Finally, the Paypal spokesman stated in a blog post that

• Paypal had suspended the services to respond to enquiries from Indian regulators, specifically questions on personal payments and whether these payments constitute remittances into India.
• He assured the Indian clients that Paypal is working with the Indian regulators to get the issues resolved quickly and on priority and apologized for the inconvinience being caused.
• However, he could not give a timeline for resolution and said that it could take a few months, since the regulators had let Paypal know about the revised licensing rules only recently.
• Meanwhile Indian clients who had initiated withdrawals would be credited with the amounts withdrawn and any losses that may be incurred due to currency fluctuation and withdrawal charges.
• Negative balances arising from reversal of transactions would be resolved case by case if the client requests for a resolution by clicking the “Resolve Negative Balance” link on the Account Overview Page.
• All instances where business payments were erroneously reversed as personal payments can be resolved by requesting the payer to follow the instructions on the site and to make the payment again.

Why did this happen? What are the revised regulations that have impacted them? New York Times informed the Indian clientele. To quote them:

“Providers of cross-border money transfer service need prior authorization from the Reserve Bank under the Payment and Settlement Systems Act,” a spokeswoman for the Reserve Bank of India, Alpana Killawalla, said in an e-mailed response to questions. “PayPal does not have our authorization.” http://www.nytimes.com/2010/02/11/business/global/11paypal.html

It is seen from the Paypal website that Paypal has license to operate a remittance business in many parts of the world but not in India. They feel that they are not in the remittance business in India because they perform online transactions only. Recipients transfer the money to a bank or withdraw it.

The Indian Payment and Settlement Systems Act, however, demands that anyone desirous of setting up a payment system in India should apply for and obtain a license to operate in India under section 5 of the act.  Under the provisions the Reserve Bank of India will have the right to regulate and supervise payment systems including electronic payment systems. The bank can lay down standards for the setting up of such systems; authorize the set up of the system; determine the criteria for the membership; and oversee the administration and regulation of the guidelines laid down under the act.

Consequently, Paypal has no choice but to decide to apply for an authorization under this act if it wants to continue its operations in India. It is expected that Paypal will be applying for the license immediately and will be allowing its Indian clients to withdraw monies into their Indian bank accounts soon. So those who hold accounts with Paypal hang on! A resolution of the problem seems to be on its way!