Tag Archives: DIPP

Draft E-commerce Policy: The dawn of a new beginning

Data is the basic building block of everything we are trying to do in this age of Industry 4.0. Data is a valuable resource for any individual, corporation or the Government. Data can be used for analytical, statistical, business, security purposes among various other things. Keeping ‘data’ central to the idea of governing the e-Commerce industry in India the Department for Promotion of Industry and Internal Trade on February 23, 2019, published the ‘Draft e-Commerce Policy’ (“Draft Policy”).

The overall objective of the Draft Policy is to prepare and enable stakeholders to fully benefit from the opportunities that would arise from progressive digitalization of the domestic digital economy. The Draft Policy focuses on data protection, the State’s paternalistic attitude towards the use of the citizen’s data and cross border transactions. The Draft Policy intends to regulate some things beyond e-commerce i.e. it proposes to regulate technologies like AI, IoT, Cloud computing and Cloud-as-a-Service etc. On a holistic level, it is understood that these technologies empower e-commerce industry currently and are integral to its growth and therefore the Government intends to bring these technologies under the purview of the Draft Policy. The Draft Policy is a mix of visionary thought process, advanced technological solutions, putting in place digital infrastructure to support India’s digital economy etc.

DATA

The Draft Policy resonates the idea and intent of the legislature that is formulated under the Data Protection Bill, 2018 as far as the rights over data of an individual is concerned. The collective idea of the Draft Policy is to streamline the protection of personal data and empowerment of the users/consumers with respect to the data they generate and own. Though the question to be assessed here is whether this is the real intent of the Draft Policy?

The Draft Policy recognises the rights of an individual over its data by stating that “An Individual owns the right to his data” and therefore the use of an individual’s personal data shall be made only upon seeking his/her express consent. It further states that the data of a group is a collective data and therefore a collective property of that particular group; it extends this rationale to state that “Thus, the data that is generated in India belongs to Indians, as do the derivatives there from”. But the Draft Policy ends up categorising data of Indians as a collective resource and therefore a “national resource”.

The abovementioned intent of the Draft Policy is fair and strives to achieve the greater good of the country, but at what stake? If personal data belongs to an individual then this objective appears that the State wants to interfere with the personal rights of a person. The Draft Policy clearly states that “All such data stored abroad shall not be made available to other business entities outside India, for any purpose, even with the customer’s consent”, what follows this point in the Draft Policy, restricts sharing of data with any third party in a foreign country even if the individual has consented to such sharing of the data.

The intent behind such restriction is that currently, India lacks stringent laws regarding cross-border flow of data. If there are no strict restrictions on cross-border flow of data Indian stakeholders will merely be engaged in back end processing of data for the EU / US based e-commerce entities without having the ability to create any high-value digital products. While the Government considers data as a national resource and compares it with coal, telecom spectrums etc. it ignores the fact that the inherent nature of personal data is that it belongs to an individual and not to the State, unlike coal.

The obvious reason as to why the State is taking such a stance is to eliminate issues related to consent asymmetry. But is this paternalistic attitude warranted?

If the Government is worried about foreign countries using our national resource i.e. data to their advantage it should put in place stringent data privacy and protection laws in India taking inferences from other countries.

DATA INFRASTRUCTURE

The Draft Policy takes forward the digital India initiative and intends put in place secure and digital infrastructure and encourage the development of data –storage facilities/ infrastructure including data centres, server farms, towers, tower stations, equipment, optical wires, signal transceivers, antenna etc.

The Government will add the above-mentioned infrastructure facilities in the  ‘Harmonized Master List’. This will enable regulation of the listed infrastructure in a more streamlined manner. Whereas the infrastructure will be put in place by various implementing agencies, while financing agencies may identify these as infrastructure that they may intend to support. This will facilitate achieving last mile connectivity across urban and rural India.

The Government by developing such data/digital infrastructure wishes to support India’s fast-growing digital economy and create employment.

EASE OF REGULATION

Given the interdisciplinary nature of e-commerce, it is important for the Government to tackle various regulatory challenges. The Draft Policy suggests formulating a Standing Group of Secretaries on e-Commerce (SGoS), which shall be an important body for tackling various legal issues emerging from various statutes such and Information Technology Act, 2000 and rules thereunder, the Competition Act, 2002 and the Consumer Protection Act, 1986.

Additionally, the Draft Policy states that “All e-Commerce websites and application available for downloading in India must have a registered business entity in India as the importer on record or the entity through which all sales in India are transacted”.

SIGNIFICANT HIGHLIGHTS OF THE DRAFT POLICY

  • The Government intends to continue charging custom tariffs on any digital goods being traded electronically (imposing custom duties on electronic transmissions). Whereas the Government is strict on its stance of not accepting the permanent moratorium on custom tariffs for goods (including digital goods) traded electronically as proposed by the WTO.
  • The Draft Policy states that there should technological standards put in place for emerging technologies like IoT, AI etc.
  • The Draft Policy introduces a term, namely ‘Infant Industry’ under which small scale entities facing entry barriers to enter the market will be integrated with market keeping data as a central to this integration. This will also help strengthen platforms like ‘e-lala’ and ‘Tribes India’.
  • The Government intends to establish technology wings in each Government department.
  • The Government intends to streamline the process of importing goods in India and harmonise the functions of various administrative bodies involved in the process of import of goods in India.
  • A body of industry stakeholders will be created that shall identify ‘rogue websites’. These rogue websites will be added to ‘Infringing Website List’ (IWL). IWL will enable the ISPs to remove or disable these websites. It will also enable payment gateways to curtail the flow of payments to or from such rogue websites. Search engines will be able to efficiently remove such rogue websites identified in the IWL.
  • There shall be no trade mark infringement and customers at large shall not be deceived by using deceptively similar trademarks. In case an e-Commerce entity receives a complaint about a counterfeit/fake product which is manufactured with intent to deceive the customers. The e-Commerce entity shall convey such misuse of the trademark within 12 hours from receiving the complaint to the trade mark owner. Whereas in case any prohibited goods/products have been sold on any e-commerce platform the entity operating such e-Commerce platform shall delist such products within 24 hours from receiving such complaint.
  • Any non-compliant e-Commerce entity will be not be given access to operate in India.
  • All e-Commerce sites/apps available to Indian consumers shall display prices in INR and must have MRPs on all packaged products, physical products and invoices generated.
  • In the view of misuse of ‘gifting’ route, as an interim measure, all such parcels shall be banned, with exception of life-saving drugs.
  • Details of sellers shall be available for all the products sold online.
  • Sellers shall provide undertaking regarding genuineness of any product sold online.
  • In case of a counterfeit product is sold to a consumer, the primary onus to resolve such an issue will be of the seller but the intermediaries shall return the money paid to them by the customer and the marketplace shall seize to host such products on their platforms.
  • The intermediaries shall curtail piracy on their platforms.
  • An integrated system that connects Customs, RBI and India Post to be developed to better track imports.
  • The Draft Policy also intends to simplify the processes involved in export of goods by doing away with redundant requirements such as the need to procure Bank Realisation Certification

Once the final e-Commerce policy is enacted what will be interesting to see is whether Government opts for ease of governance or ease of doing business.

Overall this Draft Policy is a positive step towards making India one of the most prominent digital economies in the world, especially considering the strict stance the Government has taken during the WTO negotiations by not accepting the permanent moratorium on waiving custom duties on digital goods sold through electronic transmission. The Government intends to boost the local and home grown e-Commerce business entities and to provide a level playing field for MSMEs by retaining the rights to impose tariffs on electronic transmission through e-Commerce. Certain issues regarding data/personal data of an individual still needs a deep intellectual thinking, integrated with a practical approach from the Government before implementing a sector-wide policy, especially keeping in mind that at the end of the day personal data belongs to an individual and the use of such personal data shall be the decision of the respective individuals and not of the State.

Author: Manas Ingle, Associate, NovoJuris Legal

Update: Regulatory Department of Industrial Policy and Promotion (DIPP) Notification on Definition of Start-ups

The Department of Industrial Policy and Promotion (DIPP) vide its notification dated 11 April 2018 has amended its previous notification dated 23 May 2017 on the eligibility guidelines for ‘start-ups’. This notification is in suppression of the earlier notification dated 23 May 2017.

Definition of Start-Up:

An entity shall be considered as a start-up:

  • up to a period of 7 years from the date of incorporation/registration, if it is incorporated as a private limited company or registered as a registered partnership firm or a limited liability partnership in India. In the case of start-ups in the biotechnology sector, the period shall be up to 10 years from the date of its incorporation/ registration.
  • The turnover of the entity shall not exceed Rs.25 Crore.
  • The entity should be working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation. However, an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘start-up’.

Income Tax benefits:

Relaxation under section 80-IAC

Prior to this notification, in case of claiming tax benefits under section 80-IAC of Income Tax Act, 1961, the start-ups had to be incorporated on or after 1 April 2016, but before 1 April 2019 but as per the new notification, the period has been extended to 1 April 2021 and can claim 100% tax exemption on profits for 3 out of 7 years. With this new change, the start-ups shall enjoy income tax benefit for 3 out of 7 consecutive assessment years. Further, the Certification from the Inter-Ministerial Board is necessary to avail such exemption.

Tax benefit under section 56 (2) (viib) of Income Tax Act 1961

As per section 56(2) (viib) of Income Tax Act 1961, in case of Company receiving consideration issuance of shares above Fair Market Value (FMV), then the excess of consideration above the FMV would be taxed in the hands of Company as other Income. Prior to this notification, the start-ups were exempted from the aforementioned provisions. The valuation of the Company in such case should be as per 11UA of the Income Tax Act 1961, which states that it should be as per Discounted Free Cash Flow method determined by either Merchant Banker or by Chartered Accountant.

Pursuant to this notification, the start-ups could avail such tax benefits on issue of shares for a consideration above the fair market value, only upon fulfilment of following conditions:

  1. The aggregate amount of paid-up share capital and share premium of the start-up after the proposed issue of shares should not exceed Rs.10 Crore.
  2. The investor/ proposed investor, who proposed to subscribe to the issue of shares, should either have (i) an average returned income of Rs.25 Lakh or more for the preceding three financial years or (ii) Net worth of Rs. 2 Crore or more as on the last date of the preceding financial year.
  3. The start-up has obtained a report from a merchant banker specifying the fair market value of shares in accordance with Rule 11 UA of the Income Tax Rules 1962.

Further, start-ups shall have to make an application to Inter-Ministerial Board and obtain the approval for such exemption.

Pursuant to this notification, it shall be expensive for start-ups to obtain merchant banker certificate for such issuance. This may require clarity as rule 11UA allows both Merchant Banker or by a Chartered Accountant to issue valuation certificate. However, this notification mandates such valuation could be done by only merchant banker.

Source: https://www.startupindia.gov.in/notification.php

Regulatory update: Department of Industrial Policy and Promotion (DIPP) Notification on Definition of Startups

The Department of Industrial Policy and Promotion (DIPP) vide its notification dated 11 April 2018 has amended its previous notification dated 23 May 2017 on the eligibility guidelines for ‘start-ups’. This notification is in supersession of the earlier notification dated 23 May 2017.

Definition of Start-Up:

An entity shall be considered as a start-up:

  • up to a period of 7 years from the date of incorporation/registration, if it is incorporated as a private limited company or registered as a registered partnership firm or a limited liability partnership in India. In the case of start-ups in the biotechnology sector, the period shall be up to 10 years from the date of its incorporation/ registration.
  • The turnover of the entity shall not exceed Rs.25 Crore.
  • The entity should be working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation. However, an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘start-up’.

Income Tax benefits:

Relaxation under section 80-IAC

Prior to this notification, in case of claiming tax benefits under section 80-IAC of Income Tax Act, 1961, the start-ups had to be incorporated on or after 1 April 2016, but before 1 April 2019 but as per the new notification, the period has been extended to 1 April 2021 and can claim 100% tax exemption on profits for 3 out of 7 years. With this new change, the start-ups shall enjoy income tax benefit for 3 out of 7 consecutive assessment years. Further, the Certification from the Inter-Ministerial Board is necessary to avail such exemption.

Tax benefit under section 56 (2) (viib) of Income Tax Act 1961

As per section 56(2) (viib) of Income Tax Act 1961, in case of Company receiving consideration issuance of shares above Fair Market Value (FMV), then the excess of consideration above the FMV would be taxed in the hands of Company as other Income. Prior to this notification, the start-ups were exempted from the aforementioned provisions. The valuation of the Company in such case should be as per 11UA of the Income Tax Act 1961, which states that it should be as per Discounted Free Cash Flow method determined by either Merchant Banker or by Chartered Accountant.

Pursuant to this notification, the start-ups could avail such tax benefits on issue of shares for a consideration above the fair market value, only upon fulfilment of following conditions:

  1. The aggregate amount of paid-up share capital and share premium of the start-up after the proposed issue of shares should not exceed Rs.10 Crore.
  2. The investor/ proposed investor, who proposed to subscribe to the issue of shares, should either have (i) an average returned income of Rs.25 Lakh or more for the preceding three financial years or (ii) Net worth of Rs. 2 Crore or more as on the last date of the preceding financial year.
  3. The start-up has obtained a report from a merchant banker specifying the fair market value of shares in accordance with Rule 11 UA of the Income Tax Rules 1962.

Further, start-ups shall have to make an application to Inter-Ministerial Board and obtain the approval for such exemption.

Pursuant to this notification, it shall be expensive for start-ups to obtain merchant banker certificate for such issuance. This may require clarity as rule 11UA allows both Merchant Banker or by a Chartered Accountant to issue valuation certificate. However, this notification mandates such valuation could be done by only merchant banker.

Source: https://www.startupindia.gov.in/notification.php

Regulatory Updates: Intellectual Property (IP Laws) – DIPP and WIPO to set up Technology and Innovation Support Centers for IP generation

The Department of Industrial Policy and Promotion (DIPP) (Industrial Promotion Body) and World Intellectual Property Organization (WIPO) have joined hands to establish Technology and Innovation Support Centres (TISC) in the country which is expected to boost generation and commercialisation of intellectual properties.

The agreement, signed between the DIPP and WIPO for setting up of TISCs, will provide an motivation to knowledge sharing, capacity building and sharing of best practices among the over TISCs operating worldwide by providing access to global network.

Services offered by TISCs may include:

  1. Access to online patent and non-patent (scientific and technical) resources and IP-related publications;
  2. Assistance in searching and retrieving technology information;
  3. Training in database search;
  4. On-demand searches (novelty, state-of-the-art and infringement);
  5. Monitoring technology and competitors;
  6. Basic information on industrial property laws, management and strategy, and technology commercialization and marketing.

The Cell for IPR Promotion and Management (CIPAM) is designated as the National Focal point for the TISC national network. As the national focal point, CIPAM shall identify potential host institutions, assess their capacities and support them in joining the TISC project. CIPAM will also act as the main intermediary between WIPO and TISC host institutions and coordinate all the activities of the national TISC network.

Source

Amendments to Companies Act and some relief to Permitted Startups

With the ability to modify the guidelines quick and fast, Companies Act has become dynamic. On 19 July 2016, the Ministry of Corporate Affairs notified the Companies (Share Capital and Debentures) Third Amendment Rules 2016 (Amendment) to amend certain provisions of the Companies (Share Capital and Debentures) Rules 2014 (Rules). These Rules contain the procedures for issuance of shares and debentures and disclosures to be made.
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Notes of the Amendments made:

1. Relaxation of preferential allotment process:
Earlier to these amendments, any securities issued through the ‘private placement’ process had to be fully paid up at the time of allotment. This infact was an anomaly, because, if the company chose a ‘right issue’ process, then it was possible to issue partly paid shares. The amendment now seeks to set this anomaly right and made it possible to issue partly-paid shares even through private placement process.

2. Determination of conversion price:
Earlier to these amendments, a company issuing convertible securities had to determine the conversion price at the time of issuance. This is true for any foreign direct investment as well. Now, companies may either determine the conversion price (a) upfront at the time of offering the convertible securities, or (b) not later than 30 days prior to the date the holder of convertible securities becomes entitled to convert such convertible securities, based on a valuation report of a registered valuer issued not later than 60 days prior to such date. The change in the foreign direct investment guidelines is still the same and it has to be notified to RBI at the time of issuance.

3. Issue of secured debentures:
Earlier to these amendments, a company could provide only its own assets and properties as a security for issuance of secured debentures. Now, the companies can issue secured debentures by creating a charge on the assets and properties of its subsidiaries, holding company or associate companies. The amendment expressly permits companies intending to redeem their debentures prematurely to transfer such amounts in excess of the limits specified under the Rules as may be necessary to the Debenture Redemption Reserve.

4. Issue of equity shares with differential rights:
Earlier, companies could not issue equity shares with differential rights if they defaulted in (a) the payment of dividends on preference shares, (b) the repayment of a term loan (or interest thereon) from specified institutions, (c) the payment of statutory dues relating to employees, or (d) crediting prescribed amounts in the Investor Education and Protection Fund. Now, such defaulting companies to issue equity shares with differential rights after 5 years from the end of the financial year in which they make good the default. It would have been nice, that a company could issue such shares immediately upon compliance.

5. Sweat equity shares by Permitted Start-ups:
Start-ups (as defined in notification number GSR 180(E) dated 17 February 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India – “Permitted Startups”) are now permitted to issue sweat equity shares up to 50% of their paid-up capital for the first 5 years from the date of their incorporation. For other companies, this limit continues to be 25%.

6. Stock options to promoters and shareholder-directors of the Permitted Start-ups:
Permitted Start-ups can issue stock options to their promoters and to directors who hold more than 10% of the start-up’s equity shares for the first 5 years from the date of their incorporation. The restriction on issuing stock options to promoters and such directors continues for all other companies, who are not Permitted Startups.

7. Form SH-7 by companies not having share capital:
The Amendment requires that Form SH-7, for intimating any alteration of a company’s authorised share capital, be filed by companies that do not have share capital in case of an increase in the number of members.

Author: Venkatesh Vempati, works as an Associate with the Compliance Team