Fintech

Fintech Startups in India – Legal Requirements & Compliances

Introduction

Before the demonetization of currency in 2016, most financial transactions were conducted physically, such as going to the bank to deposit money or cashing a check. But in the current climate, not many of us visit banks for these transactions when we have access to all of these features on our mobile devices while simply sitting at home.
After demonetization, we used fintech to complete all our transactions and they have become a necessary and irreplaceable part of our lives. Even if we don’t realize it, it is likely a big part of both our personal and professional lives. For e.g., when we go out with friends we split the bill, and then we pay the money using our mobiles, and then while heading home we use Uber and pay via credit cards and other online modes. This is all made possible by using Fintech.
Now, fintech is a combination of two terms “Financial” and “Technology”. It is a term used for businesses that use technology to automate financial services and processes. The term encompasses a rapidly growing industry that serves both consumers and businesses in many ways. From banking, investments, and stocks to more, we have an endless array of applications for our every need.

Fintech startups

As we have discussed above fintech is a term for financial technology and it has been a crucial part of the economy. Now all the financial tasks that required paperwork earlier can be completed through the use of technology within minutes and the internet has emerged as the preferred platform for it.


It is essentially a sector of the economy made up of businesses that employ technology to improve the effectiveness of financial services-based industries and other fintech startups are taking their place of how the earlier companies used to provide the services and conduct their operations.

  • India is the 2nd largest Fintech hub globally with more than 6636 startups and still counting. And the market size that they capture is huge. Currently, it has more than 70 billion worth of stake in the Indian market and is expected to be more than 150 billion worth by 2025.
  • Here are some top fintech startups in India: –
  • Paytm 2010
  • Razor Pay 2013
  • Cred 2018
  • Zest Money 2015
  • Khatabook 2017

Kinds of Services Provided by Fintech Startups in India

Services Offered by India’s Fintech Startups
Services fall mostly into 4 categories:

  1. Financial transactions (including e-wallets and mobile payments);
  2. Peer-to-peer lending also referred to as P2P lending;
  3. Retail banking services, including C2B and B2C;
  4. Individualized advice on finances and saving

Legal Requirements for A Fintech Startup

1. Choosing the corporate structure
It is crucial to choose a business structure for your firm before you launch your venture. Any one of the following structures can be used for a business:

Single-Person Business (OPC)
According to Section 3(1)(c) of the Indian Companies Act, 2013, a single individual may establish a company for any permissible reason. As a result, because it is a special fusion of a business and a sole proprietorship, you may choose this business structure if you only have one owner but still want to function as a business.

Limited Liability Company (LLP)
An LLP combines a company and a partnership, with each partner’s limited liability being limited to the value of their shares.

Private Limited Company (PLC)
In this scenario, the company has separate rights and obligations from the owners, and neither the shareholders nor the directors of the company are personally liable to the company’s creditors. In India’s fintech market, this framework is the most popular and frequently used.

2. Registration for GST
The new business would have to submit an application for GST registration and get a GSTN for their enterprise. There are many advantages to being registered, including the ability to claim an input tax credit, simple registration on e-commerce websites, advantages in terms of competition with other businesses, fewer compliance requirements, etc.

3. Policies, Agreements, and Contracts
Every business needs a unique collection of legal documents. Legal professionals are typically hired by businesses to prepare and customize legal papers to meet their specific needs. The following, among others, are just a few examples of the agreements, contracts, and policies that must be in place:
Privacy policy
Cookie Policy
Terms and conditions
User policy
Employment agreement
IP licensing agreement
Co-founders agreement / Partnership agreement (as applicable)
Vendor Agreement
Product development agreements

4. Intellectual Property Registration
Startups need to safeguard their intellectual property (IP) in order to avoid having their website content, web/app design, brand name, logo, brochure, etc. violated. By registering all of the IPs, the business will be able to protect its brand, set it apart from rivals, and pursue legal action in the event that any registered IP is violated. IP that is legally protected includes copyright, trademarks, patents, trade secrets, and industrial designs, to name a few.

5. Domain name
A fully developed website and a registered domain name are essential for a technology-based company to create its online presence and appear in search engine results. By registering the domain, you can help stop others from engaging in cybersquatting, which is the illegal use of a domain name that is identical to or confusingly similar to the domain name of a well-known company in order to benefit from its reputation or clientele.

6. Licensing
The license requirements and guidelines depending on the type of services that the Indian fintech startup is offering.

The startup must register with the Reserve Bank of India (“RBI”) if it offers payment services.

Licensing is required for retail service providers in order to provide lending and deposit services to Micro, Small, and Medium-Sized Enterprises (“MSME”).

The fintech company must be registered as an RBI-approved Non-Banking Financial Company (“NBFC”) if it offers financial management and investment services.

Compliances For Fintech Startups In India

There is no shortage of the legal prerequisites and compliances needed to run a fintech firm in India and what makes it more challenging is the fact that the majority of fintech businesses provide a range of services to their clients. The following are a few requirements that must be met:

  1. Payment gateways
    All communications involving payment aggregators and payment gateways – between the payment gateway and the RBI – must go through a bank. This is required to protect online transactions. The Payment Card Industry Data Protection Standard is one such regulation that payment gateways often uphold for safeguarding and securing digital transactions (PCI DSS). According to the Circular on Guidelines on Regulation of Payment Aggregators and Payment Gateways, 2020 (“Payment Intermediary Guidelines”), all payment aggregators and payment gateways are intermediaries that enable online payments.
  2. Digital wallets
    The startup must adhere to Know Your Customer (“KYC”) regulations if it offers e-wallet or mobile wallet services. In its “Master Direction- Know Your Customer (KYC) Direction 2016″and “Guidelines for Prepaid Payment Instruments,” the RBI outlined the KYC requirements.
  3. Insurance aggregators
    The Insurance Regulatory and Development Authority (“IRDA”) regulates insurance aggregators that offer information about various insurance products, and they must abide by the IRDAI Insurance Web Aggregators Regulations, 2017.
  4. Lending platforms
    For lenders and borrowers to be able to make informed decisions, lending platforms that have obtained the P2P NBFC license are required to publish their default rates on their websites. The Master Directions – NBFC – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017, govern these platforms.
  5. Data protection
    All financial institutions are required to abide by the Information Technology Act, 2000 (“IT Act”) and its applicable rules and regulations, such as the IT (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (“SPDI Rules”). This is because financial institutions are by their very nature in the business of collecting personal and/or sensitive information about individuals. This is carried out to safeguard data, handle and report security breaches, and steer clear of legal entanglements. Except in limited circumstances, corporate entities are required to request permission from the information provider before disclosing any confidential information.

Conclusion

Fintech firms concentrate on employing cutting-edge technology for financial services, which makes them quicker and more effective. These technologies include artificial intelligence, machine learning, blockchain, etc. They aid in expanding financial inclusion as well as focusing on new populations.
But starting a new fintech firm is a difficult process, to say the least, and it is crucial for new participants to comprehend the laws and rules governing India’s fintech policies before entering this industry. This will help prevent legal issues in the future and enable the new participants to benefit from any government perks or incentives set up for fintech businesses.

FAQs

Q1. Please describe the regulatory framework of Fintech businesses
A.
There are overlapping and non-linear business models of fintech and they are not regulated by a single framework in India
They are many regulators like RBI, SEBI, IRDAI, etc.

Q2. Is there any regulation that prohibits or restricts the use of Fintech services in India (like Cryptocurrencies)?
A.
Regulation on Fintech in India is very complex and is still evolving, so currently it is difficult to say anything but in the future, there may be concrete rules regarding the Fintech services.

References

  • https://www.helplinelaw.com/business-law/LRCF/legal-requirements-and-compliances-needed-for-fintech-startup-in-india.html
  • https://www.gst.gov.in/
  • https://www.rbi.org.in/
  • The Companies (Amendment) Act, 2017

Leave a Comment