Without any argument, new communication systems, especially digital payment technologies, have supplanted the snail-paced conventional systems of communication and transactions. Business communities and consumers are increasingly using digital means to send and receive information in electronic form. The reason is that the information technology (IT) has abridged the time and distance factor in transacting business. Nowadays, inflow and outflow of information have become instant and momentary. Therefore, one principal contribution of IT is in the field of contract-formation.
Electronic contracts (e-contracts) are born out of the need for speed, convenience and effectiveness. The law has already recognised contract-formation using facsimile, telex and other similar technologies.
Let us envision a contract between an Indian businessman and an English businessman. Away from digital means, one option is that one party first draws up two copies of the contract, signs them and sends (through postal or courier service) them to the other, who, in turn, signs both copies and sends one copy back. The other option would be that the two parties meet somewhere and sign the contract. However, within the digital world, the whole process can be completed in seconds, with both parties simply affixing their electronic signatures to the electronic copy of their contract. There is, thus, no need for tardy dispatching mechanism (postal or courier services) and/or supplementary travelling costs in such a situation.
Before proceeding with the E-Contracts, let us have a brief look at the basics of the business model and kinds of transactions under which e-contracts are mostly used.
E-Commerce Business Models
Electronic commerce (e-commerce), in a very general sense, refers to buying and selling products and services over the internet and the World Wide Web (www). E-commerce, however, in actuality, includes all forms of commercial transactions involving both—organisations and individuals—that are based upon the electronic processing and transmission of data including text, sound, and visual images; and involves transactions over the internet as well. In addition, e-commerce also refers to the effect that the electronic exchange of commercial information may have on the institutions and processes that support and govern commercial activities.
There are several ways of looking at e-commerce:
(1) From a communications perspective, it is the ability to deliver products, services, information, or payments via networks like the internet.
(2) From an interface view, it means information and transaction exchanges: business-to-business (B2B), business-to-consumer (B2C), consumer-to-consumer (C2C), and business-to-government (B2G).
(3) As a business process, e-commerce means activities that support commerce electronically by networked connections. For example, business processes like manufacturing and inventory and business-to-business processes, like supply chain management is managed by the same networks as business-to-consumer processes.
(4) From an online perspective, e-commerce is an electronic environment that allows sellers to buy and sell products, services, and information on the internet. The products may be physical, like cars; or services, like news or consulting, etc.
(5) As a structure, e-commerce deals with various media: data, text, web pages, internet telephony, and internet desktop video.
(6) As a market, e-commerce is a worldwide network. A local store can open a web storefront and find the world at its doorstep—customers, suppliers, competitors, and payment services. Of course, an advertising presence is essential.
Types of Online Transaction
Online transactions can be recognised and categorised in four ways:
Business to Customer (B2C)
It is the transaction where a business entity on one side and an individual customer, on the other hand, conduct business. The expression B2C has been commonly used to refer to a sale by a business enterprise or retailer to a person or ‘consumer’ conducted through the internet. For instance, Flipkart.com which provides facilities for customers to buy goods from the website—is an example of a B2C e-business. In this situation, the website itself serves the purpose of a shop. The B2C transactions can be in relation to both—tangible and intangible products. The focal point of this e-commerce application is on the consumer’s use of a merchant’s web storefront or website. Consumers from any place can browse and order for goods and services online at any time. B2C is an electronic equivalent of the conventional mail-order or telephone-based ordering system.
Business to Business (B2B)
It is the type of e-commerce where there is an exchange of products, services, or information between businesses using the internet, rather than between businesses and consumers. Alibaba.com is the prominent example of B2B model.
Customer to Business (C2B)
Customer to Business (C2B), also known as Consumer to Business, is the most recent e-commerce business model, where individual customers offer to sell products and services to companies that are prepared to purchase them. It is the opposite of the traditional B2C model. Example of this model is blogs or internet forums where the author offers a link back to an online business facilitating the purchase of some product (like a book on Amazon.com), and the author might receive affiliate revenue from a successful sale.
Customer to Customer (C2C)
It is the transaction which involves two or more customers with business entity merely providing a web-based interface to facilitate the consumer to consumer transactions (B2C). The expression C2C generally refers to the sale of a product pertaining to a consumer to another consumer either directly or through an intermediary exclusively dedicated for this activity. One best example of C2C website is Ebay.com, which is an online auction site, where any person can buy and sell, and exchange goods and articles using this website. This website provides the web-based interface (i.e. the website with its database and other functions) and users can transact freely with each other. Another example is Amazon, which in fact, acts as both a B2C and a C2C marketplace.
Alan Davidson, The Law of Electronic Commerce, Cambridge University Press, (2009).
R K Singh, Law Relating To Electronic Contracts (2017)
The advancements in the internet as means of facilitating contract formation does not, at first read, present a situation different from that applicable to a facsimile or telex. An e-contract can be created either via the exchange of e-mails or by the completion of a document as a website which is submitted to another party electronically. While it is true that to the great extent that e-contracts are modernised methods of contract formation but they don’t require any particular changes to the law. Still, there are some particular issues arising from their electronic form. This post will discuss the international instruments that provide legal recognition to e-contracts and very advanced facets of it.
A contract is concluded if the parties intend to be legally bound, and they reach a sufficient agreement. Conclusion of contract with offer and acceptance. A contract can be concluded by the acceptance of an offer.
There are various ways to conclude e-contracts. The significant and interesting ones are as follows:
Forming contracts via electronic communications (such as e-mails)
The simplest e-contract is concluded by the exchange of text documents via electronic communications, such as e-mail. Offers and acceptances can be exchanged totally by e-mails, or can be combined with paper documents, faxes, telephonic discussions, etc.
Acceptance of orders placed on online marketplaces
The vendor/ supplier can offer goods or services (such as air tickets, software, etc.) through his website. The vendee, in such cases, places an order by completing and transmitting the order form provided on the website. The merchandise may be physically delivered later (e.g., in case of outfits, CDS, books, etc) or be immediately delivered electronically (e.g., in case of e-tickets, software, etc).
In some cases, users are required to accept an online agreement in order to be able to avail the services e.g. clicking on ‘I agree’ while installing software or clicking on ‘I agree’ while signing up for an e-mail account.
The electronic data interchange (EDI)
It is the inter-process of communication of business information in a standardised electronic form. That is, they are contracts used in trade transactions which enable the transfer of data from one computer to another in such a way that each transaction in the trading cycle (for example, commencing from the receipt of an order from an overseas buyer, through the preparation and lodgment of export and other official documents, leading eventually to the shipment of the goods) can be processed with virtually no paperwork. In this case, the data is formatted by means of standard protocols, so that it can be implemented directly by the receiving computer. EDI is, frequently, used to transmit standard purchase orders, acceptances, invoices, and other records, and thus, reduces paperwork and the potential for human errors. In this type of contracts, in contrast to the above methods, there is an exchange of information and completion of contracts between two computers and not an individual and a computer.
Through electronic agents/ bots
It is possible for computer users to instruct the computer to carry out transactions robotically. For instance, in today’s supermarket, the computer updates its inventory as items are scanned for sale. When the stock of an item falls to a predetermined level, the computer is programmed, without human involvement, to contact the computer of the supplier and place an order for replacement stock. The supplier’s computer, exclusive of human intervention, accepts the order and the next morning automatically prints out worksheets and delivery sheets for the supply and transport staff.
These electronic agents are programmed by and with the authority of the purchaser and supplier. The legal status of electronic agents has not been clarified by the courts, but the most common view is that like any other piece of equipment under the control of the owner, the owner accepts responsibility. A computer is a tool programmed by or with a person’s authority to put into operation their intention to make or accept contractual offers.
According to Russell and Norving, ‘An agent is anything that can be viewed as perceiving its environment through sensors and acting upon that environment through effectors. A human agent has eyes, ears, and other organs for sensors, and hands, legs, mouth, and other body parts for effectors. A robotic agent substitutes cameras and infrared range finders for the sensors and various motors for the effectors. A software agent has encoded bit strings as its percepts and actions.’
Such electronic agents and devices have features which facilitate humans in their normal interaction and functions, such as, intelligence, autonomy and pro-activeness. The idea of having intelligent systems—to assist human beings with routine tasks, to shift through an enormous amount of information available to a user and select only that which is relevant—is not novel and a lot of work and results have already been achieved in the field of artificial intelligence (‘AI’).
Legal recognition of electronic agents
The E-COMMERCE DIRECTIVE 2000/31/EC of The European Parliament and of the Council of 8 June 2000 does not take in hand the issue of automated transaction made through electronic agents. The explanatory notes of the proposal of the Ecommerce Directive state that the Member States should refrain from preventing the use of certain electronic systems such as intelligent electronic agents for making a contract. But, the final version makes no reference to electronic agents in the main text or in the recital. The deletion of the proposed text furnishes a sign of the EU’s failure to respond to the tremendous growth of e-commerce. It is also not in consonance with the preamble to the Directive, which states that the purpose of the Directive is to stimulate economic growth, competitiveness and investment by removing many legal obstacles to the internal market in online provision of electronic commerce services. However, the exclusion of the provision giving legal recognition to electronic agents is a step backwards and a failure to recognise the role of electronic agents in fostering the development of e-commerce such as lower transaction costs, facilitate technology and adherence to international conventions.
The United Nations Convention on the Use of Electronic Communications in International Contracts 2005 (hereinafter referred to as the ‘UNCUECIC’) contains provisions dealing with issues such as determining a party’s location in an electronic environment; the time and place of dispatch and receipt of electronic communications and the use of automated message systems for contract formation. Art.12 of the UNCUECIC, which deals with the use of automated message systems for contract formation, states, ‘A contract formed by the interaction of an automated message system and a natural person, or by the interaction of automated message systems, shall not be denied validity or enforceability on the sole ground that no natural person reviewed or intervened in each of the individual actions carried out by the automated message systems or the resulting contract.’ The objective behind the adoption of the uniform rules was to remove obstacles to the use of electronic communications in international contracts, including obstacles that might result from the operation of existing international trade law instruments, and to enhance legal certainty and commercial predictability for international contracts and help States gain access to modern trade routes.
In the USA, the Uniform Electronic Transactions Act, 1999 (UETA) expressly recognises that an electronic agent may operate autonomously, and contemplates contracts formed through the interaction of electronic agents and those formed by the interaction of electronic agents and individuals.
Section 14 of the UETA reads as follows:
In an automated transaction, the following rules apply:
(1) A contract may be formed by the interaction of electronic agents of the parties, even if no individual was aware of or reviewed the electronic agents’ actions or the resulting terms and agreements.
(2) A contract may be formed by the interaction of an electronic agent and an individual, acting on the individual’s own behalf or for another person, including by an interaction in which the individual performs actions that the individual is free to refuse to perform and which the individual knows or has reason to know will cause the electronic agent to complete the transaction or performance.
(3) The terms of the contract are determined by the substantive law applicable to it.
Section 14 of the UETA, which is based upon Article 11 of the UNICTRAL Model Law on Electronic Commerce, deals with ‘automated transaction’. This Section states that contracts can be formed by machines functioning as ‘electronic agents’ for parties to a transaction. It wipes out any claim that lack of human intent, at the time of contract formation, prevents contract formation. When machines are involved, the requirement of intention flows from the programming and use of the machine. It is quite evident that the main purpose of this provision of the UETA is to remove barriers to electronic transactions while leaving the substantive law, e.g., law of mistake, law of contract formation, unaffected to the greatest extent possible. Also, the Uniform Computer Information Transaction Act (UCITA) also has provisions supporting the ability of electronic agents to make binding contracts.
Wooldridge & Jennings, ‘Intelligent Agents: Theory and Practice’, Knowledge Engineering Review, (June 1995) Vol. 10 No. 2, Cambridge University Press (1995).
Alan Davidson, The Law of Electronic Commerce, Cambridge University Press, (2009).
R K Singh, Law Relating To Electronic Contracts (2017)
As I view things and events around the world from the comfort of my home, this blog is my take on how regulations related to technology will get impacted due to the COVID-19 pandemic. As they say, sudden and unexpected events often lead to systematic and permanent changes. Work from home is a mandate now, as the fear of personal contact and surface contact is prevalent, everyone has uncertainty about the impact of infection. There are even doubts on the globalization given the infection is spreading from one corner of the world to another.
Given the fact that COVID-19 is a pandemic, the authorities have commanded us to practice ‘social distancing’ (trending buzz word on social media) under the twenty-one days lockdown. Hence, there is an unwillingness to engage socially among masses now. As there are shifts in perceiving the world now, there is a shift in the understanding of technology as well. Governments around the world are now valuing its role more than ever and understanding the need for the well-drafted technology policy, as they rush to contain the spread of COVID-19.
Following are the potential changes that we can see in the technology policy of India during and after the COVID-19 crisis.
Increase in the adoption of internet services
With the reach of the internet increasing up to 500 million users and over 660 million broadband subscriptions, internet penetration in India is much evident. However, the present situation is proof that it has been a boon for us that Jio entered the market and made the internet more accessible than ever. The internet is an essential service and something that has kept the masses engaged and sane in their homes during the nationwide lockdown. India has the cheapest internet access in the world, but still, as the crisis gets over, the government will definitely consider more options of making internet services more accessible to the poor of the country which is largely suffering in this crisis. In the present lockdown state, it is important to mention the situation that exists in Kashmir where just the 2G internet is available with the speed which is good for nothing.
India has the cheapest mobile data in the world with 1GB costing just Rs 18.5 (USD 0.26) as compared to the global average of about Rs 600, research by price comparison site Cable.co.uk showed. Average Wireless Data Usage per wireless data subscriber per month is 10.37 GB.
The Ministry of Labour & Employment has extended the deadline for filing the Unified Annual Return for 2019 under eight laws that were filed on the Shram Suvidha Portal to April 30, 2020 (the previous deadline was February 1, 2020). The notification further states that authorities are not to take action against any entity that did not meet the earlier deadline.
The Employees’ State Insurance Corporation (ESIC), through its communication dated March 16, 2020, has extended the dates for filing of ESI contribution and payment. Accordingly, all contributions for the months of February 2020 and March 2020 can be filed and paid up to April 15, 2020 and May 15, 2020, instead of March 15, 2020 and April 15, 2020, respectively.
The Government of India will contribute the employer contribution (on behalf of companies) and employee contribution (on behalf of employees of those companies) towards the Employee Provident Fund Organization (EPFO) for the next three months for establishments with up to 100 employees meeting certain base salary thresholds.
All EPFO members (employees) will now be able to withdraw up to 75 percent of their total EPFO fund or an amount equivalent to three months of their salary, whichever is lower. The amount withdrawn from EPFO shall be non-refundable, and the employees do not need to return the same to their EPFO account.
Streaming services and regulations
In the process of home quarantine, the dependence on the streaming services is so much that the internet service providers have asked streaming platforms like Netflix and Amazon Prime to reduce the bits rate, in order to lower the stress on networks. The streaming platforms have duly conceded to this demand considering the continuous requirement of providing services to consumers. Consumers are realizing the benefits of streaming platforms and hence there is going to be a potential increase in subscriptions going forward, converting to paying users. In terms of policy-making, if streaming services have the potential to displace traditional entertainment services, the Indian government will look for regulating the content more than ever. Government is already in consultation with the stakeholders regarding options of self-regulation or government regulation.
Increase in demand for spectrum to meet the consumer demand
The percentage of connections that are based on a wireless medium is a staggering 96% approx. Therefore, in the light of increased adoption of the internet for continuous entertainment and work at home has led to increased stress on telecom operators. Therefore, with the 20% sudden increase in demand, telecom operators have sought more spectrum allotment from the government.
A new perspective for e-commerce
The government has rightly considered E-commerce as the provider of essential services during the present situation. Their adequate performance under the lockdown can provide them with a deep sigh of relief, as for the past few months, their food and grocery delivery services have been under the strict supervision of the government. There are several lobbies representing the brick and mortar retailers of groceries and food that have targeted e-commerce market and posed it as a threat to the business of offline retailers across the country. The opportunity for them to legitimize the need for online service during the lockdown has done what demonetisation did for digital payments.
Offline print becomes the victim
Online media channels are also opportunists that are gaining certain traction in terms of consumers. The newspaper industry seems to have been hurt by contact to contact the spreading nature of the COVID-19. Various online posts and WhatsApp threads are flowing in the online media that newspapers are potential vectors of COVID-19. In one of the cases, the Times Group has sent a legal notice to The Print for an article which suggested that COVID-19 can potentially spread through newspapers as well. Therefore, there could be a rise in online media usage and could lead to a rift between offline and online media.
A struggle to contain fake news or misinformation
The sensational way in which COVID-19 crisis has led to the nationwide lockdown is much due to the sensationalized content related to COVID-19 which is spreading through the social media across the country faster than the virus itself. The amount of misinformation spreading about COVID-19 is at large scale, and platforms are struggling to deal with it, especially given the lack of continuous moderation by social media platforms which are not warranted legally. This has given several blows to the effectiveness of lockdown given the people believed on certain misinformation such as cow urine is the cure of COVID-19, the religious congregation will protect from the disease etc, which led to people not take lockdown seriously. Understanding the struggles with automatic moderation of the content on the internet, the government can sooner than before enforcing its strict moderation policy which undermines the right to free speech.
The twenty-one days lockdown recently faltered when an exodus of the large number of migrant workers from urban cities like Delhi and Jaipur came in light. The Supreme Court’s division bench in a hearing on Tuesday, while reviewing the steps that the central government has taken to provide relief to the poor migrant workers during the lockdown, expressed serious concern over spread of fake news or misinformation regarding lockdown’s duration on social, electronic and print media causing the mass exodus of migrant worker from cities to their homes in villages. Read the SC’s order here. Centre in this light has sought direction from SC that no media stakeholders should publish COVID-19 news without ascertaining facts with government. Although, The constant and close monitoring has been held as not warranted by law as per various precedents of Indian courts.
Privacy, necessity and proportionality
While the right to free speech could be threatened in the future due to the present crisis, the right to privacy has already dealt with several blows. Considering the situation of emergency and lack of any comprehensive law protecting the privacy, the privacy of a number of citizens have been compromised. The health status of quarantined/ or infected is open to all as their homes are being marked and personal details are being made public on social media. Governments are openly surveilling quarantined people for ensuring the enforcement of quarantine and inviting bids from technology companies to procure technology that can make continuous surveillance more effective. In India, several governments are already tracking citizens by keeping a tab on their phones or utilizing geofencing. The crisis has legitimized much longing plans of the government to create an infrastructure which can assist in surveilling its citizens whenever the need arises. Given the opportunity, the Department of Science and Technology has invited proposals and has set up a task force for building surveillance, AI and IoT tools.
As several privacy activists have opinions against the government’s plan to keep track of infected persons. If litigation arises, the question is whether the present circumstances will meet the necessity and proportionality test in order to justify the violations of privacy?
Drones as part of law enforcement
Drones, in some cities, are being used for surveillance to ensure that the current curfew is not violated. Drones allow the police to surveill and document, in a low risk manner. In cities like Chennai, they are being used to disinfect areas. If all goes well in these difficult times of crisis, then expect that police will place more orders for drones going forward, and many tasks will be automated.
One of the prime examples of the proposition that experience of COVID-19 crisis will pace up the policy-making with respect to regulate technology is the rollout of a set of guidelines for telemedicine or remote delivery of medical services. Telemedicine practice means that doctors will now be allowed to use information and communication technologies as per guidelines for the exchange of valid information for diagnosis and treatment of ailments with patients. In order to assure steady and quick medical services during the nationwide lockdown, Ministry of Health and Family Welfare finally sanctioned the guidelines that have been proposed ten years ago. Globally, telemedicine has emerged as a front-line weapon against the COVID 19 pandemic. The situation under present crisis motivated the government to provide the concept of telemedicine among masses explaining that the unnecessary exposure of people involved in the delivery of healthcare can be avoided using telemedicine, as patients can be screened remotely.
On the same lines, the Ministry of Electronics and Information Technology (MeITY) through an advisory has directed all state governments to permit IT/ITeS industries to carry out essential functions which include delivery, warehouse operations, shipping and logistics. There are cases and videos reported from several parts of countries of police officials halting and beating delivery executives in order to enforce the implementation of the lockdown. Therefore, the advisory by MeITY will help in ensuring that delivery executives and other associated employees carry out these functions. The Ministry advised the state governments to treat “copy of orders, waybills, invoices” as evidence.
Reuters had reported that e-commerce and online grocery delivery services were being disrupted across the country as multiple states have locked down to contain the COVID-19 pandemic. Section 144 has also been imposed in multiple parts of the country, making it harder for delivery personnel to operate, and for warehouse employees to get to work. Flipkart and Amazon temporarily suspended logistics services for sellers across regions, according to an Economic Times report. The problem that e-commerce companies are facing right now is that different states have come out with different guidelines on their operations during the pandemic. For instance, the Tamil Nadu government has banned home delivery services such as Zomato and Swiggy as the state goes into lockdown, but the Maharashtra government exempted food delivery as the delivery of an “essentially good”.
Therefore, the MeITY advisory will assist in providing a uniform direction to all the state governments in order to allow the operation of e-commerce deliveries of essential services across the country.
Other important things to know
Further, for the general information of the reader:
As per guidelines,
Commercial and private establishments will be closed. (such as shopping malls, private outlets etc.)
Shops, including ration shops (under PDS), dealing with food, groceries, fruits and vegetables, dairy and milk booths, meat and fish, animal fodder/ district authorities may encourage and facilitate home delivery to minimize the movement of individuals outside their homes/ Banks, insurance offices, and ATMs/ Print and electronic media Telecommunications, internet services, broadcasting and cable services/ Delivery of all essential goods including food, pharmaceuticals, medical equipment through E-commerce.
Offices of the Government of India, its Autonomous/ Subordinate Offices and Public Corporations shall remain closed.
Police, home guards, civil defence, fire and emergency services, disaster management, and prisons/ District administration, Electricity department, water, sanitation Municipal bodies (Only staff required for essential services like sanitation, personnel related to water supply etc)/ Hospitals and all related medical establishments, including their manufacturing and distribution units, both in public and private sector, such as dispensaries, chemist and medical equipment shops, laboratories, clinics, nursing homes, ambulance etc. will continue to remain functional/ Transportation services for medical purposed will be permitted.
The Ministry of Home Affair issued an addendum to the guidelines to include more services/activities that have been exempted from the 21-day nationwide lockdown. Following additional services have been exempted: [The post has been updated on 26.03.2020]
The Government “Treasury” has already been exempted vide the guidelines issued yesterday. It is now clarified that the term “Treasury” would include Pay & Accounts Officers, Financial Advisors, field offices of the Controller General of Accounts;
Further, it has been added that the RBI, RBI Regulated financial markets, entities such as NPCI and CCIL, payment system operators and standalone primary dealers would also stand exempted;
IT Vendor for banking operations, Banking Correspondent and ATM operation and cash management agencies;
Shops for seeds and pesticides;
Data and call centres for Government activities only;
Operation of Railways, Airports and Seaports for cargo movement, relief and evacuation and their related operational organisations;
Inter-state movement of goods/cargo for inland and exports;
Cross land border movement of essential goods including petroleum products and LPG, food products, medical supplies; and
Veterinary hospitals, pharmacies (including Jan Aushadhi Kendra), Pharmaceutical research labs stand exempted.
Punishment for violating the lockdown order
The guidelines strictly note that-
“Any person violating these containment measures will be liable to be proceeded against as per the provisions of Section 51-60 of the Disaster Management Act, 2005, besides legal action under Section 188 of the IPC.”
Section 188 of the Indian Penal Code provides two offences and their punishments as follows:
Disobedience to an order lawfully issued by a public servant, if such disobedience causes obstruction, annoyance or injury to persons lawfully employed. Punishment: Simple Imprisonment for 1 month or fine of Rs 200 or both.
If such disobedience causes danger to human life, health or safety, etc. Punishment: Simple Imprisonment for 6 months or fine of Rs 1000 or both.
The Section 3 of the Epidemic Diseases Act talks of penalty on any person found to be disobeying any regulation or order made under the law and would be deemed to have committed the offence under the Section 188 of IPC. Therefore, those violating the lockdown orders can face legal action under the Epidemic Diseases Act, 1897, which lays down punishment as per Section 188 of the Indian Penal Code, 1860, for flouting such orders.
Note from the author: The blog started with the aim of simplifying and compiling laws related to technologies for the understanding of everyone. The keyword that motivated the author to write on such topics is the uncertainty behind the laws that regulate technology. However, this post has been different and dealt with the simplification of certain other issues as well. It is again the uncertainty behind the present times that has motivated the author to write this blog piece. The uncertainty related to the magnitude of the damage due to the corona outbreak may result in more such unprecedented laws and guidelines from the government. The author will continue to simplify them for the understanding of everyone. A very little contribution to society in these difficult times. Let us fight this together. Stay home, stay healthy.
The FinTech sector in India is thriving and growing expansively, enabled by a large consumer base, innovatively boosted startups and balanced regulatory policies in the form of ‘Digital India’ programme. The Indian Fintech industry has grown by 282% in the last decade and has reached the valuation of USD 450 million in 2015. Currently, there are more than 400 fintech companies that are working in India and the investments are to be fueled with 170% by 2020. The Indian fintech market is expected to grow by USD 2.4 million by 2020 from the present USD 1.2 billion, as per NASSCOM report. The transactional value of Indian fintech sector is evaluated to be USD 33 billion in approx in 2016 and is further forecasted to reach the point of USD 73 billion by 2020.
FinTech facilities in India
The primary facilities offered by companies operating in the space of fintech are:
Pre-paid Payment Instruments
Also known as PPIs, this instrument enables the user to engage in the purchase of products that include products relating to financial services as well. To be able to purchase the products, a value entered into the e-wallets in the PPIs so as to make purchases against that value. There are 3 types of PPIs: Closed, semi-closed and open systems. Depending on the type, one may also have the facility to withdraw cash from the PPIs. Other than the banks, they can only be issued by institutions authorized to function in the arena of e-wallets or pre-paid card services.
Managed by the National Payments Corporation of India, the UPI (Unified Payment Interface) provides a platform for quicker real time-based transactions, facilitating ease for the smartphone users to enter into multiple transactions with a lower cost than what the traditional method demands. Constituting a major part of the consumer behaviour in the market, the UPIs enable universality to the transactions they wish to enter in and engage in the greater number with the traders.
In the traditional financial market, it was only the banks that could lend money. However, with the convergence of technology and financial market, loans nowadays are even dispersed by non-banking financial companies, also known as NBFCs. The NBFCs with their interactive and user-friendly applications have attracted wide userbase in the digital arena to enter into credit purchasing, loan system after verification.
These lending platforms offered are Peer to Peer based. Such platforms bring together willing lenders and borrowers to enter into regulated transactions. As per the guidelines issued by RBI in this regard, the lending platforms can only be offered by the registered non- banking companies in India.
Online Sale and Purchase
The recent trends amongst many have also been that of online sale and purchase. To facilitate the same there requires to be a system whereby an entity collects payments form the purchases and send it across to the sellers. The entities involved in this function are known as payment aggregators or intermediaries. These entities electronically consolidate the payments done and transfer the same to the sellers.
Once begun as a measure to penetrate into the grassroots level of society the banking system and provide ease to the customers, digital banking services by the payment banks have now become a feature of the payment banks. The RBI has allowed payment banks to offer basic services involved in smooth banking by the customers online. This includes facilities such as accepting deposits (though RBI has placed a limit on it), view transactions, transfer funds, etc. However, this arena remains strictly regulated for not all facilities remain digitally available such as issuing credit cards.
Regulatory Challenges to Fin-Tech in India
While in India, digital finance firms are thriving as the government is continuing to issue pro-startup regulations and policies, the central regulatory body for Fintech i.e. the Reserve Bank of India, still suffers due to a traditionally rooted and established infrastructure which cannot be easily replaced with the updated regulatory framework that matches the advancements of technology.
Indian market is already recognized as the conservative and restrictive market and henceforth makes it difficult for Fintech firms to further instil the confidence in adopting the Fintech services in the absence of any concrete regulatory framework.
The commendable steps have been taken by the Indian government and regulatory institutions in a prompt manner, however, policies and regulations have to match the pace with which technological advancements in the finance sector taking place. This is much needed to ensure secure a transparent growth of Fintech in India.
Regulatory Uncertainty in the Fintech Sector
The foremost challenge that the regulator for the fintech sector has to dealt with by it the lack of regulations. Moreover, if there are regulations then to consolidate them is another major challenge. There is a requirement to “to support the formulation of policies that foster the benefits of fintech and mitigate potential risks”. Henceforth, a regulator or policy-maker has to work in the directions of “the modification and adaptation of regulatory frameworks to contain risks of arbitrage, while recognizing that regulation should remain proportionate to the risks.”
Digital On-boarding and Financial Inclusion
The two significant challenges that one can see as the huge mountainous tasks in the Indian context are: firstly, making the fintech platforms accessible to every Indian and secondly, analyzing the risks that are potentially present in trying out a scheme to provide digital onboarding. The Supreme Court recently decided upon the constitutionality of the Aadhaar, the ambitious government project to provide a unified identity. Aadhaar has been held constitutional but Section 57 of the Aadhaar Act was struck off. Section 57 provided the mandatory verification and linking procedure for consumers to avail a company’s service. The judgment is having serious implications on the government’s efforts to provide frictionless onboarding of consumers.
“The judgement impacted the delivery of financial services across verticals including bank account opening, loans, mutual funds and insurance. Though the judgement allows voluntary use of Aadhaar by consumers, there are multiple interpretations of it and the Unique Identification Authority of India (UIDAI) has resorted to safer approaches to avoid any more legal battles and stopped services to private entities altogether.”
Low Credit for Startups
Investors in the market are now hesitant to invest in fintech startups. The investors are baulking as there have been quite a number of bad loan incidents. The big setback to the fintech industry as well as the financial sector came into the form of IL&FS breakdown. The company defaulted against the inter-corporate deposits and commercial papers or borrowings. The incident has affected the whole fintech industry as the crisis included lending businesses that were key to a number of NBFCs as a funding source.
The Apex Court’s judgment brought down to stoppage, another popular mode of financing which is also the foremost mode of debit for lenders, MFs and insurance, as in pulling money from customer’s account. This is yet another judgment that has slowed down the advancement and has promoted the traditional manner of physical registrations.
Both the traditional banking system and the fintech services gather a large number of data records from various of their clients, which contains a profile of behavioural and financial information. Though the utility of such data is positive when it is used for a specific purpose of improving the services, it leads to giving way to a heap of privacy issues as well, especially when the financial service provider engages a third party’s technology services.
The judiciary recognized the risk of data privacy to the banking sector’s consumer in the case of Punjab National Bank v Rupa Mahajan Pahwa, “in which Punjab National Bank had issued a duplicate passbook of a joint savings bank account, held between the petitioner and her husband, to an unauthorized person”.
Other Challenges to the Fintech system in India
In terms of regulatory standards, India lacks in providing a comprehensive cybersecurity framework to reduce the cyber-crime issues. The competition law has also, in some sort of stages, have failed to control the domination of certain advance fintech NBFCs.
Note from Author: This post is the first one in the series of ‘Simplifying FinTech and FinTech Laws’. The evolution of finance started almost a century decades ago when the world saw the establishment of Fedwire in the US in 1918. The actual FinTech application was the first mobile payment in 1997 to buy a Coca-Cola from the vending machine. In India, as well, the FinTech has completed almost one and a half-decade, but still, there seems to be little awareness about what the term ‘FinTech’ actually means and what law governs it. The fact that people are not aware of what ‘FinTech’ is and what daily financing applications constitute it is the inspiration of the series of posts. The author is hopeful that these posts will help in simplifying the understanding of FinTech and related laws.
An individual can realize that something has changed when, in the current scenario, he sees that everyone around him is transacting amounts with a click on their mobile phones. Since the time civilization has seen the increasing use of the mobile payment apps like PaytTM, Google Pay etc., financial technology (hereinafter referred to as “fin-tech”) companies, the financial services industry has been turned on its head. Whether you are doing online shopping or just buying groceries from your local grocers, fintech is surrounding us from all sides in 2019.
Financial technology, basically, means the technology that seeks to assist, improve and automate the facilitation, processing and delivery of transactional and financial services. At the core, fintech is being utilized to facilitate corporations, businessmen and customers process their financial operations by operating through curated software and algorithms as used on computers and significantly on computers, eliminating the manual intermediation in the financial industry. Broadly, as stated, the ‘fin-tech’ term can be applied to the number of technological innovations in the processes of transaction business, such as the invention of digital money to double-entry bookkeeping.
Since the digital boom and the incoming of the recent smartphone generation, financial technology has grown exponentially and expansively, in both the manner. Therefore, the fintechs are attracting the attention of various sectors especially customers of banking facilities and investment funds, which have the impression of fintech as the future of the financial services industry. The offline retailers and telcos are also considerably looking fintech as a better alternative to traditional financial services, as financial technology provides them with the speedier and decentralized mode of handling transactions. The extensively large number of activities are raising a flurry of questions regarding the emerging financial topography.
Some several major fin-tech products and services are currently being utilized in the market, some of them are Peer to Peer lending platforms, crowdfunding platforms, distributed ledger technology, Big Data, Mobile Banking Services etc. These fintech options are in operation to facilitate the services of international finance, bringing together the large lenders and borrowers, “seekers and providers” of data and information, providing the centralized or decentralized mode of transactions.
Traditional financing institutions have understood the need to upgrade their services. In pursuance of this, financial institutions are modifying the services by adding the technological innovation, by the way of both retaining the services technology companies or by themselves investing in technological research and development (“R&D”). However, there still exist wide disparities in the practices of traditional banking facilities in India.
Further, according to the Financial Stability Board (FSB), of the BIS, “FinTech is technologically enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services”.
These definitions focus on encompassing the broader categories of innovations in the financial sector as facilitated by technologies, irrespective of the kind, business scale and regulatory status of the technologically innovative firm. The width of the FSB’s definition can be gauged while “assessing and anticipating” the expansive development of the financial system, and “the associated risks and opportunities”. Therefore, the key take away from the definition is that FinTech refers to “the integration of technology into offerings by financial services companies in order to improve their use and delivery to consumers”.
FinTech developments or innovations have the potential to facilitate a range of beneficial services, specifically efficient processing and cost-minimizing. Technological advancements are also substantially transforming how people have access to financial services. The investments in the Fintech sector is largely increasing through venture capital funds. The same is estimated at around USD 20 billion.
FinTech products and services
There is no defined scope of FinTech innovations, products and services. The broad nature of the technological advancements in the area of financial services includes some of the most prominent fintech innovations that have produced quite a significant effect on financial markets. Mobile and web-based payments are being used in Payments, Clearing and Settlement as an advancement. Similarly, crowdfunding and peer to peer lending have made deposits, lending, and capital raising more advanced than before. E-trading has made Investment management better. It is worth noting that, Data Analytics and Risk Management in delivering financial services are flexible now as the automation of the process is being carried out by using Big Data and Artificial Intelligence.
Payments, Clearing and Settlement
Fintech products and services in this category are the innovations that focus on the expediency and efficiency of the ‘payments, clearing and settlement’. The innovation in terms of improving the speed of transaction, minimizing the cost and flexing the mode of financial transaction, will bring positive changes to the whole financial services system.
Internet-based payment apps
In general terms, payments services work such that there is a user who gets an account opened in a bank and receive “a payment instrument” (Credit Card, Debit Card, etc.), which is, in consequence, is” linked to the account from the issuing bank to pay merchants online or offline”. Bank merchants are intermediaries that request payment and are obliged to reciprocally share the information of payment with the bank i.e. the financial institution. Banks receive funds while facilitating the transactions for various other financial institutions. Today, all the series of aforementioned processes are being assisted by the Internet. In such transactions, the payments are directly made to the service provider through the fintech services and “integrated payment agency”.
There are two kinds of internet-based payment services, such that the services that are based on mobile applications which merely assist the existing payment infrastructure. For eg. Apple Pay, mPay, GPay etc. which operate over the “existing card payment infrastructure” providing the consumer of services with an ability to use their mobile as their credit cards or debit cards. Then there are other mobile applications or internet websites that provide payment facilities through the “new payment infrastructure”, for eg. “Mobile phone money services such as M-Pesa in Kenya and IMPS in India”.
A digital form of currencies, basically “digital representations of value”, is “value stored electronically in a device such as a chip card or a hard drive in a personal computer”. Innovative technology in combination with the proliferation of AI and automation, internet availability, and upgrading consumer choices, has expanded the scope of the need for alternative forms of hard currencies or traditional instruments of payment. Digital currency can be defined, in a broad sense only, as something that represents value such that firstly it is an electronic or digital form of money or “government-issued flat currency”. Then subsequently it also covers the virtual currency- an electronic form of the currency that is not a legal tender. These currencies are the tokens or tenders which are developed, controlled and created by certain private developers, with the value being trusted and appreciated in a specific community.
Distributed ledger technology
Distributed ledger technology (“DLT”) is the innovation that provides a wholly secure and safe transaction record, which connects various users in a network duly updated and verified. Each and every transaction is accessible to all the users and hence allow users to have the track record of a transaction, eliminating the chances of fraud and centralization in the transaction. These transactions following the DLT are, in actual sense, peer-to-peer transactions, offering advantages of efficiency and security. As per the World Bank’s report,
“Distributed Ledger Technology refers to a novel and fast-evolving approach to recording and sharing data across multiple data stores (or ledgers). This technology allows for transactions and data to be recorded, shared, and synchronized across a distributed network of different network participants.”
Blockchain technology is a form of distributed ledger technology which is constituted of transactions (e.g. cryptographed tokens or securities) stored in units of blocks. Blockchain system works on the model of a distributed ledger to record time-stamped digital transactions that are irreversible and may not be unilaterally altered. The process of recording transactions over the ledger is called mining. A blockchain network has as many nodes as much there are participants in the network. The recorded transaction is broadcasted to all the participating nodes and requires consensus over the authenticity of the transaction from each and every node that is part of the distributed ledger. As per the report of the steering committee on fintech related issues:
“Blockchain is a type of DLT which enables a community of users to record transactions in a distributed (without a central repository) and a decentralized (without a central authority) manner. The transaction records are visible to all the participants of the blockchain network, while being immutable at the same time. Blockchains rely heavily on cryptographic primitives”
Deposits, lending and capital raising avenues
As the currency flow has transformed around us, other kinds of the transaction are also transforming to become expedient and flexible and disintermediating the financial transactions. Alternative finance is becoming a prominent mode of capital raising and financing. As the Medium and Small Scale Enterprises are mushrooming across India, the inability to access adequate finance still exists in our lives as one of the major reasons for the constraint to the growth of SMEs. There is lack of access to the adequate sums as the traditional banks don’t provide finance till the time they satisfy their creditworthiness requirements which require strong collaterals, good asset size and perfect credit history on part of the SMEs and businesses.
The new avenues of financing which exempt the lending from being vitiated by the financial intermediation, are data-driven and facilitated by technology. Popular alternative financing avenues are Crowdfunding and Peer to Peer lending.
Crowdfunding is an innovative technology portal which allows its users to connect such that forming the relationship constituting three parties: the entrepreneur or SME firm seeking funds, the contributors looking for investing the project or cause, and the moderator organization that facilitates the engagement between the contributors and initiators. The moderators make it flexible for the contributors to acquire data about the several initiatives at a platform that are seeking the funding opportunities for the development and production of their products and services. Foremost and prominent business models of crowdfunding are rewards-based crowdfunding, donation-based crowdfunding, and equity-based crowdfunding.
Peer-to-Peer (“P2P”) Lending platforms allow individual businesses and, especially, SMEs to finance and borrow amongst themselves. As the credit goes to the updated and developed IT infrastructure, P2P portals provide the options of interest rates lower than the traditional banking institutions. Further, the thin line of distinction between banks and P2P platform providers is that the P2P fintechs are basically “matchmakers”, as the P2P platforms facilitate the networking between lenders and borrowers and in exchange of such a function they charge a fee. As the P2P lenders provide services on a fee based mechanism, they basically doesn’t have to meet the mandatory “capital adequacy requirements”.
In the case of P2P platforms, one cannot expect investor protection through compensation against default as one expects under deposit guarantee schemes in traditional bank deposits. The rising trend of application of P2P platforms in order to secure finance can be gauged from the fact that most of the jurisdictions like Germany and Italy, have already classified P2P portals as banks (as they undertake the task of credit intermediation) and are being regulated as banks.
All these aforementioned technological innovations potentially can bring many opportunities and challenges. Fintech has the capability to substantially improve the efficiency and diversity of the financial market. The load concentration in traditional banking for minor payments will get minimized and may lead to expedient delivery of services to consumers. As technology advances, it finds a way to make a service or product more user-friendly. Similarly, as Fintech advancing, it is providing an incentive for traditional financing institutions to be competitive and focused on their customers.
The Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry, Govt. of India has recently issued a Press Note No. 2 (2018) (“P.N.2”) on 26 December 2018 providing clarificatory amendments to the para. 22.214.171.124 (related to e-commerce sector) of the Consolidated Foreign Direct Policy (“FDI”) of 2017. Para. 126.96.36.199 incorporates the substance of the Press Note 3 (2016) dated 29 March 2016 under which DIPP allowed the Foreign Direct Investment (FDI) up to 100% in entities enagaged in e-commerce activities under the marketplace model of e-commerce, subject to certain conditions. The same note has expressly prohibited the FDI in entities undertaking the activities of inventory-based model.
However, the e-commerce giants in India are constantly engaging in the inventory-based model to the extent that they are now making huge investments in expansion of it. Considering such developments, the DIPP realised that the wordings and intentions of Press Note 3 lacked in stringency that is needed to achieve the intended goal. Therefore, through the Press Note 2 of 2018, that will be in effect from 1st February 2019, the DIPP is bringing in certain significant clarifications and modifications regarding the provisions that govern functioning and availing of FDI benefits by the e-commerce entities. The DIPP has issued these changes with an aim to ensure level playing field for e-commerce entities as well as the brick and mortar retailers.
The P.N.2 mainly reflects the clarifications related to following four significant points:
Ownership and Control of the e-commerce entity over the inventory;
Equity participation in seller or vendor entities;
Fair and non-discriminatory business dealings by the e-commerce entities on the platform;
Exclusivity Sale Arrangements.
DIPP in the note has explicitly clarified that the P.N.2 intends to ensure the comprehensive implementation of the policy in letter and spirit.
Control of the e-commerce entity over the inventory
Setting forth the clear definitions of the Marketplace-based model and Inventory-based model of the e-commerce, the P.N.2 introduces the test of ‘ownership’ or ‘control’ over the inventory of sellers. This test determines the distinction between a marketplace-based model and inventory-based model. As given in the note, a marketplace-based model provides an Information Technology platform by the e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller. Whereas the inventory-based model provides the inventory of goods and services owned by the e-commerce entity and is sold to the consumers directly.
In the present scenario, entities providing an online marketplace platform to various sellers for selling their products online are prohibited from:
Holding the actual ownership over the inventory;
Permitting total sales value from one seller or such seller’s group companies to exceed the 25% of such marketplace’s sales value in a financial year.
The previous clarifications of DIPP provides that the ‘group companies’ include two or more companies that are owned and/or controlled by a common parent company (either directly or indirectly). Further, ‘group companies’ also includes two or more enterprises which have power to directly or indirectly: (a) exercise 26% or more of voting rights in other enterprise, or (b) appoint more than 50% of the strength of Board of Directors in the other enterprise.
Pursuant to P.N.2, inventory of a seller or vendor will be deemed to be in ‘control’ of an e-commerce entity if more than 25% of purchase of such seller or vendor is from the e-commerce entity or its group companies. Therefore, such an ‘ownership’ or ‘control’ will render the e-commerce marketplace-based entity into inventory-based entity.
Therefore, ‘ownership’ has been clearly demarcated now under the changed para 188.8.131.52. This will impact on the e-commerce entities that sell goods or sell goods through a group of companies to sellers such that the sellers then put that goods on the entity’s online platform for sale to retail customers. It will further also impact the vendors of inventory that have no contribution from any foreign element as they have to seek multiple sources for acquiring their inventory. This will put an additional capital burden on such sellers.
Equity participation of the e-commerce entity in seller’s entity
The P.N.2 has brought in a new restriction under which sellers are not permitted to sell their goods on a platform run by an e-commerce entity, if such entity or its group companies have equity participation in the seller or have control over their entity. This brings in effect a prohibition that any entity related directly or indirectly to the e-commerce entity will be prohibited from selling on a platform. However, there is a further clarification needed from DIPP on this point as it is unclear about including direct participation only or including both i.e. direct and indirect participation.
DIPP on January 03, 2019 provided a ‘Response to comments reported in the media on Press Note 2 (2018), wherein DIPP stated that various concerns have been raised that Press Note prohibits sale of private label products through marketplace. However, it was clarified that the Press Note does not impose any restriction on the nature of products which can be sold on the marketplace. There is no further clarification have been made on this stand by the DIPP which is in contradiction to what can be inferred from the P.N.2, but it is the final law. This means that no equity participation in suppliers selling on the platform but no ban on private label sales.
Fair and non-discriminatory business dealings
In order to maintain level playing field, it is stated in the present FDI policy that the marketplace-based entity will not directly and indirectly influence in determining the sale prices of goods or services that are provided by the sellers on their platforms. The P.N.2 has taken a step forward by introducing various restrictions in the business dealings.
It has specifically provided that services should be offered by an e-commerce marketplace entity to vendors on an online platform at an arm’s length and in a fair and non-discriminatory way. Such services will include logistics, warehousing, fulfilment etc. and should be provided in similar terms as provided to other vendors in similar circumstances. Another restriction, that has been introduced to ensure to bring local retailers at par with their e-commerce counterparts, is on the cashback facility provided to buyers. By disallowing irrational discount and cashback schemes for providing undue benefit to a section of vendors, DIPP is aiming for promotion of fair competitive practices.
However, with the kind of wordings used in this part of P.N.2, DIPP has continued the legacy of confusing notifications on account of certain vagueness. The P.N.2 is not at all clear about what ‘similar circumstances’ mean for determining the fair and non-discriminatory terms of services provided to various sellers. Further, as there is no restriction on various sellers who may want to independently provide huge cashbacks through these platforms, it will be practically difficult to ensure the fair and non-discriminatory nature of offers and discounts.
No exclusivity in sale arrangements
Through the P.N.2, the DIPP has clarified that all the marketplace entities are prohibited from mandating the sellers to sell their products exclusively on their platform only. However, the wordings of the provision related to this doesn’t provide anything related to the situation in which a vendor voluntarily wants to sell exclusively on one platform. Further there is absence of any clarification from the DIPP, that the restriction is only on positive exclusive sale arrangements or the arrangement between entity and seller is also included in it.
Some other significant changes
The P.N.2 provides the stipulation that the e-commerce marketplace entities have to get a certificate with a statutory auditor’s report. This is to be submitted to Reserve Bank of India by September 30 of every year for preceding financial year, indicating the fulfilment of the compliances of all the guides as introduced by the P.N.2.
Removal of the aforementioned 25% restriction cap on total sales value
The aforementioned condition has been omitted.
The introduction of amendments to the FDI policy related to e-commerce activities would have impacted on e-commerce giants highly if the sale of the products under private label has been restricted. The DIPP’s response to media reports has provided a huge relief to e-commerce entities like Amazon and Flipkart which are bullish on growth of their private label brands and investing heavily for its expansion. The P.N.2 has brought in various restrictions on the marketplace entities with an intent to ensure the fair and non-discriminating business dealing such as to make a level playing field for e-commerce entities and local retailers. However, most of the f introduced changes still need additional clarifications relevant to their applicability and scope.
(This is the first blog of the series of two blogs discussing the impact of DIPP’s Press Note 2 on regular special Offer, Discount and Cashback schemes given by various e-commerce entities. This blog has explained all the law behind the press note 2. In the next blog, we will understand the impact of this law on the market by talking in terms of the practical instances. Keep checking for the next blog, it will be interesting)