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      Question

      Under Section 21 of the Payment and Settlement Systems

      Act, 2007, a Clearing Corporation introduces a new settlement procedure that: (i) prioritizes settlements of larger-value transactions over smaller-value transactions; (ii) imposes differential settlement timelines based on participant credit ratings; (iii) does not disclose the prioritization logic to system participants. A smaller bank complains that it suffers settlement delays due to this undisclosed prioritization. Which of the following correctly applies Section 21 to this conduct?
      A The Clearing Corporation's prioritization is permissible as an operational efficiency measure; disclosure of settlement logic is not required under Section 21 Correct Answer Incorrect Answer
      B The Clearing Corporation violates Section 21 because it must disclose the terms, conditions, and operational procedures including prioritization logic to system participants; failure to do so breaches the statutory duty of disclosure and fair treatment Correct Answer Incorrect Answer
      C The Clearing Corporation's procedure is valid only if the RBI approves it; Section 21 does not independently constrain operational procedures Correct Answer Incorrect Answer
      D The differential treatment based on credit ratings violates Section 21 only if intentionally discriminatory; legitimate credit-based differentiation is permissible Correct Answer Incorrect Answer
      E Section 21 applies only to payment system providers, not clearing corporations; clearing corporations are exempt from disclosure requirements Correct Answer Incorrect Answer

      Solution

      Explanation: Section 21 of the PSSA, 2007 outlines the duties of a system provider, including: "to publish and disclose to the system participants and to such other persons and in such manner as may be prescribed, the terms, conditions and procedures relating to the operation of the payment system and any change therein." This duty is mandatory and unqualified. Additionally, Section 20 requires system providers to "disclose to the system participants, in such manner as may be prescribed, the terms and conditions governing their participation in the system, including any charges levied and the limitations of liabilities as approved by the Reserve Bank." The Clearing Corporation's failure to disclose prioritization logic violates Section 21. The statute envisions transparency enabling system participants to understand settlement mechanics and plan accordingly. Undisclosed prioritization creates information asymmetry and potentially unfair treatment. While operational optimization (transaction prioritization) may be permissible, it must be: (i) disclosed to all participants; (ii) applied uniformly according to disclosed criteria; (iii) not result in arbitrary discrimination. The smaller bank's complaint establishes both lack of disclosure and differential treatment. Section 26(3) penalizes failure to furnish required statements/information: fine up to ₹10 lakhs per offence, and ₹25,000 per day for continued failure. Thus, option (B) correctly applies Section 21's disclosure duty.

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