Cash-on-delivery, a payment option widely used in India and offered by almost every leading e-commerce companies including Amazon and Flipkart, is most likely illegal. Reserve Bank of India, in a response to an RTI, has noted that collection of money by e-commerce companies like Flipkart and Amazon is not permissible, although it is also not yet explicitly illegal.

The Economic Times reports that the RTI query filed by Dharmendra Kumar of India FDI Watch asked RBI to confirm if the cash-on-delivery (CoD) payment option and disbursement of money to e-commerce merchants by e-commerce marketplaces such as Flipkart and Amazon comply with the Section 8 of the Payments and Settlements Systems Act, 2007 or not.

The bank replied to the query saying that the "aggregators/payment intermediaries like Amazon and Flipkart are not authorised under Section 8 of the PSS (Payments and Settlements Systems) Act, 2007." Note that the majority of e-commerce transactions in India are done via CoD payment mode and if RBI explicitly makes the model illegal this could affect the e-commerce sector in India worth more than 30 billion.

The Payments and Settlements Systems Act 2007 came into effect in August 2008 regulates and supervises all the payment systems in India.

The Act talks about the online and electronic payment. There is no clear mention of CoD payment which raises a question on the validity of this payment form. However, some legal experts believe that there is nothing illegal in the CoD payment system.

"The Payment and Settlement Systems Act, 2007 should apply to CoD transactions by e-commerce operators, Abhishek A Rastogi, a lawyer was quoted as saying by the business newspaper. "It (CoD) can be done through a contractual arrangement between e-commerce operators and merchants. These will be regulated by the Payment and Settlement Systems Act, 2007, rules and regulations framed thereunder."

While lawyers like Rastogi stand in support of CoD, there are some legal experts who believe that the payment mode is a violation of the PSS act. One of the lawyers, quoted by the report, says that the circular was issued eight years ago and any company not working in compliance of the act can be punished.

Basically, RBI has given no clarity on this issue. The act has no explicit mention of CoD which creates the confusion on whether the payment mode is legal or illegal. There are many online shoppers in India who depend solely on the CoD for purchases made from Flipkart or Amazon.