FDI in a Payment Aggregator Company Before RBI Licence, Is It Allowed

India’s digital payments ecosystem continues to attract foreign investment, especially in Payment Aggregator (PA) businesses. It is worth noting that, as it involves public funds, this is a regulated activity that requires a license from the RBI. Many time, founders and foreign investors faces a critical regulatory question:

An Indian company that wishes to operate as a payment aggregator, receive FDI before obtaining the RBI approval, even though it is a financial service entity?

Out of our experience of 70 years, we try and explain the legal position and practical approach, with a clear focus on FDI norms.

Articulating the Regulatory Framework:

A Payment Aggregator is an entity that facilitates the collection of payments from customers and settles them to merchants. In India, Payment Aggregators are regulated by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007, and the Master Directions on Regulation of Payment Aggregators.

Foreign Direct Investment in Indian companies is governed by the Foreign Exchange Management Act, 1999 (FEMA), read with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, and the Consolidated FDI Policy.

Key Concern: FDI in Financial Services:

Under FEMA and the FDI Policy:

• FDI in financial services is permitted only in entities regulated by a financial sector regulator, such as SEBI, RBI, IRDA, or PFRDA.
• A Payment Aggregator clearly falls within the ambit of financial services.

This raises a genuine concern:

How can a company be allowed to receive the FDI proposes to undertake the activities of the Payment Aggregator without being registered under any Financial Regulator?

Is FDI Allowed Before Obtaining the PA Licence?

Yes – FDI is allowed even before RBI authorisation, subject to conditions.

This position is well recognised by industry participants, banks and regulators.

Why is this allowed?

At the time of receiving FDI:

• The Indian company is wishes to undertake the Payment Aggregator operations
• It is only a proposed PA applicant

The foreign investment is used for:

• Capitalisation to meet RBI’s minimum net worth norms
• To cover the initial PA License application fees
• Build the necessary IT Infrastructure
• Regulated operations commence only after regulatory approval

Industry & AD (authorised dealer) -Accepted Compliance Approach:

The following structure has been accepted by AD banks/RBI and widely used in the Industry:

Step 1: Incorporation of Indian Company

• Company incorporated under the Companies Act, 2013
• Object clause includes proposed activities of Payment Aggregator

Step 2: Infusion of FDI.

FDI received under the automatic route

Sector classification disclosed as:

“Financial services – Payment Aggregator (subject to RBI approval)”

FEMA pricing, valuation, and reporting norms complied with

Step 3: Application for PA Licence.

• Application filed with the RBI
• Statutory auditor certificate confirming minimum net worth of ₹15 crore.

Step 4: Commencement of Operations.

• Payment aggregation activities begin only after RBI approval.

Critical Compliance Restrictions Before RBI Approval:

While FDI is allowed, certain activities are strictly prohibited unless the RBI grant the approval:

Not Permitted

• Merchants Onboarding
• Operating or opening PA escrow accounts
• Settling or Handling customer funds
• Marketing or representing as an “RBI-authorised Payment Aggregator”

Permitted

• Holding foreign capital as equity
• Building technology platforms
• Internal testing (non-live environment)
• Preparing compliance and governance frameworks
• Liaising with RBI during the authorisation process.

FDI Conditions That Continue to Apply:

Even before applying for the license, the company must comply with:

• Sectoral cap: 100% FDI permitted
• Entry route: Automatic
• Pricing guidelines: Mandatory
• KYC / AML norms: Applicable
• Downstream investment rules: Applicable
• FDI reporting: FC-GPR filing within prescribed timelines

Best Practice: Risk Mitigation Through Disclosure:

From a regulatory and banking perspective, it is strongly advisable to:

Clearly disclose in the shareholders’ agreement, FDI filings, and RBI application that:

“The company shall commence Payment Aggregator operations only upon receipt of RBI approval.”

This simple disclosure significantly reduces regulatory queries and delays.

Conclusion:

FDI can be received in an Indian company before obtaining the Payment Aggregator license, as this is both commercially and regulatorily necessary to meet the Reserve Bank of India’s net worth requirements. RBI and Authorised Dealer (AD) banks recognise and accept this sequence of investment and licensing. Payment Aggregator operations cannot commence without prior RBI approval. For fintech founders and foreign investors, understanding this distinction is crucial to structuring investments correctly while remaining fully compliant.

At KDP Accountants, we regularly assist clients with structuring FDI in fintech and payment businesses, FEMA & RBI compliance, drafting MOA clauses, FDI declarations, and auditor certificates. Connect with us at enquire@kdpaccountants.com for professional assistance & end-to-end support for PA license applications.