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INDIA (DOMESTIC FIRMS): An Introduction to India

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The year 2019 was an eventful one for the Technology, Media and Telecommunications (TMT) sector in India. Data governance, platform regulation, e-commerce, digital payments, blockchain and digital tax were key areas of focus.

Data protection. India’s long-awaited personal data protection bill is expected to be introduced in Parliament soon. This bill will overhaul India’s data protection law, impose new obligations on information technology (IT) companies, and establish a new data protection authority which will oversee compliance and implementation. One of the bill’s most contested issues has been whether companies should be required to store personal data in India. The bill has been listed for discussion in the upcoming parliamentary session, but its final version and what Parliament will make of it, remain to be seen. Separately, the Indian government has formed a new committee to deliberate the governance of ‘non-personal data’, informed by its increasing interest in using data for public good and unlocking its economic value. It is possible that ‘non-personal data’ here means anonymised and aggregated datasets collated by companies, but there is no working definition at present. The committee’s views will likely inform the government’s final positions on the matter.

Platform regulation. In the past few years, India, like many other countries, has grown discontented with the misuse of social media, fake news, and misinformation. In December 2018, the federal government responded by proposing new rules for internet intermediaries in India. Amongst other things, these rules require intermediaries to proactively monitor content on their platforms, comply with strict timelines to take down unlawful content and in certain cases, establish permanent registered offices in India. These proposals were met with industry-wide opposition. The government is now reconsidering the rules in an effort to balance privacy and national security interests, and is expected to release the final rules in January 2020. Earlier this year, social media platforms had created a voluntary code of ethics to regulate social media activity for the period of the Indian general elections in 2019. Meanwhile, the broadcasting ministry is deliberating the regulation of curated content online, through certification requirements, or a self-regulatory framework. All these developments point to online platforms facing increasing regulation in India. Platforms argue that excessive regulation could drive down user engagement and discourage innovation.

Digital payments and fintech. Digital payments saw a mixed bag of developments this year. One of the most successful innovations to have taken place in the payments ecosystem in recent times is the development of the ‘unified payments interface’ (UPI). UPI is an indigenous, interoperable payments system that allows seamless transfers of money to and from bank accounts, making payments as effortless as sending emails. In 2019, over half of the digital transactions taking place in the country were facilitated by UPI. Another development was the release of the Reserve Bank of India’s (RBI) ‘Payment Systems Vision 2021’, aimed at enabling a ‘cash-lite’ society with strong e-payment solutions. This document signals the RBI’s intent to create a supportive regulatory regime for fintech players. The RBI also rolled out an enabling framework for its regulatory sandbox in India in August 2019, which is expected to foster innovation and facilitate evidence-based regulation. On the flipside, stringent know-your-customer (KYC) requirements have riddled the sector with increased customer onboarding costs, slowing the adoption of products like e-wallets. The RBI also delivered a shock in September 2019 with its discussion paper on payment intermediaries, which are regulated indirectly through banks. This discussion paper indicates the RBI’s desire to directly regulate these companies, creating a slippery slope for other tech players in the digital payments ecosystem that have thus far been indirectly regulated.

Blockchain and cryptocurrencies. 2019 also witnessed a continuing spell of trouble for cryptocurrencies in India. In February 2018, cryptocurrencies were effectively banned from the formal economy. This decision was challenged before the Indian Supreme Court, which is currently deciding on the matter. In July 2019, a government panel released a draft bill banning cryptocurrencies and proposing a government-backed digital currency. In the midst of this regulatory uncertainty, the country is seeing an exodus of its existing cryptocurrency exchanges. Interestingly, blockchain, which is the underlying technology for cryptocurrencies, is being adopted with much enthusiasm in India, by regulators and private players alike.

E-commerce. The e-commerce sector has had its own set of trials and tribulations in the last few years. In a bid to combat predatory pricing and deep discounting in the Indian e-commerce market, the federal government has continuously tightened restrictions on foreign direct investment (FDI) in e-commerce companies in February 2019. For example, companies funded by FDI are barred from exercising any ownership or control over the inventory sold on their platforms. E-commerce platforms will also have to comply with the requirements under the newly enacted Consumer Protection Act, 2019. A set of draft rules released under this law indicates the government’s intent to mandate the local presence of all e-commerce companies in India through registered offices. E-commerce companies believe that this may serve to create entry barriers for online marketplaces and even restrict market access for consumers in India. Interestingly, the proposed intermediaries rules carry a similar requirement for the local incorporation of online companies.

Digital tax. In October 2019, the Organisation for Economic Co-operation and Development (OECD) released a proposal to create a ‘unified approach’ on digital tax. This proposal suggests taxing online businesses on the residual profits earned from sales in member countries, even if they are not physically present in those countries. India has sought changes to this proposal, in an attempt to seek a fairer share of revenues. It remains to be seen what the final form of this proposal will look like, as talks are still underway. In any case, online businesses can expect to see some movement on taxation practices in India in the future.

Telecommunications. At the heart of it all is the telecommunications sector, which is driving the Indian internet boom. This sector is currently the battleground for the 5G spectrum auction, the results of which will determine which companies will get to spearhead the digital revolution for the next generation of internet technologies in India. The National Digital Communications Policy of 2018 will help lay the foundations for this growth, with its focus on enabling universal broadband connectivity, cloud computing, artificial intelligence and the internet of things. This focus on driving innovation could spell good fortune for tech start-ups, who have been granted much-needed tax exemptions and relaxed regulatory compliance requirements over the past year.

2019 has set the stage for an interesting year up ahead for TMT players. As the country’s digital economy continues to grow, companies that enter the year ready to parry with changing legal frameworks and business models could emerge unscathed and consolidate their positions in the region, while those that continue to hold onto old patterns of conducting business may find this period particularly challenging.