensing and networth requirements to carry out financial activity, but that often makes the informal market bigger, and fails to address the problem of fraud. We have three choices - leave it to the customer, hold the firm committing fraud to account, or place liability on the intermediary. The choice we make will shape the structure of markets, the roles of intermediaries, and incentives for honesty and risk.

Option 1: The customer

In a caveat emptor or "let the buyer beware" world, the burden of due diligence rests solely on the customer. If Falcon ceased operations, and consumers money was held up, then it is the consumers loss.

On the one hand, a caveat emptor world incetivises caution by consumers. Consumers may learn to discern good firms from bad with experience and this may eventually drive out the bad firms. However, it also leads to enormous wariness in every transaction. Anonymous transactions, where the buyer and seller do not know nor have long-term interactions with each other - become impossible or extremely risky. This is an implicit entry barrier for new firms trying out innovative products - they will have to take significant efforts to signal credibility. Modern capitalism becomes less viable if fraud risk sits squarely with the consumer.

A private certification agency could mediate the "credibility" signal, offering a seal-of-approval as a safeguard against the risk of fraud. However, such private certification agencies are notably absent in India. The reasons for this lack of emergence remain unclear -- perhaps it is difficult to design viable business models within a price-sensitive and fragmented market. In the absence of a credit certification agency, a caveat emptor world means retail customers have no ex-post recourse, only their ex-ante judgment.

Option 2: The firm

Here, the company providing the goods or services is made directly and strictly liable for any fraud. Under Indian law, if a seller's fraudulent actions prevent or frustrate a buyer's due diligence, the seller cannot then turn around and claim that the buyer should have been more careful under the caveat emptor principle. This runs into trouble when customers are dealing with a fly-by-night operator. If the company commits fraud and vanishes, it becomes the domain of the police to pursue, locate, and prosecute the company's proprietors and courts to impose sanctions. If the company's resources are exhausted, there is no meaningful restitution to the consumer; sanctions may deter future fraud but do not compensate customer's losses. If the justice system doesn't work well or is not designed to deal with class action suits by a group of consumers, then this outcome is not too different from the burden being solely on the customer.

Option 3: The intermediary

In this set up, the intermediary, such as the payment aggregator, would act as a trusted third party. The burden of scrutinising legitimacy - of both buyer and seller - would rest on the intermediary. The intermediary may provide insurance to buyers (and sellers) against fraud, restoring lost funds where possible. The liability (at least in part) would lay on Worldline. We see an example of this in the credit card industry where the Fair Credit Billing Act in the United States requires credit card companies to investigate unauthorised transactions (or billing errors in the case of fraud) and transfer money back to customers if they report misuse of the card (or evidence of fraud) within a specified period of time.

In India, RBI requires payment aggregators to do due diligence of merchants it onboards. In the Falcon case, Worldline as the payment aggregator would have conducted due diligence of Falcon. A liability framework exists under the RBI as well, but only for unauthorised transactions. The applicability to instance of fraud remains unclear. If the RBI were to extend the liability framework to deal with fraud, similar responsibilities may get placed on payment aggregators, and other intermediaries.

At first glance, this is a better outcome for consumers. They are assured of the credentials of an anonymous provider of services and getting their money back in the event of fraud. This may increase the number of transactions that take place and the size of the market. However, protection comes at a cost. The intermediary firm will have to incur additional expenses and significantly change its business model. The firms may pass on the burden of anti-fraud compliance to customers in the form of higher platform fees, or stricter participation standards. But firms will also be incentivised to invest in measures to detect and block fraudulent transactions. We may see a consolidation in the intermediaries market with a few, large providers able to offer risk management at cost.

Conclusion

Instances of fraud create pressure upon the government to create an ex-ante regulatory system that makes many kinds of fraud infeasible through licensing conditions, price restrictions, and other regulatory barriers. But these conditions also make many kinds of products and transactions infeasible, which is not in the best interest of consumers and markets.

A well-designed regulatory system should first confirm that a complaint involves fraud, as not all losses are caused by fraud. It should then allocate this burden wisely. The Falcon case suggests that we are operating under the Option 1 scenario. The desirability of shifting to Option 3, with a significantly higher liability burden on the intermediaries, is an issue that merits immediate attention. A system that harnesses the interests of profit-seeking financial firms in blocking fraud is the one that has the best chance of success.

The author is a researcher at the TrustBridge Rule of Law Foundation.

Prepaid Payment Instruments: How has regulation impacted market outcomes?

by Amol Kulkarni and Renuka Sane.

Regulatory interventions often function as de-facto industrial policy, by favouring certain business models over others, effectively picking winners and losers. In this article we present an episode in recent Indian history where regulatory decisions of the Reserve Bank of India on prepaid payment instruments (PPI) significantly influenced competition and product evolution. PPIs are instruments that facilitate the purchase of goods and services, financial services, remittance facilities, etc., against the value stored therein (RBI, 2021). They saw a phenomenal growth of more than 100 times in volumes and more than 25 times in value between September 2012 and November 2024 when volumes had reached 584.78 million and the value Rs. 192.14 billion (RBI, PSI). By this time, the Unified Payments Interface (UPI) volumes and value were more than 25 times and 100 times that of PPI volumes and value. The data suggests that something happened between October 2016 and September 2018, which put the brakes on the PPI growth story and shifted the momentum towards UPI.

UPI enables transfer of funds directly between bank accounts, and does not require parking of funds in non-interest bearing accounts like PPIs. Some may argue that UPI was a superior product that led to reduced interest in PPIs. However, for others, the need to park and transact with only a limited amount in a PPI, ring fences them from larger amounts in a bank account reducing their total risk exposure. Nonbank transaction accounts can also improve access to digital payments for unbanked households (Toh, 2023). The argument that UPI winning over PPIs because the former is a better product would have more credibility if, during the specified period (Ocotber 2016 - September 2018):

• There were no regulatory interventions that adversely affected PPI operations,
• Regulations did not favour UPI,
• Exits of private players from the PPI space were dispersed as more players realised the futility of competing with UPI.

The article argues that this was not the case, and there is reason to believe that the policy and regulatory environment during this period contributed to the slowdown in the PPI growth trajectory, particularly those of non-bank PPIs, and favoured UPI.

The build-up of the PPI market

On 8 November 2016, the Government of India withdrew the legal tender status of Rs. 500 and Rs. 1000 denomination of banknotes issued by the RBI till that date (RBI, 2016). Such large-scale demonetisation gave a fillip for the demand of digital payments. Consequently, the volume of PPI transactions shot up from 127 million in October 2016 to 261 million by December 2016 and steadily rose to around 340 million by March 2017. The value of PPI transactions also surpassed Rs. 100 billion during this period (RBI, PSI). In the months following demonetisation, around 10 entities, all non-banks, received permission from the RBI to issue and operate PPIs (RBI, 2025). The number of non-bank PPI issuers increased from 37 to 55, and surpassed bank PPI issuers for the first (and only) time in this period (RBI, AR).

The draft PPI Master Directions: March 2017

A few months after demonetisation, on 20 March 2017, the RBI issued draft Master Directions on Issuance and Operations of PPIs in India for public comments (RBI, 2017). One of the stated objectives of the draft Master Directions was to encourage innovation in the segment in a prudent manner, taking into account safety and security along with customer protection and convenience.

By this time, three types of PPIs were regulated: semi closed PPIs with minimum KYC, semi closed PPIs with full KYC, and open PPIs. The key difference between semi-closed and open PPIs was that the former could be used to purchase goods and services at specific or clearly identified merchant locations, while the latter could be used for purchase of goods and services at any card accepting merchant location. Cash withdrawal was not permitted through semi-closed PPIs but allowed through open PPIs.

The draft Master Directions proposed two important changes:

1. Increase in the capital and networth requirements: Before the draft, PPI operators were required to maintain a minimum positive net worth of Rs. 1 crore at all times, along with a minimum paid up capital of Rs. 5 crores (RBI, 2016).
2. Limits on monthly fund transfers: Earlier there were no limits on monthly fund transfers. The 2017 draft directions proposed restrictions on the minimum amount outstanding at any point of time, the maximum amount that could be loaded on to a wallet in a month, and the amount that could be transfered out in a month.

Some key proposals of the 2017 draft directions were:

All figures in Indian Rupees

Issue	Semi closed PPIs with minimum KYC	Semi closed PPIs with full KYC	Open system PPIs
Minimum positive net worth to be maintained at all times	25 crores	25 crores	25 crores
Amount outstanding at any point of time	20,000	1,00,000	1,00,000
Maximum amount that can be loaded during any month	20,000	Cash loading limit: 50,000	Cash loading limit: 50,000
Monthly fund transfer limit	10,000	For pre registered beneficiary: 1,00,000 For other cases: 10,000	For pre registered beneficiary: 1,00,000 For other cases: 10,000

There was pushback from stakeholders on the proposals of the draft Master Directions (IGIDR, 2017; CUTS, 2017; IFMR, 2017; NASSCOM-DSCI, 2017). For instance, the Finance Research Group (FRG) at IGIDR called out disproportionate proposals around capital requirements, and transaction limits on consumers, and suggested rolling them back. Specifically, with respect to transaction limits, the FRG pointed out:

The intention for imposing transaction limits and restricting consumers from transacting with their own money is unclear. Every payment system in an economy is susceptible to fraud. However, we do not impose limits on the use of payment systems to pre-empt frauds. For example, the susceptibility of credit card transactions to frauds does not lead us to impose limits on individual credit card transactions. On the contrary, imposing transaction limits on consumers is contrary to their interests.

The final PPI master directions: October 2017

In October 2017, the RBI issued Master Direction on Issuance and Operation of PPIs, after examining comments and feedback received on draft directions (RBI, 2017A). Some key provisions of the Master Directions were:

All figures in Indian Rupees

Issue	Semi-closed PPIs with minimum KYC	Semi closed PPIs with full KYC	Open system PPIs
Minimum positive net worth at the time of application	5 crores	5 crores	5 crores
Minimum positive net worth by the end of third financial year of receiving final authorisation	15 crores	15 crores	15 crores
Amount outstanding at any point of time	10,000	1,00,000	1,00,000
Maximum amount that could be loaded during any month	10,000	Cash loading limit: 50,000	Cash loading limit: 50,000
Cap on amount that could be loaded during a financial year	1,00,000
Monthly fund transfer limit	10,000	For preregistered beneficiary: 1,00,000 For other cases: 10,000	For preregistered beneficiary: 1,00,000 For other cases: 10,000

The Master Directions had reduced networth requirements from Rs 25 crore proposed in the draft to Rs 15 crore. However, additional restrictions were imposed on transaction limits. For instance, the maximum amount which could be loaded during any month in a semi closed PPI with minimum KYC was reduced from Rs. 20,000 to Rs. 10,000. In addition, a new limit on maximum amount that could be loaded in a semi-closed PPI with minimum KYC during a financial year of Rs. 1,00,000 was included in the final directions. It is important to note that this had not found mention in the original draft proposal that was circulated for comments.

This effectively meant that the average amount that could be loaded in a semi-closed PPI with minimum KYC on a monthly basis was Rs. 8,333. Alternatively, for 10 months during a financial year, Rs. 10,000 could be loaded in a semi-closed PPI with minimum KYC every month, but for the next two months, no amount could be loaded, to comply with the annual limits. Coversations with stakeholders suggest that such restrictions potentially frustrated recurring payments and auto-debit mandates which rely on minimum balance being available in a wallet. Further, it restricted the use case of PPIs to very narrow set of transactions.

The impact of regulatory changes: the size of transactions

The proposals in both the draft and final Master Directions had an immediate and severe impact on the PPI market. Figure 1 shows the impact on the PPI transaction volumes, and the turning point when UPI overtook PPIs.

Figure 1: PPI and UPI transaction volumes

Figure 2 shows the impact of Master Directions on the PPI transaction values, and the turning point when UPI overtook PPIs - immediately after these Directions.

Figure 2: PPI and UPI transaction values

However, one must also note that PPI transactions were more than UPI's, for about a year since its launch in May 2016 till about October 2017, when the final master directions on PPIs came into effect. UPI got a fillip due to demonetisation but was still used less than PPIs for several subsequent months. This suggests that PPIs were relevant in a market with UPI.

The impact of regulatory changes: the number and type of players

Figure 3 presents the changes in the number of players in the PPI market. Between March and October 2017, i.e. between the draft and final PPI directions, licenses of seven PPI operators, all of which were non-banks, were cancelled. Of these, four voluntarily surrendered their license, perhaps owing to the restrictive regulatory framework proposed in the draft Master Directions (RBI, 2025). This shows the impact that the draft directions, which also reflected regulator's thinking, had on the the PPI market. Once the directions were finalised, licenses of 20 PPI operators were cancelled by the RBI, all of which were non-banks. Overall, we see that in this period, 16 players voluntarily surrendered their licenses, four ceased operations, five converted themselves to payments banks, and one license was revoked. Further for three years from 2018 to 2020, not a single permission was granted to non-banks for the issuance and operation of PPI (RBI, 2025). Given that licenses were being voluntarily surrendered, one may assume that very few or no fresh applications were received by the RBI. This was also the period during which the government began massively incentivising use of UPI through cashbacks and other schemes (Kulkarni, 2018).

The number of licenses issued went up only in 2021, potentially as a response to the creation of a new category of semi-closed PPI with minimum KYC which could be loaded only through bank accounts.

Figure 3: Non-Bank Licenses issued and cancelled

The regulations led to a shift in the composition of players as well. Earlier, the market saw both bank and non-bank entities offer PPI products. The commercial consequences of the regulatory changes were much larger on non-bank PPIs relative to bank PPIs. Consequently, the number of non-bank PPI operators reduced from 55 in 2016-17 to 36 in 2020-21, while the number of bank PPI operators increased from 54 to 56. In fact, it went upto 62 in 2019-20, possibily indicating the interests that banks retained in offering PPIs, which ideally should have not been the case, if UPI was a superior product. Of the non-bank PPI operators which continue to operate in spite of the regulatory changes in 2017, many are legacy operators enjoying a loyal user base, some are part of larger groups having deep pockets and providing financial or digital services, others have expanded into offerings like digital lending, some offer niche services like foreign exchange, money transfer, and transit payments, while few had to undergo change in management and control.

Figure 4: Bank and non-bank players

Further, non-bank issuers have faced more stringent compliance burdens, particularly around KYC norms, fund loading restrictions, and interoperability requirements. For instance, while non-bank PPIs must maintain an escrow account with a partner bank, bank operated PPIs can leverage their own deposit accounts, reducing costs and operational friction. Additionally, regulatory decisions such as restricting credit lines on PPI wallets have disproportionately impacted non-bank issuers, limiting their ability to innovate and compete with banks that can seamlessly integrate PPI-like functionalities within their broader suite of financial services.

RBI's review of its stringent conditions (late 2019-early 2020)

More than two years after the October 2017 Master Directions, the RBI decided to review some of the stringent conditions imposed on the PPI market, particularly those related to loading of PPIs. In December 2019, it decided to create a new category of semi-closed PPI with minimum KYC which could be loaded only through bank accounts. For such PPIs, the amount which could have been loaded through bank accounts during a financial year was increased to Rs. 1,20,000 i.e. Rs. 10,000 per month could be loaded in such PPIs. The RBI recognised that such leeway was necessary to ensure regular bill and merchant payments (RBI, 2019A). For other semi-closed PPIs with minimum KYC, the annual limit of Rs. 1,00,000 for loading was retained. However, this move appeared to be too little too late and perhaps failed to uplift the momentum in PPIs. Consequently, in January 2020, in addition to bank accounts, credit cards were permitted as a mechanism of loading semi-closed PPIs with minimum KYC having an annual loading limit of Rs. 1,20,000. This move, so far, has also failed to push PPI towards previously experienced growth rates.

Conclusion

The analysis of RBI regulation of PPIs over the past decade, changes in PPI volumes, value, and operators during this period, suggests that regulation has indeed impacted market outcomes for PPIs. While the RBI provided some relaxations, these were not enough to push PPIs back into high growth trajectory.

While it is difficult to pinpoint the exact regulatory requirement which might have impacted the PPI market most, it is clear that the restrictions introduced in October 2017 collectively contributed to a significant decline amongst industry's interest in PPIs as payment instruments. This was validated through interactions with key stakeholders as well.

One reckons that the RBI would have introduced such restrictions in the interests of safety and security of the payments market, prevent fraudulent actors from misusing the instrument, and obstruct unreliable entities from issuing and operating PPI instruments. It might not have predicted that the restrictions could have had such adverse consequences of reducing the attractiveness of PPIs as an instrument, and the users and market players, moving away from the PPI market. It is here where robust public consultations, and ex-ante cost benefits analyses can prove useful to estimate the potential impact of regulatory instruments, avoid disproportionate regulation, and ensure balanced market outcomes. While the RBI did invite suggestions on draft directions in March 2017, several new requirements, such as the annual cap on loading semi-closed PPIs with minimum KYC, were directly incorporated in the final directions of October 2017. This prevented stakeholders from providing their inputs on such new requirements.

The RBI should use tools like public consultations more often and thorougly. In any case, frauds and transaction failures are equally possible with UPI, as recent events have shown. In fact, with UPI, the entire bank balance of the customer is at risk, making them more susceptible than PPIs could ever have been.

Some may argue that with the advent of UPI, PPI was bound to lose market share. However, as this article shows, PPI was restricted by regulations, and did not get an opportunity to effectively compete with UPI, which on the other hand was booming on the back of regulatory relaxations, incentives, and zero fee mandates. One must also not forget that it was the non-banks which propelled UPI to unimaginable heights, and non-banks were also behind PPIs initial growth before the regulations hit them badly.

References

CUTS, 2017: Comments on draft Master Directions on issuance and operations of PPIs in India, 2017, https://cuts-ccier.org/pdf/Advocacy-Comments_on_RBI_Master_Direction_on_Issuance_and_Operation_of_PPIs.pdf

IFMR, 2017: Comments on draft Master Directions on issuance and operations of PPIs in India, 2017, https://dvararesearch.com/wp-content/uploads/2024/01/IFMR-Finance-Foundation-Comments-on-the-RBI-Draft-Master-Directions-on-Issuance-and-Operation-of-Prepaid-Payment-Instruments-in-India.pdf

IGIDR, 2017: Finance Research Group, Inputs on draft Master Directions on issuance and operations of PPIs in India, IGIDR, 16 April 2017, https://ifrogs.org/PDF/201703note_inputsToCpOnPpis.pdf

Kulkarni, 2018: Amol Kulkarni, (Not) the way to promote digital payments, CUTS Discussion Paper, February 2018, https://cuts-ccier.org/pdf/DP_the_way_to_promote_digital_payments.pdf

Mukherjee, 2025: Mukherjee, India: UPI enabled for prepaid payment via third-party apps, Coingeek, 7 January 2025, at https://coingeek.com/india-upi-enabled-for-prepaid-payment-via-third-party-apps/

NASSCOM-DSCI, 2017: Inputs on draft Master Directions on issuance and operations of PPIs in India, 2017, https://www.dsci.in/resource/content/nasscom-dsci-submission-rbi-master-directions-ppis

RBI, 2008: RBI Press Release regarding Inviting Comments on Approach Paper on Guidelines for PPIs dated 7 November 2008, at https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=19419

RBI, 2016: RBI Master Circular dated 1 July 2016 regarding Policy Guidelines on Issuance and Operation of PPIs in India, at https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=10510

RBI, 2016A: RBI Press Release dated 8 November 2016 regarding Withdrawal of Legal Tender Status of Rs 500 and Rs 1000 Notes, at https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=38520

RBI, 2017: RBI Draft Master Directions dated 20 March 2017 regarding Issuance and Operations of PPIs in India, at https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3325

RBI, 2017A: RBI Master Direction dated 11 October 2017 (updated as of 17 November 2020) regarding Issuance and Operation of PPIs at https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=11142

RBI, 2019: RBI Notification regarding Introduction of a New Type of semi-closed PPIs dated 24 December 2019, at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11766&Mode=0

RBI, 2019A: RBI Press Release regarding Statement on Development and Regulatory Policies dated 6 December 2019, at https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=48803

RBI, 2021: RBI Master Directions on PPIs dated 27 August 2021 (updated as on 27 December 2024), at https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12156

RBI, 2024: RBI Notification dated 27 December 2024 regarding UPI access for PPIs through third-party applications, at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12756&Mode=0

RBI, 2024A: RBI Press Release dated 5 April 2024 regarding Statement on Developmental and Regulatory Policies, at https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=57639

RBI, 2025: RBI, Approvals/ Certificates of Authorisation issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007 for Setting up and Operating Payment System in India, 9 January 2025, at https://rbi.org.in/Scripts/PublicationsView.aspx?id=12043

RBI, AR: RBI Annual Reports at https://rbi.org.in/Scripts/AnnualReportMainDisplay.aspx. There was a change in financial year from June to March from 2019-20. Also, data of bank PPI issuers for 2015-16 is not available.

RBI, PSI: RBI Payment System Indicators (monthly) at https://www.rbi.org.in/Scripts/PSIUserView.aspx

Toh, 2023: Ying Lei Toh, How Much Do Nonbank Transaction Accounts Improve Access to Digital Payments for Unbanked Households?, Payment System Research Briefing, 29 November 2023, Federal Reserve Bank of Kansas City, at https://www.kansascityfed.org/Root/documents/9919/PaymentsSystemResearchBriefing23Toh1129.pdf

The authors are researchers at the TrustBridge Rule of Law Foundation.

Balancing Power and Accountability: An Evaluation of SEBI's Adjudication of Insider Trading

by Natasha Aggarwal, Amol Kulkarni, Bhavin Patel, Sonam Patel, and Renuka Sane.

Insider trading is considered to undermine the fairness of the market and erode investor confidence. The Securities and Exchange Board of India (SEBI) has, in recent years, increased its focus on, and intensified its enforcement of, insider trading cases. Expanding enforcement actions should prompt a deeper examination of how effectively SEBI is performing this function vis-a-vis the "rule of law". Adherence to the rule of law by the regulator promotes transparency, creates a stable and predictable environment for businesses and individuals and builds public trust in the regulatory system. Regulatory actions need to be evaluated on benchmarks grounded in legal theory and the extant legal framework.

In a new working paper, Balancing Power and Accountability: An Evaluation of SEBI's adjudication of Insider Trading, we evaluate SEBI's orders on insider trading cases over a 15-year period (2009 - 23) as well as the performance on these orders in appeal before the Securities Appellate Tribunal (SAT). We develop an evaluation framework based on elements of the rule of law applicable to regulatory adjudication, with 56 indicators for SEBI orders, and 82 indicators for orders of the Securities Appellate Tribunal (SAT).

This paper addresses three critical questions:

• What do SEBI's enforcement actions look like, and how have they evolved over the years?

  SEBI's annual reports provide some broad data about the total number of enforcement actions undertaken in a year, but do not provide details of the type of enforcement actions taken for each type of violation, the particular legal or regulatory provision alleged to have been violated, or the impact of successful enforcement actions in reducing instances of insider trading.

  Our dataset comprises 320 SEBI orders - 255 orders are by Adjudicating Officers (AOs) and 65 are by Whole-Time Members (WTMs). Each order can contain cases against multiple entities - we call them alleged violators. The 320 orders contain a total of 912 alleged violators. SEBI officers have imposed sanctions on 565 of the 912 alleged violators (62% of the alleged violators). AOs and WTMs have imposed penalties in 336 cases and 82 cases respectively. The median penalty amount for AOs is about Rs. 7.8 lakh, and for WTMs is about Rs. 15 lakh. Only WTMs, and not AOs, have the power to impose debarment and disgorgement. We observed that they have imposed disgorgement in 144 cases, and debarment in 192 cases. The average disgorgement amount is Rs. 46 crore, while the median is only Rs. 1 crore. The average period of debarment is 3 years, and a median of 1 year.

  Our paper illustrates the number of insider trading orders issued between 2010 and 2022. This shows that a spike in orders on insider trading from 2017, and then again in 2019. There has been a slight drop in the number of WTM orders in 2022. This is consistent with statements in the SEBI annual reports, which suggest that insider trading has been high on the regulator's agenda.

• Are SEBI's orders consistent with the requirements of procedural and substantive rule of law requirements?

  The procedural rule of law measures are based on administrative law and natural justice principles, and deal with how SEBI has been performing in terms of procedural fairness while adjudicating insider trading matters. One aspect of procedural fairness is that the orders should include certain basic information. We find several shortcomings in providing factual information on basic rule-of-law indicators. First, several orders do not mention basic facts about the case such as the date of show cause notice (7%), period of investigation (17%), period of UPSI (27%), and a description of UPSI (20%). Second, orders do not cite precedent. We find that about 87% of orders do not cite any previous AO or WTM order. Finally, the orders do not specify the full details of the sanctions imposed. In 12% of cases where disgorgement was ordered, the time period for payment was not specified. Similarly, for both penalties and disgorgement, interest rate was not specified in a large number of cases.

  The substantive rule of law measures are based on the law relating to insider trading. These dive a bit deeper than the procedural requirements, and examine whether the orders satisfy the requirements of applicable law and regulation. For example, a key component of a good order on insider trading should be that SEBI has been able to clearly demonstrate that the violator is an insider. We find that SEBI has identified a clear insider relationship in only 335 (60%) of its orders. In the remaining 230 orders, it has described a connection in 152 (66%) orders. Describing a connection is not as clear as specifying the connection. If we were to give SEBI the benefit of the doubt and consider it as an acceptable description, even then, in 14% of the cases SEBI has failed to provide any explanation on how a person is an insider

• How do SEBI's insider trading orders stand up to challenge before the Securities Appellate Tribunal (SAT)?

  Our analysis resulted in a set of 119 cases in the SEBI and SAT datasets. These cases result in 183 appeals (32%) out of the total 565 cases with sanction. Out of these, 97 (53%) were allowed, partly allowed, or remanded, while 86 (47%) were dismissed. This suggests that once appealed there is a 50% chance that the SEBI order will not hold in appeal.

  We find that the higher the sanction, the higher the proportion of appeals. 38% of AO cases and 17% of WTM cases with a penalty amount higher than Rs. 10 lakhs resulted in an appeal, relative to 22% of AO cases and 5% of WTM cases below Rs. 10 lakh. This is more pronounced in the case of debarment and disgorgement, where appeals are present for more than half the cases with higher sanctions. We also find that it is less likely that an AO or WTM case with penalty above Rs. 10 lakh or debarment for more than one year will be modified in appeal. 79% of WTM cases involving higher disgorgement amounts and all WTM cases involving a penalty below Rs. 10 lakh were modified in appeal.

Regulatory enforcement actions are necessary to ensure that those who violate the law face consequences, and may also have a deterrent effect on others. However, there are adverse consequences if these actions emerge from a flawed process, or if the actions taken are arbitrary or disproportionate. SEBI is ahead of other Indian regulators such as the Reserve Bank of India in at least publishing its orders. An appeal rate of between 30-38%, and a win rate of 50% at the SAT could be further improved by investments in order writing, and by re-evaluating the regulations on insider trading.

The authors are researchers at the TrustBridge Rule of Law Foundation.

A guide to writing good regulatory orders

by Natasha Aggarwal, Bhavin Patel and Karan Singh.

India has several regulators that are vested with quasi-judicial powers and that play a pivotal role in economic governance. In exercising their quasi-judicial functions, regulatory orders must: (i) demonstrate compliance with the principles of natural justice, (ii) establish legitimacy by showing how they are taken strictly in accordance with, and to the extent authorised by the governing law, and (iii) be accountable, by ensuring that all the information an appellate authority may require for its evaluation of the regulatory action is clearly documented.

Regulatory orders significantly impact market participants and public trust. In particular, four sets of stakeholders are impacted by regulatory orders: (i) parties involved in the enforcement proceedings, (ii) the regulator itself, (iii) appellate and review fora, and (iv) the market and the general public. However, deficiencies in reasoning, structure, and clarity in quasi-judicial orders often undermine regulatory legitimacy and efficiency, leading to diminished stakeholder confidence. Moreover, arbitrary orders that do not demonstrate application of mind can be challenged or overturned or remanded in appeal. Such challenges, overturns, and remands lengthen the enforcement process and increase costs for all those involved. They also take away from the certainty of regulatory orders and affect the predictability of the law. Regulatory certainty and predictability are important requirements of the rule of law and are critical for the smooth functioning of markets.

The need for regulatory orders to be well-reasoned is recognised in Indian law. In a recent paper, titled "A guide to writing good regulatory orders", we propose a method of structuring regulatory orders that would aid readability, strengthen the logical flow of arguments, and enhance the accessibility and transparency of regulatory orders. In particular, we identify four sets of requirements for better order writing: informational, structural, substantive, and stylistic. Broadly, the information requirements relate to identificatory and citatory information that should appear in orders, and to information that helps establish that procedural requirements have been complied with, such as dates of Show Cause Notices. Structural requirements relate to the logical arrangement of the contents of orders in a manner that aids reading and comprehension, and which strengthens regulatory arguments. The substantive requirements help establish that all the requirements of the substantive law applicable to the matter discussed in the order have been addressed. Finally, our suggestions on stylistic requirements include the use of plain language and writing styles that are accessible and comprehensible to all affected persons.

We propose to conduct further studies on how the suggestions in this paper may be implemented through tools and technologies that could augment regulatory capacity for order writing.

The authors are researchers at the TrustBridge Rule of Law Foundation.

Mapping insider trading laws: A database for SEBI’s Prevention of Insider Trading Regulations

by Natasha Aggarwal.

The Indian legal framework on insider trading is complex and has, over the years, been significantly updated and amended. The insider trading regulations were introduced in 1992 and amended four times between 2002 and 2011. This set of regulations was replaced by the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations), which has been amended 12 times between 2018 and 2024. Many of these amendments aimed to address regulatory gaps, such as those concerning the scope of terms like "connected persons" and "unpublished price sensitive information" (UPSI). However, frequent changes in the PIT Regulations have created challenges in understanding the correct position in law and in analysing past events and developments.

To help solve this problem, we have prepared a relational database by identifying the constituent elements of the violation of "insider trading" in the PIT Regulations. The database does not map changes to the disclosure requirements in the PIT Regulations.

The prohibitions under the PIT Regulations may appear straightforward but are often complex in practice and implementation. For example, understanding insider trading requires understanding (i) what constitutes UPSI, which in turn requires understanding what constitutes generally available information, and (ii) who is an insider, which in turn requires understanding the scope of terms such as "connected person", "deemed to be connected person", and "immediate relative". Moreover, certain regulated entities are required to adopt a code of conduct - a requirement that initially applied only to listed companies but now applies to entities such as mutual funds and intermediaries.

Based on the above, we have identified the following key definitions that require clarity for better compliance with, and understanding of, the PIT Regulations:

• Connected person;
• Deemed to be connected person;
• Insider;
• Immediate relative / relative;
• Trading;
• Unpublished price-sensitive information (UPSI); and
• Generally available information.

We have also identified the following violations of the PIT Regulations:

• Communication of UPSI
• Trading when in possession of UPSI; and
• Failure to implement or comply with the code of conduct.

These issues are referred to as 'Indicators' in our database.

We expect that this will be helpful for researchers and market participants to analyse the evolution of these indicators and the legal framework for insider trading. Our indicators are linked to: (i) related regulatory instruments, such as amendments (along with the date on which the amendment takes effect), SEBI's board meetings, consultation papers, and circulars, and (ii) provisions of the earlier insider trading regulations (i.e., the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (1992 Regulations)).

For example, the definition of UPSI is mapped to an amendment in 2018, two consultation papers, two board meetings, and the provision of the 1992 Regulations that defined UPSI. This allows a user to map all documents in which an indicator has been discussed, and then understand and analyse: (i) the current legal position, (ii) the evolution of a definition or a violation, and (iii) the SEBI's reasoning in introducing certain amendments and the impact of specific documents, such as consultation papers, on regulatory provisions.

The database is available here. We encourage you to read the tab titled "Read me" to understand how to navigate this database.

We will update this to reflect any further changes to the PIT Regulations. If you notice any errors or inconsistencies, please reach out to us at info@trustbridge.in, and we will make the necessary corrections.

Natasha is a Senior Research Fellow at TrustBridge.