LEGAL IMPLICATIONS FOR FINTECH COMPANIES IN INDIA 

AUTHOR: KAUSTUBH TRIPATHI, FACULTY OF LAW, UNIVERSITY OF DELHI. 

The year 2022 proved to be a nightmare for India’s volatile Fintech industry, as one of the fastest growing FinTech start-ups of the country was trampled in a vicious web of regulatory and taxation discourses, resulting in delayed product launches and strict penalties. The event solidified the claims about hollowness in India’s regulatory framework for Fintech companies. India hosts over 7000 FinTech start-ups adding up over 60 billion USD in the economy, yet approx. 30 % of the Indian Fintech companies are strangled in taxation and legal battles which adversely affects the innovation and results in stagnant growth. From digitalizing the cash payments to having blockchain secured transactions, the Fintech industry has emerged as a strong element of the Indian economy. However, the strain resulting from the legal and taxation aspects questions India’s ability to become a global Fintech powerhouse. Despite the FinTech boom, academic and policy discussions often overlook the significant taxation and legal hurdles these companies face. 

This article explores the legal challenges confronting FinTech companies in India, analysing their impact on innovation and growth, and proposing actionable policy solutions to address these hurdles.

Fintech, short for financial technology, represents the integration of technology with the financial services, making the banking and financial services enhanced, accessible, efficient, and innovative. By leveraging advancements in artificial intelligence, blockchain, and data analytics, FinTech companies are revolutionizing traditional banking and financial ecosystems. In a nutshell these fintech companies have transformed traditional economies to digitalized ones. In 2024, the value of the Indian fintech sector was $580 Billion and it is speculated that it will be the first ever aspect of the Indian economy to hit the magical figure of $ 1 trillion by 2030. With over 7000 plus fintech companies operating in India, covering segments like payments, lending, insurance and wealth management, makes India a global hub of fintech. The efforts of the government through its Digital India scheme, Jan Dhan Yojana and establishment of Aadhar based financial services, has greatly facilitated the bull run of the Fintech sector in India. 

 The sector, though, is a promising one, but still is plagued by legal challenges. The most important challenge faced by the fintech sector is a fragmented regulatory framework in which it operates. This creates ambiguity and uncertainty about the laws and compliance standards to be followed. The absence of clear and unambiguous legal definitions about certain terms such as digital lending, neo banking, and peer to peer lending promotes a fragmented compliance by the fintech companies, which often are caught in a web of non-compliance issues. As of now, the guidelines issued by 3 authorities, namely, the Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority of India (IRDAI), are followed by the sector. It is these bodies that oversee the different services aspects of the fintech sector, often issuing contradictory rules and regulations. To understand this contradiction, let's delve into the guidelines of each of the three authorities above-mentioned. The RBI governs payment system, digital lending, and prepaid wallets, while the Ministry of Electronics and Information Technology (Meity) focuses on digital protection and cybersecurity. Now, for instance, the RBI mandates physical KYC (Know Your Customer) for validation of identity, while the Meity allows for a fully digital onboarding process for doing swift business. This has created a compliance dilemma for the fintech sector. Such contradictions are not just limited to KYCs but extend to other functions such as cryptocurrency regulation through the fintech companies. In 2018, RBI citing financial stability risks and consumer rights banned all crypto transactions. However, Meity and NITI Aayog have displayed interest in blockchain tech and its governance, creating mixed and complex influences on the fintech sector. All this was settled by the honorable Supreme Court through its Internet and Mobile Association of India v Reserve Bank of India (2020) ruling, where it overturned the ban imposed by the RBI. The 2018 RBI Directive holds that all fintech companies are to store all payment data exclusively in India. This has an adverse effect on the industry which relies heavily on cross border data transfers. Again, the Meity, here is contradicting RBI by supporting regulated data transfers across jurisdiction for the purpose of innovation and multinational collaboration. Again, the authorities here are giving mixed and confusing signals to the fintech companies. 

 A legal compliance fragmentation and conflicting guidelines are a major hurdle and discourages the industry. A comparison of how the major nations across the globe have addressed the problems we have in our jurisdiction is something we must have a look upon. In the United States, sector specific regulators such as SEC (Securities Exchange Commission) for investment platforms, CFPB (Consumer Financial Protection Bureau) for consumer financial products and the OCC (Office of Comptroller of Currency) for banking services, provide clear and crisp guidelines which are domain specific to their jurisdiction and ensures that clarity exists amongst the market players. The Wyoming Crypto friendly laws are another facilitator for the blockchain and fintech sector in the US. The Payment Services Directive 2 (PSD2) of the European Union (EU) facilitates and allows for cross border data transfers and reduces jurisdictional overlap by ensuring that the laws remain same across all jurisdictions at all levels, providing a harmonized fostering environment for fintech companies. In Asia, Singapore and China, through clear guidelines and uniform enforcement were able to maximize the capabilities of the fintech sector. The Monetary Authority of Singapore (MAS) is the sole regulator of fintech in Singapore which has reduced ambiguity. The Singaporean approach to fintech is said to be the most advanced and facilitating in the world. Through the regulatory sandbox system, Singapore allows FinTech companies to test innovative products with limited compliance obligations and in a controlled manner. Singaporean model sandbox has achieved global benchmark for fostering innovation, while India still is in nascent stages. 

The fintech companies operate within a web of technology, finance and legal regulation obligations, which has led to various obstacles for the sector. These obstacles are exponentially increased by the overlapping guidelines and jurisdictions along with continuously growing technology. The judiciary through its precedents and rulings have constantly highlighted the need for clearer laws in this sector. The 2020 ruling of the Supreme Court in IMAI vs RBI, quashed RBI’s ban on crypto trading citing a violation of Fundamental Rights of businesses under Article 19 (1) (g). The infamous Paytm Payments Bank case of 2021, has been a nightmarish story for the fintech companies in India. The case showcased the RBI’s strict enforcement which led to temporary ban on Paytm Payments Bank. This event created a furore in the sector. 

The industry needs an immediate rescue. The first step and probably the most crucial step for the government shall be to establish a regulatory body for the fintech sector. Solving the puzzle of jurisdictional overlap and establishing transparent and fixed regulatory compliance requirements are a must to yield positively from the fintech sector. Taking inspiration from Singapore's sandbox, the expansion of RBI's sandbox shall be considered, in order to amplify innovation while prioritizing consumer rights. Creation of strong data protection laws and shaping them on the basis of global standards like GDPR is another great step towards building up a robust system. This can be supplemented by streamlining licensing procedures that would promote international cooperation and lower operational costs. Introducing definitive rules for digital lending and cryptocurrencies would introduce transparency, generating consumer confidence, and attracting investment in these new domains. 

The Indian FinTech sector now finds itself at a very crucial juncture, where its future is depended on the regulatory challenges and questions. In spite of the efforts made by the government and other key regulators to have clear guidelines, the industry still faces challenges from the fragmented framework of regulatory compliance, which often eclipses the growth of the industry. Notes must be taken from the Singaporean and the American models, in order to establish a robust compliance system for the FinTech providers. A future where accessible financial inclusion is the norm, powered by sophisticated technology and strong and clarity driven legal systems, is a possible benchmark for India to achieve—if the correct and inclusive steps are taken today. India’s FinTech revolution will not just transform its economy but set an example for the world to follow, which is very unique in its right.

1. RBI’s Digital Lending Guidelines, 2022, Reserve Bank of India, available at https://rbi.org.in.

2. RBI Circular on Storage of Payment Data, 2018, Reserve Bank of India, available at https://rbi.org.in.

3. Internet & Mobile Association of India v. Reserve Bank of India, (2020) 10 SCC 274, available at https://indiankanoon.org.

4. Ravi Srivastava, FinTech and Regulation in India (Oxford Univ. Press 2022).

5. Rohit Sinha, Digital Financial Services in India: A Legal Perspective (E. Book Co. 2021).