Paypal is not working around the system: they are simply not a bank. They are a payment processor. Just think about what would happen to the fees that he already complains about if they had to insure the deposits.
And a payment processor should not hold the customer's money for a longer duration. That is what the Government is trying to push them into complying.
Just like any other payment processors operating in the country, Paypal can also keep the money with them for just enough duration that is required to process the payment. After that they need to TRANSFER the amount and not hold it with them.
If the India Govt relaxes it for Paypal, multitude of such payment processors would start operating and one day you would see them disappear with people's money. Then again you will blame the Govt.
