Proposed Amendments to ITA 2000 and Privacy Protection

Does ITA 2000/8 address “Privacy Protection”  and if so, does it do it effectively is a question that is lingering in the industry. It will continue to be a point of debate for the amended ITA 2017 (p). …This is in continuation of the discussions on the proposed amendments to ITA 2000/8 presently being discussed by an expert committee headed by Mr T.K.Vishwanathan. ….. Naavi

Protecting the Right to Privacy of an individual is a fundamental right claimed by citizens living in a democratic society and is closely associated with the right to freedom of expression, right to information and security. India has recognized the need for Privacy by interpreting the Article 21 of our constitution favourably but has not yet enacted a separate law which says “Privacy is right protected under law and any violation thereof leads to civil and criminal liabilities”. It is also not likely that in the near future any specific law will be passed in this regard.

However, ITA 2000 and more specifically ITA 2008 has addressed many concerns of Privacy Protectionists without being recognized as a “Privacy Protection Legislation”.

What ITA 2000/8 has done is to provide protection to the “Data” which indirectly protects the “Privacy”. Without being too obsessive, it is better if we recognize the role of ITA 2000/8/17(p) as the principle legislation for protecting the Privacy for which it is eminently suited particularly if a few minor changes are accommodated in the proposed amendments.

“Privacy” of a person is defined as a “Right to determine what amount of personal information should be made public”. It should be a right that can be exercised only by the individual (provided he is in a state of mind where he can exercise that control as per the requirements of law). Every other person who comes into possession of Personal Information should follow the universal principles of privacy protection such as “Disclosure of Privacy Policy”, “Obtaining Consent”, “Collection under minimum and specific use principles”, “Protecting the information on hand” and “destroying” it when no longer required.

An effective law defines the rights, prescribes the punishments for violation and introduces mechanism for effective implementation.

Let us see how ITA 2000/8 address these issues and what can be done further to strengthen the Privacy Protection under ITA 2017 (P), equating “Privacy Protection” with “Data Security” for the current discussion.

The first task of law is to define the “Privacy Right”. In the context of its alter-ego of data security, Privacy Right gets defined by defining “Personal Information” that qualifies for protection.

Under ITA 2000/8 we have defined what is “Sensitive Personal Information” (SPI) without defining “Personal Information”.  (PI). SPI was defined in ITA 2008 along with Section 43A which brought an obligation on the “Body Corporates” handling SPI to protect it with “Reasonable Security Practice”.

Though PI is not defined, Section 72A accords protection to PI and makes its breach a punishable offence with 3 years imprisonment.

Additionally, Section 43 read with Section 66 imposes penalties when the “Value of information is diminished” (which can be an effect of privacy breach).

Also Section 69/69A/69B while providing powers to some officials for interception, decryption and data mining, puts a bar on the others to do the same without attracting penalties.

Section 79 imposes the responsibility of Privacy protection on the “intermediaries” in clear terms through the rules of due diligence.

Grievance redressal is defined with reference to the provisions of due diligence under Section 79 and also by instituting the Adjudication and Cyber Appellate Tribunal (CyAT).

While we can debate the adequacy of these provisions in comparison to the EU standards such as the GDRP or US Standards such as the HIPAA, we cannot but acknowledge that ITA 2000/8 has covered most of the requirements of Privacy Protection (In the context of Data protection).

Without therefore saying so, ITA 2000/8 therefore provides protection of Personal Information. It is possible that some may not realize it until a separate act is legislated but it is not necessary.

It must be noted that under ITA 2000/8, any information which is processed in a computer device or meant to be processed in a computer device also is “Information”.

Hence it is possible to extend the “Data Protection Rights” as is available in different forms under Section 43, 43A, 66, 72,72A, 69, 69A, 69B, 7A, etc to information which is in a form other than as “Electronically Written”, such as “Voice which is Electronically spoken or meant to be processed in an electronic device”. This can extend “Privacy Protection” to “Voice” in certain circumstances.

The perception in the industry however is different. Most of the IT professionals in India think India does not have an adequate Privacy protection provisions in the country and cannot defend the regime with their EU counterparts. Probably they are interpreting the failures in implementation as failure of law and hence the clamour for a separate Privacy Protection Act has continued.

It is therefore an opportunity now to address some of these concerns in the proposed amendments for which some suggestions can be discussed.

Perhaps, a chapter can be dedicated in the ITA 2017(P) with the title “Privacy and Data Protection” where some provisions of Privacy and Data Protection is specifically mentioned. This will provide the required confidence to professionals who compare Indian legislation to EU legislation.

Defining Personal Information

One of the requirements that is perhaps required is to upgrade the definition of “What is Personal Information” from what is provided in the rules to Sec 43A, which states

“Personal information” means any information that relates to a natural person, which, either directly or indirectly, in combination with other information available or likely to be available with a body corporate, is capable of identifying such person.

This definition is restrictive to data with the Body Corporates and the Section 43A also restricts itself to Body Corroborates.

 An improved definition that should be added in the Act itself to be applicable for all sections including Section 72A could be

“Personal Information” of an individual means any information related to a living person who is not a minor, or of unsound mind or an undischarged insolvent, which when in possession of a third person is capable of being used to identify the individual by such third person with reference to the individual’s Name and Physical location. 

By defining the Personal Information in the above manner, we will be letting a “Netizen” preserve his “Anonymity and Pseudonomity” subject to certain conditions. Mere assumption of a “Pseudonym” or “Anonymous identity” on the information space would not be an offence unless such alter-identity is used to commit an offence.

Whenever an “Information” is required for “Law Enforcement” which means that there is a prima facie evidence that the information is suspected to be  a “Tool of Crime”, the protective veil has to be lifted.

The focus of the regulation will be to introduce a due process under which alone the “Privacy Veil” is removed.

Also under this definition, “Right” ceases when a person loses his capacity to enter into valid contracts. This means that there is no “Privacy Right” of a person who has lost his mental capacity to take decisions. Of course how this has to be determined and by whom needs to be defined in law. Such issues are already addressed under HIPAA and should not be difficult.

Establishment of a “Privacy Board”:

In order to adjudicate on the Privacy issues, the current system of adjudication/CyAT may continue where the fact of a wrongful act is not under serious challenge. Where there are serious doubts as to whether an information should be subject to privacy or not, a “Privacy Board” may be constituted as a “Reference Advisory Body” to which the Adjudicator may refer an issue of a “Request for lifting of the Privacy Veil” or “Defence an alleged violation of Privacy Right by disputing the nature of information as not being subject to the protection”. Such a “Privacy Body” may be headed by the NHRC Chair person and may have representation of the Ministries of Home Affairs, Defense, Information Technology, Netizen/Privacy Right Activists etc.

Once the issue of proper “Definition” and the “Privacy Controller” is established, other aspects of protection can be defined in an acceptable manner.

Preventing International Abuse

The privacy laws just like IPR laws of some of the foreign countries are designed in such a manner that they can be used effectively to control business flow over riding the principles of free trade.

If India does not recognize this and take some steps within our own laws to ensure that Indians are protected against unfair foreign laws, we will be letting foreign forces build “Information Colonies” in India. We have seen how Mr Donald Trump has already protected the US interests by restricting the US privacy protection only for US citizens. India needs to also protect its interests in a similar manner against exploitation of Indian interests through unfair and excessive privacy regulation of foreign Governments.

For this purpose, it must be made mandatory that whenever a foreign entity has to invoke a Privacy Law against an Indian Company or individual (including the GDPR or HIPAA etc), prior clearance of the Privacy Board is required.

This will ensure that unfair and unreasonable business restrictions are not imposed on Indian entities in the guise of protecting “Privacy” .

An appropriate mechanism of Arbitration can be instituted by the Privacy Board to ensure that there is proper conduct on both sides and there is no scope for unfair use of privacy laws by international players.

These could be part of the new amended ITA 2017 and I urge the Committee to look into these suggestions seriously.

I wish organizations such as DSCI which celebrate the “Data Privacy Day” also do some thing more concrete in this direction.

Naavi

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Redefining the scope of ITA 2008.. in the amendments..

This is the continuation of the discussions on the proposed amendments to ITA 2008 being considered by the T K Vishwanathan Committee.. Naavi

The proposed amendments to ITA 2000/8 which may come out in the form of Information Technology Amendment Act 2017 [ (ITAA2017(p)] during this year is an opportunity to make substantial changes to the present Act.

One of the main sections which needs attention in redefining the scope of the Act is to take a fresh look at Section 1(4) which keeps certain types of documents as mentioned in Schedule(1) out of the provisions of the Act. In the recent past there have been many State level enactments where legislations have been passed ultravires to the main Act because this section was not properly understood. Karnataka was one such state which passed an amendment to Registration Act 1908 which may be considered as ultravires the ITA 2000 because of Section 1(4) limitations.

Presently, Section 1(4) states as follows:

“Nothing in this Act shall apply to documents or transactions specified in the First Schedule by way of addition or deletion of entries thereto.”

The excluded documents so far notified are

1. A Negotiable Instrument (Other than a cheque) as defined in Section 13 of the Negotiable Instruments Act 1881 (26 of 1881)
2. A Power of Attorney as defined in section 1A of the Power of Attorney Act 1882 (7 of 1882)
3. A trust as defined in section 3 of the Indian Trusts Act, 1882 (2 of 1882)
4. A will as defined in clause (h) of section 2 of the Indian Succession Act, 1925 (39 of 1925) including any testamentary deposition whatever name called
5. Any contract for the sale or conveyance of immovable property or any interest in such property

The reasons for which these documents might have been kept out of the purview of the Act at that time (1998) could be either that some of these documents such as the Bill of Exchange and Promissory Notes needed to be compulsorily stamped before execution and it was difficult to do an online stamp and also establish that stamp duty was paid before the authentication and hence it was kept out of the purview.

The immovable property documents that transferred the title in the property constituted a huge part of the stamp duty income which accrued to the States and additionally there was a doubt if digital documents can be preserved for as long a time as paper documents could be preserved and hence needed to be kept out of the purview.

The other documents such as Trust Deed, Power of Attorney and Will were kept out perhaps keeping in view the “Digital Divide” and possibility of common men being duped with online frauds involving such documents.

The concerns of “Cyber Crime” involving property documents or Wills or Power of Attorney documents continue to this day and are perhaps more relevant than ever before though payment of stamp duty online is an easier problem that is no longer a concern.

Storage of electronic documents might be considered more reliable today than before. Further it would be strengthened if proper “E-Audit” under Section 7A of the Act is followed diligently.

Despite the changes that has come across in the last 18-19 years since the Schedule 1 content was drafted (first as part of Section 1 and then under Schedule 1), it is time to consider if at least some of these provisions could be addressed now.

Unfortunately the system of Authentication defined by Digital Signature and Electronic Signature itself is shaky because the system is not properly implemented. Presently the system is running because the users are unaware of the proper way of using the digital/electronic signatures and intermediaries including the licensed Certifying Authorities by pass many of the legal provisions and CCA is not enforcing its authority.

For example, today private keys are being compromised systematically by corporate directors leaving the cryptographic keys with their auditors.  Many of the Certifying authorities engage Registration Authorities (RAs) who keep copies of the private key with them, load it onto the cryptographic key and then deliver it to the customers  ignoring the fact that the private key has been compromised.

The e-sign system itself is faulty for the reason that the key pair might be generated and stored on the HSM controlled by an RA and not the subscriber and that the subscriber’s e-application for issue of digital certificate is itself not authenticated since the subscriber has not yet obtained the digital certificate at this point of time. The e-KYC of aadhaar is done with reference to the OTP relying on the KYC of the Mobile operator and the digital certificate expires before the first verification of the e-signed application is made.

In view of these fault lines in the authentication systems, it may not yet be possible to remove either the immovable property documents or the Will or Power of Attorney from the list of excluded documents.

However, if there is any conditional inclusions can be made, property lease deeds of less than one year duration which may presently be exempted from stamp duty can be included in the act.

As regards the “Will” there are two issues. A Will can be left for properties which are not digital. At the same time a Will may also include properties which are per-se digital such as the e-mail accounts, domain names, websites etc.

It can be considered if a testamentary document in electronic form could be recognized only for the digital properties such as the “Passwords”,  “e-mail accounts”, “Digi locker/Drop box accounts”, Apps on the mobile including UPI apps and Mobile wallets holding monetary value, Cryptocurrency wallets, Software purchased and running online, Mobile accounts, SIM card/Stored on the Mobile information, domain names, websites, content and web based software etc.

Additionally, I have suggested that “Contracts of Marriages” including “Contracts to nullify Marriages” can be added as an exclusion. This will address the issue of nuisance “Claimed Marriages on Twitter” or “Talaq on WhatsApp”.

A more detailed debate on this issue may throw up other suggestions if any.

Thus the scope of ITA 2017 (P) needs to be redefined with reference to the type of documents that it may cover either by modifying the First Schedule of the Act or by inserting new definitions and explanations at appropriate places.

Naavi

 

 

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Domain Name Regulation in ITA 2000..to be amended

This is a continuation of our discussions on proposed amendments to ITA 2000 presently under consideration by the T.K.Vishwanathan Committee. For further discussions henceforth we shall refer to the proposed amendments as ITAA2017(p) and the new Act as ITA2017(p).

The ITA 2000 pursued the objective of E Commerce promotion by providing legal recognition to Electronic Documents and the method of authentication through Digital Signatures. It also addressed some aspects of Cyber Crimes which were expanded in 2008 along with more on compliance requirements.

However both ITA 2000 and the 2008 amendments did not in any way looked at the regulation of “Domain Name” which is the key property of any  E-Business. Additionally, today we see a number of Cyber Crimes being committed under fraudulent websites whose domain names are registered so as to cheat public, registrant’s information hidden under the false pretense of “Privacy” and ownership often determined more on the basis of “Trade Mark registration” than any other logical consideration.

Naavi has been in the forefront of the debate for the concept of “Resolving Confusing Domain Names through a system of a trusted third party disclaimer” (Refer: lookalikes.in) . The idea here is that if two persons have legitimate interests in a particular domain name and there is neither an attempt to cheat public by “passing off” a service as similar to a more popular service or to cause confusion and obtain undue advantage there of, then we should allow the two otherwise similar domain names to co-exist with disclaimers on both sites preferably corroborated by a trusted third party.

What presently happens is that a genuine person who wants to start business under a domain name will never get a name which is free of disputes because every name will be similar to some name already registered elsewhere in the world. The very system of ICANN allowing multiple TLDs means that different entities may hold the same name in different TLDs if they have a reason. Today one company cannot register all domain names in all the 200 plus extensions that are available and therefore allow others to register the names and then hound them like a prey. The UDRP process and the INDRP process is heavily skewed towards the more wealthy disputant and holder of a trademark.

In US, the Anticybersquatting Consumer Protection Act (ACPA), provides some protection to domain name owners in addition to the remedies provided under the UDRP though even this law favours the US trademark owners. In India we donot have a similar law.

In many cases, the disputes are raised after a business builds up a brand value in a domain name since when the domain name is registered, no registrar alerts the registrant about the possibility of a challenge coming up later. Both the registrars and the ICANN make money by letting people register names which are patently undefendable if challenged by the earlier registrant of a similar name.

At the same time, those who want to register phishing domain names are not concerned with either the trademark law nor the Cyber squatting law and register domain names in patently confusing names.

Thus the current system does nothing to prevent fraudsters and only hurts genuine registrants who pick up an available name because it suits them for promoting their business without any intention of taking advantage of the existing brand name owned by some body else.

ITA 2000 as proposed for amendment should therefore try to provide a solution in this regard. The suggestions I have in this regard has been discussed in detail several years back in this site (see the old articles under the link “Old Posts“). It is time for others to add their views to the debate. In short, my suggestions are

a) Given the existence of a number of options for the TLDs in the generic and CcTLD type it is not possible to prevent registration of names which may be in conflict with others.

b) The use of “Internationalized domain names” in different languages such as Hindi or Chinese and the Phonetic similarities which are also a cause of action in trademark disputes make the current system of allowing registration of any domain name without the registrant being checked at the time of registration is a completely unacceptable system.

c) The system of “Registering a Lookalike Domain Name” with a disclaimer publication was suggested so that the affected domain name owner can object if there is a real need but genuine registrants would feel safe to develop their brand in an otherwise risky domain name.

d) The practice of hiding the name of the registrant of a domain name in the disguise of “Privacy” should be discouraged and eliminated since it puts a barrier on quick investigation of frauds.

e) The registrars should be considered liable (Even now they are liable under Section 79 of ITA 2000/8 as intermediaries but this is rarely recognized) for any frauds where the registration of a fraudulent domain name was used as a tool of cyber crime.

Incorporating the above requirements we need to develop a new system of domain name registration initially within the jurisdiction of India and provide protection to the Indian registrants with the concept of the “Regulatory Gateway” discussed in the earlier article.

In our first article on the modifications ,we suggested introduction of the following section in Chapter XI..

(..) Whoever, in bad faith and with the intention to cause disrepute, harm to another person or cause disruption of any legitimate business or cause confusion in the minds of the public, who having regard to the circumstances, are likely to be influenced registers a domain name shall be liable to pay damages to the person so affected not exceeding Rs 10 lakhs and for the purpose of this section, a person not being a resident of or a citizen of India shall also be liable even if no computer or computer system located in India is used for the contravention.
Explanation:
For the purpose of this section exercising of due diligence including appropriate disclosures shall be considered as indications of good faith.

This could be a starting point to develop the appropriate penalties either in the form of civil penalties only or with a criminal punishment also.

I leave it for further discussion by the T K Vishwanathan Committee.

Naavi

P.S: 27/10/2017: A case similar to the case of cgtmse.govt.in where a fraudulent website in the name of the Government was run to cheat public has been reported again in the name of nmcsm.in (See here ).

 Highlights the need for making domain name registrars liable for the irresponsible registration of domain names. Simultaneously it also highlights the need of Government websites like UIDAI to follow certain domain name registration policies which provide confidence to the public that the sites are genuine…as pointed out in an earlier article.

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Need for a Regulatory Gateway

Thinking about the proposed amendments to ITA 2008, my attention was today drawn to the “General Data Protection Regulation (GDPR)” which is the new Data Protection Regime being promoted by the European Union. Europe is known to be in the forefront of protecting the “Privacy” of individuals and has often crossed swords with even US when it comes to enforcing its Data Protection Regime in the information world.

The GDPR which is replacing the EU Data Protection regulation of 1995 has already come into existence with its adoption in 27th April 2016 and application from 25th May 2018 after a two year transition period.

The GDPR attracts attention across the globe and particularly the Indian community in view of its unrealistic penalty regime and the arrogance with which it is sought to be enforced.

For example, it is proposed that “Non Compliance” could result in penalties of upto 4% of Global Turnover of a company or €20 million (approx Rs 146 crores) whichever is greater. The regulation applies if the data controller or processor or the data subject is based in EU. If the regulation had used the term “if the data controller, the processor and the data subject” are all based in EU, it would have been a reasonable regulation. But expecting the regulation to be applicable to companies outside EU is inviting international litigation that could cause extreme disruption in global business.

Indian IT Companies should be more worried about this than the changes in immigration laws that may be brought in by the new US President.

Even if there are any doubts about the jurisdiction of EU Courts on non EU country resident companies, it is evident that contractual obligations between EU Companies and the non EU entities will hoist liabilities and indemnities for non compliance and hence if any Indian Company wants to do business with EU countries involving processing or storing or transmission of personal data from the EU residents, GDPR would be considered applicable. Hence the 4% Global turnover  penalty will loom large on such companies.

This tendency of one country trying to impose its law on another country is most relevant for the borderless Cyber Economy. We have seen how US has imposed its jurisdiction on Dmitry Sklyrov of ElcommSoft and innumerable litigations on cross border Cyber crimes. While the need for controlling Cyber Crimes and Cyber terrorism has established the need for cooperation between multiple countries with or without underlying treaties, there is a tendency in the IPR and Data Protection regulation to use the international jurisdiction to unreasonable levels.

GDPR is emerging as the next threat in this direction.

I therefore urge the ITA 2000 amendment committee to recognize that we cannot allow unrestricted international hegemony to play over the Indian regime and threaten the growth of E Business in India.

I therefore propose that in the new ITA 2000, a proposal is made to establish an ” International Cyber Law Regulator for India” who will be the sole authority to adjudicate if in any specific instance international jurisdiction should be allowed. This regulator need to work as a gateway to ensure that unreasonable international regulation does not hurt Indian interests while at the same time not preventing any reasonable compliance regulations promoted by international organizations to be complied with even in India.

The authority should register Indian players who would like to be protected under any international regime passing laws that may affect the Indian entities and manage the information flow in respect of all “Compliance related regulations”. At the same time, it should be mandated that any international organization that wants to take legal action against an Indian Citizen or Organization should have first registered their international legislation with the authority and obtained its consent to make it applicable to Indians and also route any complaints of non compliance entirely through this regulator.

This regulatory authority can be a multi member authority and not the CERT IN. It should have people who know Cyber law and International Law  besides Technology and the compliance regime.

This authority would be a protective umbrella that provides some relief to the Indian entrepreneurs to focus on their business rather than watching over their shoulders for all the international laws many of whom are only meant to be self serving for the advanced countries to build their colonies of influence using information technology as an excuse.

Naavi

Related Articles:

The Applicability Of EU Data Protection Laws To Non-EU Businesses

Does GDPR apply to organizations outside the EU?

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Drawing the attention of T K Vishwanathan Committee on ITA 2000 amendments

The T K Vishwanathan Committee on ITA 2000 amendments is presently working on amendments to the ITA 2000. ITA 2000 was notified with an intention to “Enable and Promote E Commerce”. However, the amendments of 2008 shifted the focus from E Commerce Enablement and Promotion to “Information Security”.

Now the proposed 2017 amendments may have to keep in mind both E Commerce promotion as well as Information Security However, there is a need to enlarge our focus and recognize that “Computer” and “Information” has acquired a much larger meaning in 2017 than it ever had and hence the thrust of the law should also shift its focus.

The theme of the ITA 2017 (proposed) should be to “Enable”, “Promote”, “Regulate” and “Secure” …. “Digital India” as it emerges.

The “Digital India” that we need to Enable, Promote, Regulate and Secure consists of amounts other things, the IOT world, Big Data, Globalized Cyber Crime Syndicates and the Dark Web, the FinTech Companies, the Digital Payment Systems and so on. The IPR regime as applicable to Cyber Space which covers the domain name disputes, the copyright on social media disputes and the Patents of cyber processes, the issues such as Data Protection, Privacy etc all need to be kept in the radar.

Will the proposed amendments recognize this larger role of regulation of Digital India in an emerging Digital World? or will it be another attempt at simply tinkering the existing legislation with some new Cyber Crime definitions, changing the punishments from 3 years to 2 or five etc (many of which are also required) needs to be seen.

While it is easier to look at the changes to be made to the current framework, it requires a “Vision” of the “Future India” if we need to amend ITA 2000/8 in such a manner that it will be respected and complied with by the industry in the coming days. If the amendments are not handled with “Vision”, the law will become messy. A messy law will not be complied with voluntarily and will be abused both by the crooked and the corrupt.

We, the people of India need to do whatever is required to ensure that the proposed amendments are an improvement of the current regulatory regime and does not become a wasteful exercise complicating the law further.

It is however the duty of every Citizen of India on this 68th Republic Day to take a pledge that in the spirit of “Ask Not what the Country has done to you, but Reflect what you have done to the Country” to keep expressing what they think is good for the country in the form of the “New” and “Improved” ITA 2000/8.

Some of the general principles that the “Amended ITA 2000” should incorporate is

a) It should be simple and understandable by the common man

b) It should lay down the broad principles and leave the detailing to the rules

c) It should cover the interests of all stake holders such as the Citizens, Netizens, Cinizens (Citizens who are also Netizens), Information Intermediaries including Internet and Mobile service providers, Banks, E Commerce Companies etc as well as the Government.

It is important to ensure that the law should be “Cinezin Centric”,  because in the coming days there will be no pure Citizens or no pure Netizens.

We should recognize that Citizens who are not Netizens may continue to exist for some more time and we need to give suitable time for them to transform from the Physical world to the Digital World.

At the same time Netizens who exist in the borderless Cyber Space to the extent they influence and interact with Citizens need to understand that law cannot be entirely made for the benefit of Netizens only.

Naavi.org invites “Visionaries” and thought leaders to contribute their thoughts on the required amendments through these columns.

Of course we cannot assure that these thoughts will be taken into consideration by the ITA 2000 amendment committee, but we hope the committee does give a glance to it.

Naavi

 Related Articles

Proposed Amendments to ITA 2000 and Privacy Protection

Redefining the scope of ITA 2008.. in the amendments..

Suggestions on Modification of ITA 2008

Domain Name Regulation in ITA 2000..to be amended

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The Watal Committee Report on Digital Payments..1

Last year, the Finance Ministry constituted a committee under the chairmanship of the former Finance Secretary, Mr Ratan P Watal, to review the framework related to Digital Payments. The committee submitted its report last month ahead of schedule probably in view of the accelerated implementation of the digital payment framework after the demonetization.

The committee’s recommendations are of wide significance and could make substantial difference to the system of regulation of digital payments as we know today. In view of the criticality of some of the recommendations, it is necessary that the recommendations are widely discussed and debated before adoption. 

We shall attempt to discuss the provisions bit by bit through a series of articles here to commence a healthy debate. This is the first of such articles in the series.

Naavi

Copy of the Report


The Watal Committee has submitted its report to the Finance Ministry on different aspect of the Digital payment infrastructure in the country. The Committee identified four factors which have led to the phenomenal growith of digital payments namely,

(i) digital and technology revolution,

(ii) entry of several non banking PSPs into payments space,

(iii) customers becoming more demanding and expecting instantaneous and one-touch payment solutions and

(iv) progressive changes in the regulatory framework.

The Committee has expressed its vision  to set a roadmap for digital payments to grow substantially over the next three years. It is desired that India’s cash to Gross Domestic Product (GDP) ratio should be reduced from about twelve percent to six percent.

The Committee has taken note that at present about 65% of population have access to mobiles and around 95% have Aadhaar identity. It is also noted that about 35% use Internet and Social media and these should be helpful in achieving the said goal.

The committee recognizes that Banks have been currently managing the payment systems and regulated by RBI. But the role of FinTech companies as Payment Service Providers (PSPs) has gathered momentum in the recent days and there is overlap of the activities of FinTech PSPs with the Banks.

In this context the committee has found it necessary to recommend that the regulatory framework needs to be changed to provide for increased participation of FinTech PSPs in the traditional Banking system. (It may be recalled that Naavi had several years back advocated that RBI should introduce a new licensing category for E Banking companies and not allow the current system to be diluted. A move in this direction appears happening now in the PSP industry).

The Committee suggests that the recommendations may be put into implementation over the next thirty to ninety days.

The measures indicated to be inroduced include

(i) placing the proposed legislative changes before the Parliament,

(ii) regulatory changes by RBI within the current legislative framework and

(iii) implementing the policy and executive steps by Ministry of Finance (MoF) and other nodal ministries.

The Committee has made a total of 13 recommendations as follows, which will be discussed in detail subsequently.

  1. Make regulation of payments independent from the function of central banking.
  2. Update the current Payments and Settlement Systems Act, 2007
  3. Promote digital payments and receipts within Government
  4. Create a fund proposed as DIPAYAN from savings generated from cash-less transactions
  5. Create a ranking and reward framework
  6. Implement other measures to promote digital payments including  promoting Aadaar based eKYC etc
  7. Consider outsourcing the function of operation of payment systems
  8. Upgrade payment systems like RTGS and NEFT to operate on 24×7 basis in due course of time.
  9. Allow non-bank PSPs to directly access payment systems
  10. Require NPCI, to be payments centric in its ownership and objectives.
  11. Enable payments to be inter-operable between bank and non-banks as well as within non-banks.
  12. Create a formal mechanism to enable innovations and new business models
  13. Implement other measures to promote digital payments including issuing regulations on Systemically Important Payment System (SIPS) and Systemically Important Financial Institutions (SIFIs) etc.

As one can observe, the recommendations are far reaching and could in the terms commonly used in the industry, “Disruptive” of the financial regulatory systems. Recognizing the impact of these suggestions and the problems of its improper implementation, there is need for all stake holders to deliberate in depth the action plan under this report.

Let’s start the debate here and now.

Naavi

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