What changed
RBI reviewed existing escrow arrangements for non-bank prepaid payment instrument issuers and decided to mandate an exclusive clause in the agreement between the issuer/operator and the bank maintaining the escrow account. This clause ensures that in the event of the issuer's liquidation or bankruptcy, the bank uses the escrow funds only to pay merchants and instrument holders, ahead of other creditors.
What it means for you
Banks must now update all escrow account agreements with non-bank prepaid payment issuers to include a specific charge clause protecting merchants and instrument holders. This gives these parties priority claim over escrow funds if the issuer fails, reducing their credit risk. Banks also need to register this charge with the Registrar of Companies under Section 125 of the Companies Act, 1956.
What you must do
- Insert the mandated clause (as per Para 4 of the circular) into all new and renewed escrow agreements with non-bank prepaid payment issuers.
- Register the charge of prepaid instrument holders and merchant establishments with the Registrar of Companies under Section 125 of the Companies Act, 1956.
- Ensure compliance and confirm to RBI office by February 28, 2011.
- Review existing escrow agreements and amend them at renewal to include the new clause.
Who it affects
All scheduled commercial banks maintaining escrow accounts for non-bank prepaid payment instrument issuers, Non-bank entities issuing prepaid payment instruments, Merchant establishments accepting prepaid payment instruments, Holders of prepaid payment instruments
What is the key change in escrow account agreements for prepaid payment instruments?
Banks must now include a clause that gives merchants and instrument holders priority claim over escrow funds in case the issuer goes into liquidation or bankruptcy, ahead of other creditors.
Do banks need to register this charge anywhere?
Yes, banks must register the charge of prepaid instrument holders and/or merchant establishments with the Registrar of Companies under Section 125 of the Companies Act, 1956.
By when must banks comply with this circular?
Banks must ensure compliance and confirm to RBI office by February 28, 2011. All new or renewed agreements from the date of the circular must include the mandated clause.