India currently has the third largest fintech market in the world, behind only China and the US.
Indian financial services, technology and the fin-tech space have seen phenomenal growth, courtesy, the implementation of favourable policies by regulators and the government in the past few years. Union Budget 2022 further supported the sector by proposing to establish a fintech hub at the Gujarat International Finance Tec-City (GIFT City), India’s first International Financial Services Centre (IFSC). Budget 2023 is likely to usher in version-2.0 of Indian tech/fintech, given it’s now a mature and well-funded ecosystem, and counts financial institutions, technology behemoths, fintech unicorns/soonicorns, etc., among its crucial players.
The industry wishlist from Budget 2023 includes tax incentives, relaxation of rules on merchant discount rates and regulatory clarity on permissible business models in the Web3 platform.
Tax incentives for companies supporting the digitisation of financial services – This will push the Indian fintech revolution into Tier-3/4 cities on the back of rapid mobile penetration and the upcoming 5G rollout. In addition, mergers and acquisitions (M&A)-related tax relaxations can promote upstream funding and downstream acquisitions, leading to the consolidation of an extremely fragmented industry. Currently, it represents and functions through several sub-categories, such as e-commerce and service platforms, payments, digital lending, wallets, ‘neo-banks’, wealth and insure-tech, infrastructure providers, etc. A consolidation will facilitate global roll-outs by large Indian tech/fintech players.
Relaxed rules around Merchant Discount Rate (MDR) – MDR-related debate has affected the payments space, with fewer monetisation opportunities. A differentiated approach to MDR, factoring in service offerings, quality etc., would be welcome for the payments-only players as well as the 25-plus Reserve Bank of India (RBI)- licensed payment aggregators notified so far. It will also provide commercial motivation to develop a private payments infrastructure in the country.
Digital/Challenger Banks – Such banks are popular in Europe, Singapore, and Hong Kong, and are gaining momentum in the US because it has taken the concept of customer ease and service qua banking to a new level. Maybe the time has come for India to consider having a ‘digital-only’ on-tap banking licensing option, with a differentiated approach to regulation and supervision, similar to what the RBI implemented through its Scale-Based NBFC Regulations. This may require changes to the extant bank ownership/shareholding norms, voting right limits, etc., under the Banking Regulation Act, 1949.
Recognising the emerging Web3-based platforms and models – Such platforms are touted as the next frontier for the tech/fintech sector; recognising them through tax benefits would eschew brain and capital drain seen recently in the digital assets, non-fungible tokens, and the Web3space. Over the last few years, the digital assets space has seen a fair amount of industry and regulatory uncertainties. Recognition for the sector, which has several well-documented and productive use cases, albeit with guardrails for investors, and plugging potential systemic risks, be it tax, exchange control, or know your customer/anti-money laundering/combating of financing of terrorism, are beyond due-date now
Regulatory clarity – Supervisory clarity and certainty of permissible business models in the Web3 platform, and fintech sector would be another key ask, as constant regulatory changes in the form of co-branding rules, digital lending guidelines, credit lines into wallets, tokenisation, data sharing and localisation, IT Intermediary and new draft Gaming Rules, approach to NBFCs-Upper Layer, payment systems operators (PSOs), etc., have moved the ‘goal-post’, making long term business planning and modelling uncertain.
Clarity on the role/extent of law enforcers – Focus is needed in matters of law enforcement action and scrutiny of emerging technology, gaming and fintech players (especially in the digital assets), digital lending and payments space (including cross-border digital money flows) by the Financial Intelligence Unit, Enforcement Directorate, National Investigation Agency, Directorate General of GST Intelligence, State level account freezes, etc. Clarity on industry structures and business models, which are acceptable to the regulators, would de-clog management bandwidth and define the ‘lines’ that have often been blurred by law enforcement. Changes in RBI’s recent Overseas Direct Investment Rules around overseas investing to mitigate round-tripping concerns, including via recognition of ‘gift’ structures, have been a positive move. Clarity qua private equity and funds ‘sponsoring’ mutual funds through a change in control deals is another key ask, and the recent SEBI paper in this regard is welcome.
Addressing data security concerns – With increasing concerns around data privacy and security in the tech and fintech sectors, various sectoral regulators have been issuing data rules. Tech/fintech business models are increasingly straddling multiple technology and financial services products and services, which often overlap with the remit of RBI, SEBI, IRDAI, PFRDA, MEITY, etc. There is a need to synchronise the legal framework for data privacy across various regulators and bring it in line with the proposed Digital Personal Data Protection Bill, 2022, to simplify the legal framework and aid in effective compliance, monitoring and enforcement.
India currently has the third largest fintech market in the world, behind only China and the US. India’s fintech sector has received more than $19 billion in investments in the last two years alone. This trend will continue to grow. Support from the Union Budget 2023 will not only help strengthen the digital finance and banking infrastructure but also provide a seamless linkage for Indian tech and fintech companies with their global counterparts.
Anu Tiwari is Partner (Co-Head Fintech) and Kush Wadehra is Senior Associate, Cyril Amarchand Mangaldas. Views are personal and do not represent the stand of this publication.
