Data protection – Does india want to be the big state

Authored by Vatsal Gaur, Associate Partner, HSA Advocates

India continues to prove to the world that the State needs to act like a parent for her subjects (data). Good parenting is ideally a result of the parent having lived a life full of rich experience and an ability to master life trajectory. With the democracy still young, and dwindling economic parameters over the last three quarters, the locus standi seems weak. Any attempt to monopolise data, on the pretext of due functioning, is an unfounded approach to monetise the now overused ‘demographic dividend’ of young population.

The recent WhatsApp breach gave further succour to push for a Data State. This was done as the government introduced a draft of the Personal Data Protection Bill (PDP) in Parliament on December 11, 2019. The bill was referred to a joint select parliamentary committee. If the current PDP is anything to go by, there are several opportunity costs. The PDP allows for the processing of personal data for the provision of any ‘service’ or ‘benefit’ provided by the State. In contrast, another provision leaves room to define what constitutes ‘reasonable purposes’ for non-consensual processing of data.

PDP does not have a focus like GDPR, where there is at least onus on the data processor to establish how non-consensual data processing must outweigh the data subject’s fundamental right. Ordinary rules governing judicial review on State action will, therefore, become the default rule for enforcing privacy breaches. However, since the Data Protection Authority (DPA) isn’t under obligation to provide reasoned orders before processing data, the grounds of such judicial challenge will be limited. PDP shall, thus, dilute the Puttaswamy judgment on the right to privacy. A suggestion could be to adopt the GDPR framework to allow subjects to object against data processing by the state in certain situations. The current PDP only allows the right to erasure and call for factual incorrectness of data, but doesn’t provide an outright ability for citizens to object to non-consensual data sharing.

Interestingly, since the technology itself is not sacrosanct and is liable to be manipulated, in case of factually inaccurate data sharing, the State could potentially land in embarrassing situations unless an additional layer of legitimacy is in place. Thus, it is important to staff the DPA not just by appointing retired judges and bureaucrats but also seasoned technology veterans. An intensive boot camp for potential training of candidates is not a far-fetched idea. The Central Government reserves its right to issue binding instructions to the DPA severely compromises the independence, calling the need for an overarching ombudsman structure using established principles of administrative law.

The data localisation requirement under the PDP (although eased from the previous version of the bill) is still not challenge-free. For instance, sensitive personal data (SPD) and personal data would usually be stored as a mixed set, and de-identification may be an arduous exercise. Similarly, leaving the definition of ‘critical personal data’ open to the government, in the absence of legislative guidelines, seems like excessive delegation. Third-party transfers of SPD are required to be approved by the DPA, which could reduce agility in fast-paced innovation, especially blockchain and distributed ledger technology (DLT). An exception for real-time data transmission using DLT should be considered. Similarly, while the sandbox introduced in the PDP is laudable, one needs to take care of the selection criteria of companies. The chances of government owned enterprises competing with private players cannot be excluded. Therefore a ‘neutral’ and well-implemented selection procedure will be imperative.

The government retaining the right to seek anonymised data from data fiduciaries, although patently innocuous, leaves room for enough data sets to be generated which would otherwise not be available to the government. Deanonymisation of data is not entirely off-limits. Further, the blanket right to exclude the applicability of the PDP to State agencies in the interest of ‘sovereignty’, ‘integrity’ or ‘public order’ does place the State on a different footing as far as ownership and processing of data is concerned.

Does India want to be the Big Data State after all, and what is so peculiar about her data subjects that call for them being treated like wayward children? We can only read between the lines for now!

Source: The Financial Express

Open for business

Authored by Dipti Lavya Swain, Partner, HSA Advocates

The Indian government recently announced several measures intended to revive the economy amid worries of a slowdown and very weak global markets. The measures include allowing 100% foreign direct investment (FDI) in the contract manufacturing sector, while regulations on local sourcing norms for foreign investment in single brand retail trading (SBRT), and 100% FDI under the automatic route for coal mining, have also been relaxed.

The government also imposed a 26% cap on FDI in the digital media sector, which has raised a few questions. All this information was contained in a press release, so it will be worthwhile to read the fine print on the changes, which are expected soon.

Single brand retail (SBRT)

Single brand retailers with a majority foreign shareholding were required to procure from India at least 30% of the value of their goods sold in the first five years. The government has now relaxed this requirement by counting any kind of procurement either by themselves or through their group companies from within India, even if such procurement was exclusively meant for exports, towards the local sourcing requirement. Any procurement made by third parties at the behest of SBRT companies under a contract, as well as any and all procurements (and not just year-on-year incremental increases in exports), would also count towards such local sourcing requirements.

The good news is that SBRT companies will no more be required to set up brick-and-mortar stores before starting online retailing. This allows companies to test market sentiment for their brands before making substantial capital expenditures. Most companies are apprehensive about making large investments unless they are certain, so this relaxation will provide a lot of strength in such decision-making processes for interested corporates.

The retail trading business is no longer a taboo for FDI, as the government has progressively relaxed this sector with a major boost that came in 2015, when e-commerce rules for FDI in SBRT were first relaxed. Since then, India has covered a lot of distance, as can be seen in the table.

With this recent announcement, companies in sectors like logistics, technology and fintech, consumer goods, business process outsourcing and many others will benefit. Even large multinational companies (MNCs) with significant brand value like Apple, IKEA and others will no longer hesitate to invest or further their existing investments in India, because not needing to have a brick-and-mortar store means they can start e-commerce and online portals without much investment, market study, strategy, etc.

Year

A timeline of recent FDI developments in SBRT

2019 100% automatic, subject to conditions (30% of local outsourcing norms relaxed)
2018 100% automatic, subject to conditions (30% of local outsourcing norms exists)
2017 49% automatic, and beyond that through the government approval route
2016 49% automatic, and beyond that through the government approval route
2015 49% automatic, and beyond that through the government approval route
2014 49% automatic, and beyond that through the government approval route
2012-13 100% through the government approval route
2010-11 51% FDI permitted through the government approval route

All this comes after the government took a tough stand for e-commerce players with FDI through press note No. 2/2018, issued last December, which stated that inventory of a vendor/seller would be deemed to be controlled by such an e-commerce entity if more than 25% of purchase of such vendor/ seller is from the e-commerce entity, including its group. This had forced many players to change structures, and had hindered planned investments for large e-commerce players like Amazon and Flipkart, which used to have preferred players, as these players had investments in such vendors.

Contract manufacturing

An interesting highlight is the way SBRT and contract manufacturing have been connected. The clarification and relaxations are likely to go hand-in-hand and nudge foreign investors to look at India more closely. While the relaxations have been allowed in SBRT, the government has, almost in the same breath, clarified that contract manufacturing will not just have 100% FDI under the automatic sector, but also that local sourcing made by contract manufacturers for or on behalf of SBRT companies would also count towards satisfying the requirements that SBRT companies have to fulfil.

Although there were no restrictions on FDI in contract manufacturing earlier, it wasn’t expressly mentioned, and stakeholders had reached out to the government for clarity on the subject time and again. With the relaxation in FDI rules in light of the US-China trade war, and the government’s focus on boosting local manufacturing, India has the potential to become a large contract manufacturing hub. This push has also been seen in other sectors, for example, the government only recently introduced a levy of safeguard duty on various items including solar modules for generation of solar power to discourage import and encourage local manufacturing of such goods.

Setting up the entire value chain for products is not easy, which is why companies both large and small rely on contract manufacturing. For example, Apple uses Wistron and Foxconn, Xiaomi uses Holitech and Foxconn, and Samsung and Oppo also use Foxconn. All such contract manufacturers are certainly set to benefit from this relaxation, either directly through infusion of FDI within their companies, or from contract value through FDI in SBRT.

India has been wanting foreign players to “Make in India” and sell not just in India but also outside, and these relaxations may well be just what the doctor ordered for the sector. In fact, only recently, on 20 September, the government also announced mega concessions for new manufacturing companies incorporated after 1 October 2019 to be taxed at 15%. This is substantially lower than current rates of 25% for new manufacturing companies, which was also brought down from 30%.

On the announcement date, while global markets continued to be weak, India’s Sensex jumped more than 2,200 points to close about 6% higher, which is easily Sensex’s biggest single-day gain in almost a decade. These changes will have to be implemented through amendments to the (Indian) Income Tax Act and the Finance Act, which largely control the direct tax regime in India.

Apple has already committed US$1 billion since the relaxation, and the funds are most likely to go into single brand itself, and a significant part towards contract manufacturing, since it will not be possible for Apple to break ties abruptly with its contract manufacturing partner, Wistron. Chinese electronics manufacturer, Holitech, had already announced a plan to invest US$140 million to set up a component manufacturing plant in India.

Similarly, Guoxuan JV China has tied up with Tata for a potential joint venture to manufacture battery packs for electric vehicles; the world’s largest EV maker, China’s BYD Co and Chinese battery manufacturer Contemporary Amperex Technology have committed large investments into manufacturing batteries in India; and the Bolivian government’s YLB Corporation has tied up with the Indian government’s KABIL for a potential joint venture to manufacture a lithium battery plant. With the most recent tax concessions, “Make in India” incentives, FDI relaxation, start-up drives, pushes for electric vehicles, etc., India is awaiting a series of investments in the months to come.

Coal mining

The government’s announcement also allows 100% FDI under the automatic route for the sale of coal and coal-mining activities including associated processing infrastructure, which includes coal washery, crushing, coal handling, and separation (magnetic and non-magnetic), subject to compliance of sectoral laws. This is in addition to the existing automatic permission for 100% FDI under the automatic route into coal and lignite mining for captive consumption by power projects, iron and steel and cement units and other eligible activities permitted under and subject to applicable laws and regulations, and also for setting up coal processing plants like washeries. This could come as a shot in the arm for the ailing coal-mining sector.

While this may be a saving grace for many as they start calling investors and conducting internal restructuring, it may not be great news for existing players like Coal India and others, who may risk losing customers and volumes.

Digital media

Among all these market-friendly reforms, one decision that may not have gone down well with businesses is the decision to impose a 26% FDI cap, under the government approval route, for uploading and streaming of news and current affairs through digital media outlets, bringing it on par with existing rules for print media. Industry representations and queries have already flooded the Information and Broadcasting Ministry on this.

Source: India Business Law Journal

Voting rights ushering in a new era of capital raising

Authored by Vatsal Gaur, Associate Partner, HSA Advocates

What do Facebook, Google and Snapchat have in common, apart from being some of the most powerful companies in the world? Unequal voting rights! Yes, at a time when the blue-eyed boy of the Indian startup ecosystem, Ritesh Agarwal of Oyo Rooms, had to devise a leverage-backed buyback in his unicorn to maintain shareholding befitting his founder status, world over, the likes of Mark Zuckerberg and Larry Page have had their voting rights safely secured, regardless of dilutions to their equity stakes through series and series of equity fundraising.

Disproportionate voting rights, known in the Indian legal regime as shares carrying differential voting rights (DVRs), have been a subject of constant policy changes, but with SEBI waking up to smell the coffee recently, when it released the framework for listing of superior rights shares for tech-based startups, it was only time that the Ministry of Corporate Affairs (MCA) followed suit. Some of the laudable changes introduced by the MCA, via amendments to the share capital and debenture rules, include ability to issue up to 74% DVRs (from the erstwhile 26% sanction) and doing away with the notorious regulation mandating a track record of three years distributable profits, which was completely impractical to begin with (for the record, We Work, the $47 billion co-working company, which has been in the news recently over its IPO filing, is still not profit making!).

Let’s for a moment assume that Mindtree, prior to its listing, had created a Class B share, with voting rights 10x the voting rights of an ordinary share or a Class A share. The L&T hostile takeover would surely have been a tougher battle to fight, and perhaps the Mindtree founders would still be on the board. In much the same way, the recent public spat in Indigo, between its co-founders, too, could have been preempted if either one of the founders would have secured with himself a special kind of security that gave him larger voting rights. In a larger context, logjams in decision making of a company are mostly the nemesis of ‘business as usual’, and with prime minister Modi recently branding Indian entrepreneurs as ‘Growth Ambassadors’, I suppose the brief with the cabinet is clear—make company law easier! Proposals to decriminalise numerous company law violations are already underway and, with the oppressive angel tax regime being nebulised for startups raising funds—and tax officers being told to ease the whip during investigations—the stand of the government (although reactive in nature) deserves complete credit and gratitude.

I anticipate creativity in structuring of investment deals, to follow this change, in the universe of unlisted companies. For example, a Nike kind of corporate structure can be adopted suitably, wherein Class A shareholders have the power to elect 75% of the board. Alternatively, there could also be some interesting issues arising, where equity could be diluted below 50%, with the investors holding equal or greater strength at the Board level, but with the startup founders holding more than substantial voting rights at a shareholder level. A simple case of approving an amendment to a company’s articles of association, therefore, could be met with a challenge, where, say, Class A shareholders of a company with DVRs could block a special resolution, through their voting rights being disproportionately higher, despite equity dilutions following multiple rounds of capital raising. The proposed SEBI framework does advert some of these challenges due to mechanisms such as the coat-tail provisions, which allow for flattening of the voting rights in some situations.

A protectionist regime in favour of domestic founders is only fair at a time when countries and continents face de-globalisation and trade wars at a macro level. It is also a great way to ensure effective control of a company is retained with entrepreneurs regardless of enormous rounds of funding, by allowing for a separation between stock ownership, economic rights attached to such stock, and voting control.

There are various other aspects which, I believe, will come into play going forward. For instance, how would superior voting rights shares be valued? Would they be taxed higher at the time of their sell down? Could VC investors look to set off superior voting arrangements against a higher contractual liquidation preference during deal negotiations, assuming disproportionately higher liquidation preference could be read within the ambit of how DVR shares are defined under the law?

Needless to say, a new era of capital raising has begun, thereby allowing for more Silicon Valley inspired investment structuring and negotiations. Sell-side deal lawyers and founders rejoice!

Source: The Financial Express