Section 25 of the Payment and Settlement Systems Act, 2007 deals with the liability of companies and the people responsible for managing their business when an offence is committed under the Act.
The Payment and Settlement Systems Act, 2007 provides the legal framework for the authorisation, regulation and supervision of payment and settlement systems in India. The law is important for banks, payment system operators, fintech companies and other entities involved in payment services.
Section 25 is particularly important because liability may extend beyond the company to the individuals who were responsible for conducting its business when the offence took place. At the same time, the section provides a defence where the concerned person can establish that the offence happened without their knowledge or that they had taken all necessary steps to prevent it.
⭐ What is the Payment and Settlement Systems Act, 2007?
The Payment and Settlement Systems Act, 2007 is the principal legislation governing payment systems in India.
The Act establishes a legal framework for:
- Authorisation of payment systems
- Regulation of payment systems
- Supervision of payment systems
- Compliance with applicable requirements
- Protection of users
- Maintaining financial stability
- Ensuring efficient functioning of payment systems
The Act is particularly relevant in India’s digital payment ecosystem because payment systems need appropriate regulatory oversight to operate safely and reliably.
⭐ What is Section 25 of the Payment and Settlement Systems Act?
Section 25 deals with offences committed by companies.
It determines who can be held responsible when a company commits an offence under the Payment and Settlement Systems Act, 2007 or violates applicable RBI directions.
The important point is that liability is not necessarily limited to the company itself. A person who was responsible for and in charge of the company’s business at the time of the offence can also be held liable.
However, such a person can have a defence if they are able to establish that:
- The offence was committed without their knowledge; or
- They had taken all possible steps to prevent the offence.
⭐ Why is Section 25 Important?
Section 25 is intended to create greater accountability within organisations operating in the payment ecosystem.
If only the company were held responsible for every violation, individuals managing its operations might not have the same level of responsibility for regulatory compliance.
Section 25 therefore places responsibility on the people managing the business when the applicable conditions are satisfied.
Its importance can be understood through the following points:
- Promotes corporate accountability
- Encourages regulatory compliance
- Helps prevent negligence
- Strengthens corporate governance
- Encourages proper internal controls
- Supports a safer payment environment
The source specifically identifies corporate accountability, regulatory compliance, prevention of negligence, better governance and maintaining the integrity of India’s payment environment as key objectives.
⭐ Who Can Be Liable Under Section 25?
When a company commits an offence under the Act, the company itself can be liable.
In addition, the individuals who were responsible for and in charge of the conduct of the company’s business at the time of the offence may also be liable, subject to the statutory provisions and available defence.
This means the section focuses on responsibility for the company’s operations rather than automatically making every employee personally responsible.
A person may avoid liability where they can establish the applicable defence, including that:
- They did not know about the offence; or
- They had taken all necessary steps to prevent it.
⭐ Which Entities Are Covered?
The source identifies several types of entities involved in payment and settlement activities that may come within the scope of Section 25.
| Entity | Covered under Section 25? |
|---|---|
| Banks | Yes |
| Payment system operators | Yes |
| Authorised fintech companies operating payment systems | Yes |
| Prepaid Payment Instrument (PPI) issuers | Yes |
| Other RBI-authorised entities | Yes |
These entities have to comply with the applicable provisions of the Payment and Settlement Systems Act and relevant RBI requirements.
⭐ When Does Section 25 Apply?
Section 25 becomes relevant when a company or applicable entity commits an offence under the Payment and Settlement Systems Act, 2007.
The source gives examples such as:
- Operating a payment system without RBI authorisation
- Violating the conditions of an authorisation
- Failing to follow RBI directions
- Breaching provisions of the Act
- Committing another offence punishable under the Act
The exact liability in a particular case depends on the facts, the applicable statutory provision and the role of the concerned person.
⭐ Examples of Violations
Understanding the possible violations makes Section 25 easier to understand.
| Violation | Example |
|---|---|
| Operating without authorisation | Running a payment system without the required RBI approval |
| Breach of authorisation conditions | Failing to follow conditions attached to an authorisation |
| Non-compliance with RBI directions | Ignoring applicable regulatory instructions |
| Violation of the Act | Breaching a statutory requirement |
| Other punishable offences | Committing another offence covered by the Act |
These examples are based on the types of violations described in the source.
⭐ Defence Available to Responsible Persons
Section 25 does not mean that every person managing a company automatically becomes liable whenever the company commits an offence.
The source describes two important grounds through which a responsible person may establish a defence:
The Person Had No Knowledge
If the concerned person can establish that the offence happened without their knowledge, this may provide a defence under the section.
The Person Took Necessary Precautions
A person may also have a defence if they can establish that they had taken all necessary steps to prevent the offence.
Therefore, internal controls, compliance systems and proper supervision can become important for organisations and their responsible officers.
⭐ Section 25 and Penalties Under Section 26
It is important to understand the difference between Section 25 and Section 26.
Section 25 deals primarily with liability of companies and responsible persons when an offence is committed.
Section 26 sets out penalties for specified contraventions under the Act.
The source provides the following penalty structure:
| Provision | Offence | Penalty mentioned in source |
|---|---|---|
| Section 26(1) | Contravention of Section 4 or failure to comply with authorisation conditions | Imprisonment from 1 month to 10 years, fine up to ₹1 crore, or both; additional fine up to ₹1 lakh per day for continuing offences |
| Section 26(2) | False statement or omission of material information | Imprisonment up to 3 years and fine from ₹10 lakh to ₹50 lakh |
| Section 26(3) | Failure to provide information or cooperate during inspection | Penalty as prescribed under Section 30 |
| Section 26(4) | Unauthorised disclosure of confidential information | Imprisonment up to 6 months, fine up to ₹5 lakh, or twice the damage caused, whichever is higher |
| Section 26(5) | Failure to comply with RBI directions or pay prescribed penalty | Imprisonment from 1 month to 10 years, fine up to ₹1 crore and additional fine up to ₹1 lakh per day |
The source presents these penalties as the consequences associated with the relevant Section 26 provisions.
Important: Section 25 itself should not be confused with the penalty provisions in Section 26. The two sections serve different purposes within the Act.
⭐ What is the Role of RBI?
The Reserve Bank of India (RBI) plays a major role in regulating and supervising payment systems under the Act.
According to the source, the RBI can take actions such as:
- Conducting inspections
- Carrying out investigations
- Requesting documents and explanations
- Giving the concerned entity an opportunity to be heard
- Conducting the applicable adjudication process
- Imposing penalties or taking the matter through the judicial process
The RBI’s role is therefore important in ensuring that authorised entities follow the Act, applicable regulations and regulatory directions.
⭐ What Powers Does RBI Have?
The source identifies several regulatory powers of the RBI under the Payment and Settlement Systems Act, including:
Authorising Payment System Operators
The RBI has authority relating to the authorisation of payment system operators.
Issuing Regulations and Directions
The RBI can establish applicable regulatory requirements, guidelines and directions.
Conducting Inspections and Audits
The RBI can examine the operations and compliance of regulated entities.
Requesting Information
Entities may be required to provide records, reports and other information.
Investigating Violations
The RBI can investigate suspected non-compliance.
Taking Enforcement Action
Where applicable, enforcement action can be taken against entities that fail to meet regulatory requirements.
⭐ How Does RBI Monitor Compliance?
Compliance monitoring is an ongoing process.
The source identifies several mechanisms used for monitoring:
| Compliance Activity | Purpose |
|---|---|
| Inspections and audits | Assess operational and regulatory compliance |
| Compliance reporting | Review periodic reports and disclosures |
| Payment system monitoring | Identify operational, security and governance risks |
| Internal control review | Check risk management and regulatory adherence |
If deficiencies are identified, the RBI may direct an entity to take corrective action within a specified period.
In serious or repeated cases, the source states that further legal or regulatory action may be considered, including withdrawal of authorisation.
⭐ What Happens When a Company Violates the Act?
When an applicable company violates the Payment and Settlement Systems Act or an RBI direction, the consequences can involve both the organisation and responsible individuals, depending on the relevant legal provisions.
The general process described in the source can involve:
Violation → RBI monitoring/investigation → Request for information → Opportunity to be heard → Applicable adjudication/enforcement → Penalty or further legal action
The nature of the action depends on the type and seriousness of the violation.
⭐ Factors Considered During Enforcement
Before taking action, several factors may be considered.
These include:
- Nature of the violation
- Motive behind the violation
- Duration of the violation
- Level of cooperation during investigation
- Corrective or remedial steps taken
These factors are identified in the source as considerations that may be relevant during the RBI’s enforcement process.
⭐ Examples of Non-Compliance
Some examples of non-compliance mentioned in the source are:
Operating Without RBI Approval
A payment system begins operations without obtaining the required authorisation.
Repeatedly Ignoring RBI Directions
A fintech company repeatedly fails to follow applicable compliance directions issued by the RBI.
PPI Regulatory Non-Compliance
A PPI issuer continues to disregard applicable regulatory requirements despite relevant RBI notifications.
Such situations demonstrate why regulated entities need strong compliance systems and continuous monitoring.
⭐ Importance of Section 25 for Banks and Fintech Companies
For banks, fintech companies, payment system operators and PPI issuers, compliance is not simply an administrative activity.
Section 25 highlights the importance of having:
- Strong compliance policies
- Effective internal controls
- Proper corporate governance
- Risk management systems
- Regular regulatory reviews
- Clear responsibility within management
- Proper documentation
These measures can help organisations identify problems early and reduce regulatory and legal risks.
The source specifically connects Section 25 with stronger compliance measures, corporate governance, internal controls and safer operations.
⭐ Importance of Section 25 for Consumers
Section 25 primarily concerns corporate and management liability, rather than creating a specific consumer right.
However, there can be an indirect benefit for consumers.
When payment companies follow regulatory requirements and maintain effective controls, the payment environment can become safer and more reliable.
Better compliance can help reduce the risk of:
- Fraud
- Unauthorised activities
- Operational failures
- Payment disruptions
- Poor internal controls
The source specifically describes these consumer benefits as indirect results of stronger regulatory compliance.
⭐ Section 25 and Digital Payments in India
India has a large and rapidly developing digital payment ecosystem. Banks, fintech companies and payment operators handle large volumes of transactions every day.
Because payment systems are connected with consumers, businesses and financial institutions, regulatory compliance is extremely important.
Section 25 contributes to this framework by ensuring that responsibility for offences can extend to the people responsible for running a company’s business, subject to the conditions of the law.
This encourages organisations to establish stronger governance and compliance mechanisms.
⭐ How Companies Can Reduce Section 25 Compliance Risks
Organisations operating in the payment ecosystem should maintain proper compliance systems.
Some useful measures include:
- Regular internal audits
- Strong compliance policies
- Clear management responsibilities
- Employee training
- Proper documentation
- Regular review of RBI directions
- Effective risk management
- Internal reporting mechanisms
- Prompt corrective action
- Regular regulatory compliance checks
The source emphasises compliance mechanisms, internal controls and regular regulatory audits as ways of reducing legal and regulatory risks.
⭐ Section 25 vs Section 26
A simple comparison can help understand the two provisions.
| Point | Section 25 | Section 26 |
|---|---|---|
| Main subject | Liability for offences by companies | Penalties for specified contraventions |
| Focus | Company and responsible persons | Punishment/sanctions |
| Responsible management | Important | Depends on applicable offence |
| Penalties | Does not primarily prescribe the penalty structure | Specifies penalties for listed offences |
| Purpose | Establish accountability | Provide consequences for specified violations |
In simple words, Section 25 helps determine who may be liable, while Section 26 provides penalties for specified offences.
⭐ Why Strong Compliance is Necessary?
For a payment system operator, compliance failure can create risks beyond financial loss.
It can affect:
- Regulatory standing
- Business operations
- Customer trust
- Corporate reputation
- Management accountability
- Payment system security
- Financial stability
This is why regulated entities need to treat compliance as an ongoing organisational responsibility rather than a one-time exercise.
⭐ Key Takeaways of Section 25
Here are the most important points to remember:
- Section 25 relates to offences committed by companies under the Payment and Settlement Systems Act, 2007.
- Liability may extend to people responsible for and in charge of the company’s business.
- A person may have a defence if the offence occurred without their knowledge.
- Taking necessary precautions to prevent the offence can also be relevant to the defence.
- Banks, payment system operators, authorised fintech companies and PPI issuers can fall within the relevant regulatory framework.
- RBI plays an important role in supervision and enforcement.
- Section 26 contains penalty provisions for specified contraventions.
- Strong internal controls and compliance systems can help organisations manage regulatory risks.
- Better compliance can indirectly support safer and more reliable digital payments.
⭐ Conclusion
Section 25 of the Payment and Settlement Systems Act, 2007 is an important provision for establishing accountability when a company commits an offence under the Act. Its significance lies in the fact that, subject to the statutory conditions, responsibility can extend beyond the company to individuals who were responsible for and in charge of its business.
At the same time, the law recognises a defence where the concerned person can establish that the offence occurred without their knowledge or that they had taken the necessary steps to prevent it.
For banks, payment system operators, fintech companies, PPI issuers and other regulated entities, maintaining strong compliance, internal controls, governance and risk-management systems is therefore essential.
For more useful information about finance, banking, taxation, government rules and important financial topics, visit Sarkari Bakery.
⭐ Frequently Asked Questions About Section 25
Based on Google's Helpful Content System, this article emphasizes user value, transparency, and accuracy. It incorporates principles of E-E-A-T (Experience, Expertise, Authoritativeness, Trustworthiness).
Why Choose Sarkari Bakery?
Official Information
Government schemes & banking information based on official sources.
Step-by-Step Guides
Simple application process explained for every service.
Regular Updates
Content updated whenever official rules or services change.
People-First Content
Helpful, transparent and user-focused content.