“Empowering Indian Startups by being a catalyst for change in the Policy sphere”

The draft Digital India Act has been introduced as a replacement of the Information Technology Act, 2000. The IT Act 2000 was originally designed to address e-commerce related transactions, along with cybercrime and other such offenses. As the Act predates the ‘smart phone’ revolution, mobile internet and growth of social media platforms, it needed a revamp to deal with the nuances of the current cybersecurity landscape adequately, and to address data privacy rights. With drastic changes taking place in the digital ecosystem and the inception of new challenges which accompanies them, an urgent need was felt for global standard cyber laws to be introduced in the country to act as a catalyst and enabler for a $1 trillion digital economy. 

The draft Digital India Act intends to address India’s open internet, online safety and trust, accountability and quality of services in the digital space, need for an adjudicatory mechanism, and incorporation of new technologies. New-age offences such as the possession and distribution of child pornography, improper and unauthorised digital use of government-issued identity cards, misinformation, etc. will also be addressed in the Act. 

India today is standing at a crossroads where it needs to prioritise the growth of, as well create a balance between various stakeholders, including the end consumers, the common internet user, the startup ecosystem, and the Bigtechs. In order to ensure a smooth transition into this new era, ADIF feels that the implementation of the Digital India Act is necessary to enable more innovation, more startups, and protection of the citizens of India in terms of safety, trust, and accountability. There are several international developments of Acts / amendments that are already notified in certain jurisdictions and several others which are at various stages of consultation, and ADIF feels that we have a unique opportunity to integrate learning from these international experiences. In addition to this, ADIF feels that a sectoral regulator should be set up which could play the dual role of providing regulatory and oversight function and help resolve various potential issues in this domain.

Over the last few years, there has been an unintended increase in cases of frivolous criminal complaints or FIRs against company executives. In most of these cases, there is no direct relationship between the offense and the executive’s duties, thus causing unnecessary harassment and interference in the operations of their business. Most of these cases against Key Managerial Personnel (KMPs) of the companies are generally related to fraud & cheating and content-related offenses, which are covered under the sections 65-67 of the IT Act and sections 292, 294, 411, 419, 420, 425 under the IPC.

In addition to this, most of the frivolous cases against their KMPs under the IT Act were instituted in smaller towns as compared to metropolitan cities. The plausible explanation may be that the officers posted in metropolitan areas understand the nature of how the companies function better. However, this implies that comprehensive training of police officers posted in smaller cities in intermediary companies and cybercrimes investigation is needed.

These frivolous cases may not only create barriers for technology companies to operate in India but can impact the Ease of Doing Business in India. Criminal complaints against an intermediary or its KMPs usually take years for the investigation and decision on such cases. There are also issues regarding certain ambiguities in legal provisions, gaps in dispute resolution, lack of available data on such cases and the high pendency of cases amongst other shortcomings.

In this regard, ADIF feels that certain changes could help improve the situation:

1. Reviewing certain provisions of the IPC such as the offences of cheating, criminal conspiracy, etc., as they need better contextualisation from Digital Markets perspective
2. Reviewing certain provisions of the IT Act such as the offences of cheating, fraud etc. given that similar offences are already covered under the existing laws
3. Offences which do not contain an element of mens rea can be considered for conversion from criminal to civil wrong with monetary penalty.
4. Under Section 85(1) of the IT Act, a KMP is deemed liable for a corporate criminal offence on a complaint being made against them and the burden of proof to claim otherwise is on the KMPs. This undercuts the safe harbour provision provided to intermediaries in practice. To avoid harassment of individuals in frivolous and vexatious cases, it may be useful to remove the provision of deemed liability of KMPs for cases involving intermediary liability.
5. Preliminary enquiry powers before registration of FIR should be expanded to allow determination of who may be responsible for an alleged offence, specifically in relation to cases filed against companies
6. The enforceability of penal provisions can be considered from the investigation perspective. Involvement of KMPs in the investigation process for matters concerning day-to-day operations may be avoided through the designation of specific nodal officers with appropriate visibility and control over the subject matter.
7. The construction of several offences such as Section 120B (criminal conspiracy) or Section 415-420 (cheating) of the IPC can be changed. The composition of the offences under these sections does not fully capture the changed nature of these crimes and the dispensation of criminal justice
8. The government may consider strengthening the safe harbour provisions available to intermediaries and their KMPs under Section 79 of the IT Act
9. The government may also consider setting up an ombudsman for cybercrime cases involving intermediaries for fast and effective dispute resolution of criminal complaints against such entities

Keywords are words or phrases that are used to match ads with the terms people are searching for in the search bar of search engines and advertising platforms. When businesses/ advertisers select each keyword, they can choose how much they are willing to pay whenever a customer searches on that particular keyword and clicks their ad. This is the business’ keyword's maximum cost-per-click, or max CPC, bid amount. If one or more advertisers or businesses are bidding on the same keywords that search engine and advertising platforms deem relevant to the search query, an auction takes place to determine who would own that specific keyword. Ads with a sufficiently high Ad Rank, which is a combination of multiple factors, win and appear at the top of the search result. Since the auction process is repeated for every search, each auction can have potentially different results depending on the competition at that moment.

ADIF believes that allowance of bidding on company brand keywords and trademarks on search engine and advertising platforms is a copyright and trademark violation. In order to continue to feature at the top of the search results, these brands and products which are IPR registered and licensed, have to shell out extra money to safeguard their own company name to be used as keywords in search engine and advertising platforms. Hence, other competitors can potentially appear ahead when a customer searched for a specific brand word, provided they have bid higher in the search engine and advertising platforms auction. This results in a scenario where those competitors selling similar products and services, are capitalising on the brand value of the registered trademark and brand owners.

ADIF feels that Clause 78 of The TradeMarks Act, 1999 – ‘Rights conferred by registration of certification trademarks’, should include – ‘prohibition on the bidding of brand owner specific keywords and trademarks by third parties on search engine and advertising platforms.’ In addition to this, the Advertising Standards Council of India guidelines may be expanded to cover search engine advertising.

In the budget 2020, the Finance Minister of India announced deferment of tax liability on ESOPs issued by startups by 5 years. This was a welcome change, as otherwise employees had to pay tax from their pocket or had to liquidate a few of the shares at the time of exercising the ESOP option to meet tax liabilities. However, there are certain other issues related to ESOPs which needs to be addressed.

ESOPs are treated as income when the employees convert them into shares on completion of the vesting period, and the difference between the fair market value of the shares as on the date of exercising the option, and the amount paid to exercise the option (called perquisite), is taxable. Due to this, the incentive of getting the ESOP at a lower price than fair market value gets lost. Deferred tax liability on ESOPs for the Indian start-up sector, announced in the 2020 Budget, is only applicable for start-ups which are incorporated on or after April 1, 2016, but before April 1, 2024. Also, the provision is applicable to only those Startups qualified under Section 80-IAC, meaning thereby certified by Inter-Ministerial Board (IMB), which comprises of less than 1% of all the startups registered with the DPIIT. In addition to this, employee who is eligible for ESOPs must either be a permanent employee or a director of the company. This rule limits the extension of ESOP benefit to other important stakeholders, who are instrumental in shaping up the success of a startup, including consultants, lawyers, IP experts, CAs et al.

ADIF feels that ESOPs should be made taxable only at the time of selling of shares by the employee and extending it to the professionals for their services. ‘Deferred tax liability’ provision should be extended to all Startups for promoting the Start-up sector in India. In addition to this, ADIF recommends that under the reverse charge mechanism, startups with a certain threshold of turnover may be considered to be exempted from GST altogether.