1 India Entry Strategy - How foreign companies/investors can enter India
India Entry Strategy: The FAQs provide an overview of the different legal structures under which foreign investment is permitted in India
- Which law and regulations govern foreign investment in India?
Broadly, foreign investment in India is regulated under the provisions of the Foreign Exchange Management Act, 1999 (“FEMA”) and the Foreign Exchange Management (Transfer or Issue of a Security by a Person Resident outside India) Regulations, 2017 framed the reunder. The FEMA was enacted to consolidate and amend the laws relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of the foreign exchange market in India.
Based on the type of entity one proposes to incorporate, other legislations such as the Foreign Exchange Management(Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016 (“Regulations”) or the Companies Act, 2013 etc will also have to be complied with.
- What constitutes ‘foreign investment’ under Indian Law?
‘Foreign investment’ is any investment made by a person resident outside India on a repatriable basis in capital instruments of an Indian company or to the capital of an LLP.
- Who is a “Person Resident Outside India”?
A “Person Resident outside India” means a person who is not resident in India.
A “Person Resident in India” means:
- (i) a person residing in India for more than one hundred and eighty-two days(182) during the course of the preceding financial year but does not include:
(a) a person who has gone out of India or who stays outside India, in either case:
- for or on taking up employment outside India, or
- for carrying on outside India a business or vocation outside India, or
- for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;
- (b) a person who has come to or stays in India, in either case, otherwise than:
- for or on taking up employment in India, or
- for carrying on in India a business or vocation in India, or
- for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;
- (ii) any person or body corporate registered or incorporated in India;
- (iii) an office, branch or agency in India owned or controlled by a person resident outside India; and
- (iv) an office, branch or agency outside India owned or controlled by a person resident in India.
- What are the capital instruments through which foreign investment may be effected?A foreign investor may make investments in eligible Indian entities through equity shares; fully, compulsorily and mandatorily convertible debentures; fully, compulsorily and mandatorily convertible preference shares and share warrants issued by an Indian company in accordance with the regulations issued by the Securities and Exchange Board of India.
Capital instruments can contain an optionality clause subject to a minimum lock-in period of one (1) year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price.
- Is foreign investment allowed in all sectors?
No, FEMA prescribes a list of activities/sectors where foreign investment is absolutely prohibited. These are:
- (i) Lottery business including Government/private lottery, online lotteries, etc;
- (ii) Gambling and betting including casinos etc.;
- (iii) Chit funds;
- (iv) Nidhi company;
- (v) Trading in Transferable Development Rights (TDRs);
- (vi) Real estate business or construction of farm houses;
- (vii) Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes; and
- (viii) Activities/sectors not open to private sector investment e.g.(i) Atomic Energy; and (ii)Railway operations (other than a few permitted activities).
- Barring the sectoral prohibition, can foreign investments be made in all other sectors? Is there any limit on the amount of investment that can be made?
The FEMA read in conjunction with the Foreign Direct Investment Policy (“FDI Policy”) prescribes certain limits for each sector in which FDI is permitted. All foreign investors need to comply with such prescribed limits and the corresponding applicable conditions.
- Are there any additional conditions, including entry conditions that a foreign investor is required to comply with for its India entry strategy?
Investments by non-residents can be permitted in the capital of a resident entity in certain sectors/activities with entry conditions. Such conditions may include norms for minimum capitalization, lock-in period, etc., and are sector-specific.
Apart from the aforementioned entry conditions, the investors are required to comply with all relevant sectoral laws, regulations, rules, security conditions, and state/local laws/regulations.
- What are the entry routes for investment through FDI?
Investments can be made by non-residents through the Automatic Route (where prior regulatory approval is not required) or Government Route (where prior regulatory approval is required).
- What is the difference between the Automatic Route and the Government Route?
An Indian company may, subject to the prescribed FDI caps, sectoral regulations and licensing requirements applicable for various sectors / activities (if any), issue capital instruments to persons resident outside India under the automatic route. In terms of the said sectoral regulations, there are certain sectors in which foreign investment is not permitted under the automatic route and requires specific approval, such as, the domestic airlines, broadcasting, print and news media, atomic minerals, defense etc.
If the proposed investment does not qualify for the “automatic route”, the company in which such foreign investment is sought to be made would have to make an application on the Foreign Investment Facilitation Portal(FIFP) for approval. The approval is granted on a case to case basis at the discretion of the concerned ministry/department, and in approving an investment proposal, the concerned department/ministry ordinarily considers factors such as inflow and outflow of foreign exchange, general benefit to the Indian economy, induction of technology, export potential, potential for large-scale employment, etc.
- What are the different forms in which a foreign entity can establish its presence in India?
Depending on the proposed activities of such foreign entity, a foreign entity can establish its presence in India, either through the opening of a liaison office, a project office, a branch office or by directly investing in an Indian company or a partnership or a Limited Liability Partnership (LLP).
- What is the difference between a liaison office, branch office and project office?
Liaison office is a place of business which acts as a channel of communication between the principal place of business or head office, by whatever name called, and entities in India but which does not undertake any commercial/ trading/ industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channels.
Branch office,in relation to a company, means any establishment described as such by the company.
Project office means a place of business in India, which represents the interests of the foreign company executing a project in India but excludes a liaison office.
- What is the eligibility criteria for establishment of liaison office, branch office and project office?
For liaison office, the foreign entity must demonstrate a profit-making track record during the immediately preceding three(3) financial years in the home country and net worth of not less than USD 50,000 or its equivalent.
For branch office, the foreign entity must demonstrate a profit-making track record during the immediately preceding three(3)financial years in the home country and net worth of not less than USD 1,00,000 or its equivalent.
For project office, the foreign entity must have secured a contract to execute a project in India from an Indian company and the project should be funded either directly by inward remittance from abroad, or by multilateral or bilateral International Financing Agency or been granted term loan by a bank in India.
- Liaison Office
- (a) Is prior Reserve Bank of India (“RBI”) approval required for setting up of liaison office?
Prior RBI approval is required for setting up of liaison office.
- (b) What is the validity of the above approval?
The above approval is valid for a period of three (3) years. Such period may be extended for a period of three (3)years from the date of expiry of the original approval / extension granted, subject to such directions issued by the RBI in this regard.
- (c) What is the Procedure for Application of a liaison office?
Application to set up a liaison office has to be made to the RBI through an AD Category – I Bank identified by the applicant with whom they intend to pursue banking relations (“Authorized Dealer”), in the prescribed Form FNC along with the relevant documentation. The documents required to be attached along with Form FNC are:
- (i) A cover letter to Form FNC setting out the details with regard to the activities of the head office and its worldwide operations, number of employees worldwide, its previous presence, if any, in India etc.;
- (ii) An english version of the certificate of incorporation/ registration or Memorandum and Articles of Association (“Charter Documents”) attested by the Indian Embassy/ Notary Public in the country of registration;
- (iii) The audited balance sheet of the applicant company for the last five (5) years;
- (iv) Banker’s report from the applicant’s banker in the host country / country of registration showing the number of years that the applicant has had banking relations with that bank;
- (v) A letter of comfort from the parent company, in the prescribed form, if required;
- (vi) Power of attorney in favour of signatory of Form FNC in case the head of the overseas entity is not signing the FNC form; and
- (vii) Though not strictly necessary, promotional literature of the applicant is also normally attached to the application.
Upon expiry of the validity period of the approvals, such liaison offices are required to either (i) close down; or (ii) be converted into a Joint Venture (JV) /Wholly Owned Subsidiary (WOS), in conformity with the FDI Policy.
- (d) What is the permitted scope of activities under liaison office?
A liaison office in India is permitted to undertake the following activities:
- (i) To represent the parent company/ group companies in India;
- (ii) To promote exports and imports from and to India;
- (iii) To promote technical and/ or financial collaborations between the parent and group companies and companies in India; and
- (iv) To act as a communication channel between the parent company and the Indian companies.
A foreign entity will need RBI approval to carry on any other activity other than those mentioned above.
- (e) Are there any compliances applicable to liaison office?
Yes, the Regulations have prescribed a set of compliances that each liaison office is permitted to make:
- (i) The liaison office is required to have its accounts audited and file performance reports with the RBI. Liaison offices also have to file, on or before September 30 each year, an ‘Annual Activity Certificate’ as at the end of March 31st along with the audited financial statements including receipt and payment account to the Authorized Dealer with a copy to the Directorate-General of Income Tax (International Taxation), New Delhi.
- (ii) The liaison office also has to carry out certain statutory filings under the Companies Act, 2013 and comply with certain other requirements of local law, including Central and State labour legislations.
- (iii) Liaison office is allowed to open non-interest bearing current accounts in India. Such offices are required to approach banks in India for opening the accounts.
- (iv) Liaison office is required to register with the Registrar of Companies, if required as per the Companies act, 2013.
- (v) Liaison office is required to obtain Permanent Account Number from the Income Tax Authorities post the setting up of office and is required to report the same in the Annual Activity Certificate.
- (vi) All liaison offices have general permission to carry out permitted / incidental activities from lease property subject to lease period not exceeding five (5) years.
- Branch Office
- (a) Is prior RBI approval required for setting up of branch office?
Yes, prior RBI approval is required for setting up of branch office.
- (b) What is the procedure for application of a branch office?
Permission to set up a branch office has to be made to the RBI, through an Authorized Dealer, inthe prescribed Form FNC along with the relevant documentation. The documents required to be attached are the following:
- (i) A cover letter setting out the details with regard to the activities of the head office and its worldwide operations, number of employees worldwide, financial strength, reputation, its previous presence, if any, in India, etc;
- (ii) An english version of the Charter Documents attested by the Indian Embassy/Notary Public in the country of registration;
- (iii) The audited balance sheet of the applicant company/firm for the last three (3) years;
- (iv) Banker’s report from the applicant’s banker in the host country / country of registration showing the number of years that the applicant has had banking relations with that bank;
- (v) A letter of comfort from the parent company, in the prescribed form, if required; and
- (vi) Promotional literature of the applicant is also normally attached to the application.
- (c) What is the permitted scope of activities for a branch office?
The following activities are permitted to be undertaken by a branch office in India under the Regulations:
- (i) To carry on export/import of goods (procurement of goods for export and sale of goods after import are allowed only on wholesale basis);
- (ii) To render professional or consultancy services;
- (iii) To conduct research work in India in which the parent company is engaged;
- (iv) To promote technical and/ or financial collaborations between Indian companies and parent or overseas group companies;
- (v) To represent the parent company and other foreign companies in various matters in India, e.g. to act as a buying and selling agent in India;
- (vi) To render services in information technology and development of software in India;
- (vii) To render technical support to the products supplied by the parent/group companies; and
- (viii) To set up a foreign airline / shipping company.
- (d) What are the Compliances and General Conditions for a branch office?
- (i) The branch office is required to register itself with the Registrar of Companies of the State in which the office is set up and with the Registrar of Companies at New Delhi within a period of thirty (30) days from the date of establishing a place of business in India in the prescribed form along with the prescribed documents.
- (ii) The branch office is also required to have its accounts audited and make such other filings as may be required by the RBI / the Authorized Dealer at the time of granting the approval. Branch offices also have to file, on or before September 30 of each year, an ‘Annual Activity Certificate’ as at the end of March 31 of each year along with the audited financial statements including receipt and payment account to the Authorized Dealer with a copy to the Directorate-General of Income Tax (International Taxation), New Delhi.
- (iii) The branch office also has to carry out certain statutory filings under the Companies act, 2013
and comply with certain other requirements of local law, including Central and State labour legislations.
- (iv) A branch office is required to register with the Registrar of Companies, if required as per the Companies Act, 2013.
- (v) A branch office is required to obtain Permanent Account Number from the Income Tax Authorities post the setting up of office and is required to report the same in the Annual Activity Certificate.
- Project Office
- (a) Is prior RBI approval required for setting up of project office?
Prior RBI approval is not required in case if a project has been awarded in India to such foreign company.
- (b) What is the validity of the project office?
The validity for the project office is granted for the duration of the project.
- (c) What is the permitted scope of activities for a project office?
The project office can be set up for the sole purpose of executing the project and cannot undertake any other activities.
- (a) What is a Company?
An Indian Company is a company incorporated under the Companies Act 2013 or under any previous company law. A foreign entity may, subject to the sectoral cap, set up/invest in a company incorporated under the Companies Act 2013 through either a:
- (i) Wholly Owned Subsidiary; or
- (ii) Joint Venture Company where it may collaborate with another foreign or Indian company for technical expertise, financial resources or any other resource or expertise.
- (b) What is the procedure for FDI in a Company?
FDI can be brought into an Indian company either through one of the following options:
- (i) Incorporation of an Indian Company An Indian company may issue equity shares / compulsorily convertible preference shares /compulsorily convertible debentures to non-residents in accordance with the applicable provisions.
- (ii) Entry through the Acquisition of Existing Shares
Transfer of shares/ convertible debentures of an Indian company, by way of sale, from residents to non-residents of an Indian company, does not require prior Government approval provided the following conditions are satisfied:
- The transfer is in accordance with the entry routes (as applicable) under the FDI Policy;
- The non-resident shareholding, after the transfer, complies with the sectoral limits under the FDI Policy;
- The price at which the transfer takes place is not less than the fair valuation of shares determined by a SEBI-registered Merchant Banker or a chartered accountant as per any internationally accepted pricing methodology. Further, an amount not exceeding twenty five percent of the entire consideration for the transfer can be paid by the buyer on a deferred basis; and
- The Indian bank, through which the purchase consideration is received, has to obtain a declaration in the prescribed form and ensure that the documents prescribed are on its record.
- (a) What is an LLP?
LLP combines the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost. In other words, it is an alternative corporate business vehicle that provides the benefits of limited liability of a company, but allows its members the flexibility of organising their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm. An LLP is governed by the provisions of the Limited Liability Partnership Act, 2008.
- (b) What are the requirements for the formation of an LLP?
- (i) An LLP can be incorporated with a minimum of 2 (two) partners who can be individuals or body corporate through their nominees. Further for incorporating an LLP, there are required to be at least two (2) ‘Designated Partners’, of which at least one (1) must be an Indian resident.
- (ii) To register an Indian LLP, an applicant needs to first apply for a Director’s Identification Number (“DIN”), which can be done by filing an e-Form for acquiring the DIN. Then the applicant needs to obtain the Digital Signature Certificate (“DSC”) and register the same. Thereafter, the applicant needs to get the LLP’s name approved by the Ministry of Corporate Affairs. Once the LLP’s name is approved, the foreign company can register the LLP by filing the incorporation form.
- (c) Can FDI be invested in an LLP?
FDI is permitted under the automatic route, only in LLPs operating in sectors/activities where one hundred percent FDI is allowed, through the automatic route and there are no FDI-linked performance conditions. Further, an LLP is permitted to convert into a company. Similarly, conversion of a company into an LLP is also now permitted under the automatic route.
- Partnership Firm
- (a) What is a Partnership Firm?
A partnership is defined as a relation between two or more persons who have agreed to share the profits of a business carried on by all of them or any of them acting for all. The owners of a partnership business are individually known as the “partners” and collectively as a “firm”. A partnership is formed by an agreement, which may be either written or oral. When the written agreement is duly stamped and registered, it is known as “Partnership Deed”. Ordinarily, the rights, duties and liabilities of partners are laid down in the Partnership Deed. But in the case where the Partnership Deed does not specify the rights and obligations, the provisions of the Indian Partnership Act, 1932 will apply.
- (b) What are the requirements for formation of a Partnership Firm?
A partnership firm may be registered at any time (not merely at the time of its formation but subsequently also) by filing an application with the Registrar of Firms of the area in which any place of business of the firm is situated or proposed to be situated. The application shall contain:
- (i) Name of the firm;
- (ii) Place or principal place of business;
- (iii) Names of any other places where the firm carries on business;
- (iv) Date on which each partner joined the firm;
- (v) Name in full and permanent address of partners; and
- (vi) Duration of the firm.
- (c) Can FDI be made in a Partnership Firm?
FDI is allowed to be made in partnership firms, subject to the following conditions:
- (i) A Non-Resident Indian (“NRI”) or a Person of Indian Origin (“PIO”) resident outside India can invest in the capital of a firm or a proprietary concern in India on non- repatriation basis provided that:
- Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with Authorized Dealers / authorized banks;
- The partnership firm is not engaged in any agricultural/plantation or real estate business or print media sector; and
- Amount invested shall not be eligible for repatriation outside India.
- (ii) Investments with repatriation option: NRIs/PIO may seek prior permission of RBI for investment in partnership firms with repatriation option. The application will be decided in consultation with the Government.
- (iii) Investment by non-residents other than NRIs/PIO: A person resident outside India other than NRIs/PIO may make an application and seek prior approval of the RBI for making investment in the capital of a partnership firm in India. The application will be decided in consultation with the Government.
- (iv) Restrictions: An NRI or PIO is not allowed to invest in a firm or proprietorship concern engaged in any agricultural/plantation activity or real estate business or print media.
As a foreign investor looking to invest and set up business in India, your India entry strategy needs to be well-planned and thought out. Discussing the objectives with your legal counsel can India, can help them identify the legal structure that would be best suited for your requirements and business objectives. This helps not only in focusing upon the India entry strategy but also ensures that the same is successfully executed.
2Checklist for the Indian Publishing Sector
We have set out a checklist that publishing houses operating in India need to keep in mind prior to publishing non-fiction works taking into account the existing Publishing Laws in India
- What are the legal aspects that an author or publisher should be aware of prior to publication of a book in India?There are India several publishing laws in India that regulate what content can be written and distributed. These laws establish that publication of certain content could give rise to complaints of a criminal or civil offence. For example, claims such as hurting of religious sentiments or sedition are criminal offences in India.Defamation in India is a civil as well as a criminal offence. Authors and publishers need to be mindful of these laws prior to publishing a book.
- How can an author or a publisher reduce the legal risks associated with publishing in India?A publishing house can prior to the publication of a manuscript undertake a legal read of the manuscript to understand any potentials claims that could be made with respect to the manuscript. A legal read of a non-fiction book is a standard practice undertaken by most publishing houses wherein a lawyer is asked to read and assess the content of a book in light of Indian laws.
- What are some of the potential claims or legal challenges that a publication can face in India?A legal read of a book can throw light on potential claims of defamation, outraging religious beliefs, sedition, breach of confidentiality, obscenity, intellectual property infringement as well as wrongful publication of maps.
- What is defamation?Under Indian law, defamation is both a criminal (punishable with imprisonment) as well as civil (punishable through the award of damages) offence. Defamation is defined under Section 499 of the Indian Penal Code, 1860 (“IPC”). The Section provides that whoever by words either spoken or intended to be read, or by signs or by visible, representations makes or publishes any imputation concerning any other person intending to harm, or knowing or having reasons to believe that such imputation will harm the reputation of such person, is said to defame that person (unless it falls within one of the stated exceptions). Criminal defamation is punishable with a fine and/or with imprisonment and is a personally liable offence. In recent years, the number of suits filed in Indian Courts where the complainant has alleged defamation has increased exponentially with some being settled out of court and a few others leading to certain matters not being published. The Supreme Court of India has as recent as May 2016 (in the decision of Subramanian Swamy vs. Union Of India, Ministry of Law & Ors), held that the right to reputation is an inextricable part of the constitutional right to life and criminal defamation is a means through which the State sustains and protects the reputation of an individual
- Are there any exceptions to defamation under Indian laws?Yes, following are the exceptions to defamation:
- Imputation of truth which public good requires be making or publishing;
- Public conduct of public servant;
- Conduct of any person touching any public question;
- Publication of reports of proceedings of courts;
- Merits of the case decided in court or conduct of witnesses and others concerned;
- Merits of Public performance;
- Censure passed in good faith by person having lawful authority over another;
- Accusation preferred in good faith to authorized person; and
- Imputation made in good faith by person for protection of his or other’s interests.
- What are the provisions under Indian law regarding outraging the religious beliefs of persons/communities?Under Indian law, outraging religious beliefs is a criminal offence and is punishable with imprisonment. Section 295 A of the IPC criminalizes “deliberate and malicious acts, intended to outrage religious feelings of any class by insulting its religion or religious beliefs”.
- What is sedition?Sedition is another criminal offence under the IPC that states that if a person by words or by signs, either spoken or written, or by visible representation, or otherwise brings or attempts to bring into hatred or contempt or excites or attempts to excite disaffection towards the Indian Government, such a person is said to have committed sedition. Sedition is punishable with imprisonment in India.
- Are there any laws in India on obscenity?Yes, as per Indian laws, if any book, drawing, painting, representation, if taken as a whole, is lascivious or appeals to prurient interest and tends to deprave and corrupt the persons who read, see or hear the matter contained will come under the purview of obscenity.
- Can published books containing unlawful content be seized?Yes, in the event that any newspaper, or book, or any document, wherever printed appears to the State Government to contain any matter the publication of which is punishable for claims with respect to sedition, promoting enmity between different groups on grounds of religion, race, place of birth, residence, language etc., promoting disharmony, outraging religious beliefs and obscenity, the State Government may, by notification declare every copy of the issue of the newspaper containing such matter, and every copy of such book or other document to be forfeited to Government, and thereupon may seize the same wherever found in India.
- Can a manuscript include copyrighted work?Under the Indian copyright law, the doctrine of fair use legitimizes the reproduction of a copyrightable work subject to a number of factors. One of the factors is the amount and substantiality of the portion used in relation to the copyrighted work as a whole. It may be reasonable to hold that the reproduction of the whole work or a substantial portion of it as such will not normally be permitted and only extracts or quotations from the work will alone be permitted even as ‘fair dealing’. The quantum of extracts or quotations permissible will depend upon the circumstances of each case. Fair dealing is a limitation and exception to the exclusive right granted by copyright law to the author of a creative work. It permits reproduction or use of copyrighted work in a manner, which, but for the exception carved out would have amounted to infringement of copyright. If a manuscript contains copyright protected work by another, the author or the publishers will first need to determine if the fair deal exception will apply.
- Is the consent of a copyright holder required while publishing images that are copyright protected?It is recommended that prior written consent of a copyright holder be obtained prior to using copyright protected images in a published book.
- What are the legal challenges faced while publishing maps in a book?Publication of any maps (including pre-independence maps) that depict Indian boundaries requires prior certification from the Survey of India (“SOI”). The Government of India requires that the maps proposed to be published in India should contain accurate and reliable information, particularly with regard to the external boundaries and coast-lines of India. The SOI has issued guidelines for publication of maps by private publishers (“Guidelines”). The Guidelines impose restrictions on the scale and contents of maps which are proposed to be published. Please note that publishing maps depicting inaccurate external boundaries and coast lines may attract certain legal penalties under the Official Secrets Act, 1923 (restricting the collection and sharing of information about ‘prohibited places’), the Customs Act, 1962 (prohibiting the export and import of certain maps), and the Criminal Law (Amendment Act) Act, 1990. We would recommend determining if the maps proposed to be published comply with the Guidelines.
- Is it mandatory to provide sources and citations in a manuscript?Though the publishing laws in India do not mandate it, but it is highly recommended to provide a manuscript with sources and citations. Under Indian laws, there are no specific guidelines on the mode of citation of references. It is prudent to make detailed and proper citation of the references. It should be noted that citation of the references covers the following areas:
(a) Owner/Author of the reference;
(b) Title of the reference;
(d) Place and year of publication; and
(e) Any other information that may be relevant to identifying the source of the reference.
Publishers and writers of non-scientific works ought to ensure that a thorough legal read of their work is undertaken prior to publication. A legal read should ideally be undertaken by a team of lawyers who are familiar with the nuances of publishing laws in India. The significance of a due diligent legal read lies in the fact that the writer or the publisher has a lot to lose if there is a dispute post-publication.
Defamation, sedition, confidentiality breach, copyrighted or Intellectual Property Rights infringement, outraging religious faith, promoting communal disharmony and unrest amongst sections of the community based on religion, language, birthplace, residence, etc. and obscenity – are just some issues that come within the purview of Publishing Laws in India, but there could be other issues. Therefore, prior to publication of a work of non-fiction, a thorough legal read in India by a reputed legal firm is recommended, even though the same is not legally mandatory.
3Data Protection and Privacy in India
This section provides an overview of the existing privacy as well as Data Protection Laws in India with a mention of the applicability of the EU GDPR
In recent years and specially in the context of the COVID pandemic, digitization, leaps in technological capabilities, and rise in e-commerce platforms has become the norm. As a consumer, we share personal information and data with each online platform we visit, register on and order from. However, collection, use, and disclosure of this data is largely unregulated due to the absence of specific Data Protection Laws in India..
The Personal Data Protection Bill is before the Indian Parliament and we understand the same may come in the 2021 winter session. Till such time as the aforesaid Bill becomes law, our personal data and privacy continue to be governed by a gamut of Data Protection Laws in India, some of which are summarized below.
- What is the existing framework for data protection laws in India?Article 21 of the Indian Constitution is a fundamental right that guarantees protection of life and personal liberty.On August 24th, 2017, the Supreme Court in the decision of Justice K.S. Puttaswamy (retd.) &Anr vs. Union of India and Ors held that privacy is a constitutionally protected right which arises out of Article 21 of the Indian Constitution. The protection under Article 21 is not absolute and is subject to certain restrictions. For instance, the right could be restricted if there is a law created by the legislature to restrict the same (such law should promote a legitimate state interest, should not be arbitrary and should be proportionate to the object of the law).A draft Personal Data Protection Bill is presently under consideration. As on date, the current framework for data protection laws in India is set out in the Information Technology, 2000 (“IT Act”) and the rules issued the reunder, most importantly the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (“IT Rules”). IT ACT AND THE IT RULES
- Does the IT Act mandate protection of data? As per Section 43A of the IT Act, where a body corporate, possessing, dealing or handling any sensitive personal data or information in a computer resource which it owns, controls or operates, is negligent in implementing and maintaining reasonable security practices and procedures causes wrongful loss or wrongful gain to any person, such body corporate will be liable to pay damages by way of compensation to the person so affected.
- What falls under the definition of a body corporate for the purposes of the IT Act? A body corporate means any company and includes a firm, sole proprietorship or other association of individuals engaged in commercial or professional activities.
- What are the reasonable security practices and procedures to be observed by body corporates under the IT Act?‘Reasonable security practices and procedures’ means security practices and procedures designed to protect such information from unauthorised access, damage, use, modification, disclosure or impairment, as may be specified in an agreement between the parties or as may be specified in any law for the time being in force and in the absence of such agreement or any law, such reasonable security practices as may be prescribed by the Central Government.
- Do the provisions of the IT Act extend to entities outside India?Section 75 of the IT Act stipulates that the provisions of the IT Act shall apply to an offence or contravention committed outside India by any person if the act or conduct constituting an offence or contravention involves a computer, computer system or computer network located in India.
- What is an Intermediary?
An ‘Intermediary’ with respect to electronic records means any person who on behalf of another person receives, stores or transmits that record or provides any service with respect to that record and includes telecom service providers, network service providers, internet service providers, web-hosting service providers, search engines, online payment sites, online-auction sites, online market places and cyber cafes.
- Is an Intermediary liable for any third party information made available or hosted by him? If no, are there any conditions to avail such exemption?An Intermediary is not liable for any third party information, data or communication link made available or hosted by him. The exemption is subject to the following conditions:
- The function of the intermediary should be limited to providing access to a communication system over which information made available by third parties is transmitted or temporarily stored or hosted;
- The intermediary does not: (i) initiate the transmission; (ii) select the receiver of the transmission; and (iii) select or modify the information contained in the transmission; and
- The intermediary observes due diligence while discharging his duties under the IT Act.
- What is the significance of the IT Rules? The IT Rules have been issued under the IT Act and they have prescribed minimum standards on the privacy and disclosure of information, collection of information, transfer of information and reasonable security practices and procedures.
- How has the term ‘personal information’ been defined under the IT Rules? Personal information means any information relating 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.
- What is the kind of sensitive personal data or information prescribed under the IT Rules?The IT Rules list the type of personal information which may be construed as sensitive personal data or information, and includes: (i) password; (ii) financial information; (iii) health parameters (including physical, physiological and mental health conditions and medical records or history); (iv) sexual orientation; and (v) biometric information.
- Is any consent required for collection of sensitive personal data or information?Yes, a body corporate or any person on its behalf shall obtain consent in writing through letter or fax or email from the provider of the sensitive personal data or information regarding purpose of usage before collection of such information.
- Are body corporates bound to share certain aspects of the information collected with the providers of information? Yes, while collecting information directly from the person concerned, the body corporate or any person on its behalf shall take such steps as are, in the circumstances, reasonable to ensure that the person concerned is having the knowledge of (i) the fact that the information is being collected; (ii) the purpose for which the information is being collected; (iii) the intended recipients of the information; (iv) the name and address of the agency that is collecting the information; and (v) the agency that will retain the information.
- For what purposes can such information be used? The information collected may be used only for the purpose for which it has been collected.
- Is there an option for the providers of information to opt-out of providing the information? Yes, a body corporate or any person on its behalf is required to, prior to the collection of information, provide an option to the provider of the information to not to provide the data or information sought to be collected.
- Is there an option to the provider of information to withdraw any information which has already been collected? If yes, how?Yes, the provider of information has the option to withdraw his / her earlier granted consent. Such withdrawal of the consent is required to be sent in writing to the body corporate. In the case of provider of information not providing or later on withdrawing his consent, the body corporate has the option of not providing goods or services for which the said information was sought.
- What are the provisions of disclosure of information under the IT Rules?Disclosure of sensitive personal data or information can be done only with prior permission from the provider of such information, unless such disclosure has been agreed to in the contract between the body corporate and provider of information, or where the disclosure is necessary for compliance of a legal obligation.
- Can a body corporate publish information collected under the IT Rules? No, a body corporate or any person on its behalf cannot publish the sensitive personal data or information.
- How can information be transferred under the ambit of IT Rules, within India and/or outside India? A body corporate or any person on its behalf may transfer sensitive personal data or information including any information, to any other body corporate or a person in India, or located in any other country, that ensures the same level of data protection that is adhered to by the body corporate as provided for under the IT Rules. The transfer may however be allowed only if it is necessary for the performance of the lawful contract between the body corporate or any person on its behalf and provider of information or where such person has consented to such data transfer.GENERAL DATA PROTECTION REGULATION
- What is the GDPR?The GDPR is the new EU legal framework governing the use of personal data across the EU. It lays down rules relating to the protection of natural persons with regard to the processing and free movement of personal data. It replaces the Data Protection Directive 95/46/EC.
- What does the GDPR regulate?The GDPR regulates the processing of personal data wholly or partly by automated means and to the processing other than by automated means relating to individuals in the EU. The GDPR does not apply to the processing of personal data which is done by an individual in the course of a purely personal or household activity or by competent authorities for preventing, investigating, detecting or prosecuting criminal offences or executing criminal penalties (including safeguarding against and preventing threats to public security).
- Who does the GDPR apply to?The GDPR applies globally and the companies outside EU have to comply with the GDPR if they process personal data of EU data subjects in connection with the offering of goods or services or monitoring of their behaviour within the EU.
- Does the GDPR apply to Indian organisations?Yes, though the GDPR is a European law, it will apply to an Indian organisation if such organisation provides goods or services to EU citizens or monitors their behaviour within EU. An Indian organisation can either act as a controller (i.e. determine how and why data needs to be processed), or a processor (i.e. process data on behalf of a controller). The GDPR has prescribed specific obligations and penalties in both the cases.
- Does India have something similar to the GDPR?Presently, India does not have a data protection regime which is similar to the GDPR. However, the Ministry of Electronics & Information Technology in 2017 formed the B.N. Srikrishna Committee for making recommendations for a draft bill on data protection law. The Committee submitted their report in July 2018 along with the draft Personal Data Protection Bill (“Bill”) which will have jurisdiction over processing of personal data, if that data has been used, shared, disclosed, collected or otherwise processed in India, and aims at data localization, i.e. a copy of all personal data mandatorily being stored in India.
- How does the Bill define ‘Data’?The Bill categorizes data into two categories: (i) Personal Data; and(ii) Sensitive Personal Data. Personal Data means data about or relating to a natural person who is directly or indirectly identifiable, having regard to any characteristic, trait, attribute or any other feature of the identity of such natural person, or any combination of such features, or any combination of such features with any other information. Sensitive Personal Data means personal data revealing, related to, or constituting, as may be applicable: (i) passwords; (ii) financial data; (iii) health data; (iv) official identifier; (v) sex life; (vi) sexual orientation; (vii) biometric data; (viii) genetic data; (ix) transgender status; (x) intersex status; (xi) caste or tribe.
- Can data be processed without consent?The data can be processed without consent only while performing functions of the State, ensuring compliance with a law or court order or responding to a medical emergency or for any other reasonable specified purposes.
- Where would the data collected be stored? Is cross-border data flow allowed under the Bill?The Bill envisages data localization and mandates that all data collected by a data fiduciary be stored in a server located in India. The Bill imposes certain restrictions on the cross-border data flows. It is mandatory to store at least one serving copy of all personal data within the territory of India. This outflow is subject to certain conditions (provided that the data doesn’t fall under the restricted data) : (i) the transfer is to be made subject to standard contractual clauses which is to be approved by the Data Protection Authority and the data principal has provided her consent/explicit consent to such transfer; (ii) personal data can be transferred to a country which has been prescribed the Central Government and the consent/explicit consent for the same has been given; (iii) transfers as approved by the Data Protection Authority because of a necessary situation.
The Data Protection Bill, 2021 has been withdrawn with effect from August 3, 2022 and is proposed to be replaced with a new legislation. The Data Protection Bill, 2021 earlier replaced the Personal Data Protection Bill, 2019.
4 Incorporation of a Private Company
The FAQs cover the process involved in incorporating a private limited company in India
- What is a private limited company?There are several different types of legal structures in India such as a private limited company, public limited company, limited liability partnership, sole proprietorship etc.A private limited company refers to an entity which limits the liability of the owner to their respective shareholdings and restricts shareholders from publicly trading shares.
- How many directors are required to incorporate a private limited company in India?A private limited company must have a minimum of two(2) directors and can have a maximum of fifteen (15) directors. One of the Directors of a private limited company is mandatorily required to be an Indian citizen and an Indian resident. The other director(s) can be a foreign national.
- How many shareholders are required to incorporate a private limited company in India?To incorporate a private limited company, a minimum of two (2) shareholders are required. These shareholders could be natural persons or companies, including foreign companies. The maximum number of shareholders is two hundred(200.).
- Can an individual person incorporate a company in India?Yes, like several other countries such as China, Singapore, UK, Australia, and the USA, the Companies Act, 2013 has also introduced the concept of a One Person Company.
- What is a One Person Company (“OPC”)?The Companies Act, 2013 defines a One Person Company as a company that has only one (1) person as its member, i.e. a company that has only one (1) shareholder.The sole member of the OPC is required to, while registering the OPC,select a nominee who in the event of the subscriber’s death or his incapacity to contract becomes the member of the company.Only a natural person who is an Indian citizen and resident in India shall be eligible to act as a member and nominee of an OPC.
- How many directors does an OPC require?OPCs need to have a minimum of one(1)person (the member) as a director. They can have a maximum of fifteen (15) directors.
- What is the typical process to be followed to register a private limited company in India?
- Step 1: Reserve a name for the company;
- Step 2: Apply for digital signature (DSC) for each of the director;
- Step 3: Acquire an identification number (DIN) number for each director; and
- Step 4: File the SPICe Form.
- How does one reserve a name? Are there any considerations to be kept in mind while providing a name to the company?An applicant can pick up any suitable name for the company, provided that (i) the company cannot be registered with a name which is undesirable as per the Central Government; (ii) the name of the company has to end with ‘Private Limited’; (iii) the name which is chosen for the company should not resemble or be identical to the name of another registered company.One can reserve the name of its company via Reserve Unique Name form (“RUN”).
- What is the procedure of availing services of RUN?One is required to create an account for oneself at the Ministry of Corporate Affairs (“MCA”) portal.After creating an account, the applicant can avail the RUN services. The applicant can propose two names under this service. It is important to note that the name applied for will either be approved or rejected and that no re submissions are allowed. A fee of Rupees One Thousand (Rs.1,000) will be levied for the submission of each form.
- How long is the approved name valid for?An approved name is valid for a period of twenty (20) days from the date of approval of such name.
- Is it mandatory to reserve a name in advance?No, it is not compulsory to reserve a name through the RUN service. The approval of a name can also be sought while filing the SPICe (INC-32) form.One can apply for the proposed name through SPICe (INC-32) form on the MCA portal. Only one name can be applied for under this form. However, in case of rejection due to non-approval of the name, the applicant in this case gets a second chance of refilling the same SPICe (INC-32) form without any further charges.
- What is DSC? Is it required to file the SPICe (INC-32) and RUN?DSC refers to a Digital Signature Certificate. It must be obtained from a certifying agency which has been recognized by the government. Since the registration process is now online, all the forms require a valid DSC. The cost of obtaining DSC varies from each certifying agency.DSC is required to file the SPICe (INC-32) form whereas the same is not required for filing RUN.
- What is DIN?DIN is a unique Identification Number allotted to an individual who is appointed as a director of a company. Any new company is required to make an application for allotment of DIN through SPICe form at the time of its incorporation.
- What is SPICe form?SPICe refers to a Simplified Proforma for Incorporating Company Electronically. SPICe helps incorporate a company with a single application for:
The dos and don’ts of licensing intellectual property in India
- What is licensing of intellectual property (”IP”)?An owner of IP can grant another person the right or permission to make, use or sell property or items embodying or covered by this IP by means of a contractual license. A license may apply to any type of IP – trademark, patent, copyright, design and/or know-how. Under the license, the licensor maintains title in the IP and the licensee is authorized to make use of the IP only in accordance with the terms and conditions of the license.
- What is a licensing agreement?A license agreement is a document, executed between two or more parties, evidencing the terms and conditions of such contractual license.
- Does a license agreement have to be in writing?Once an entity/individual has taken the decision to license its IP, it is imperative that the terms of the license be captured in writing and explicitly agreed between the parties. Provisions of several acts governing different types of IP such as trademarks, copyrights, patents and design state that the license agreement should be in writing. Know-How as an IP has no specific legislation and though not required to be in writing by statute, it is recommended that license of any know-how be in writing as well to avoid ambiguity.
- A license agreement should be in writing with the relevant terms clearly defined. But if the parties execute a term sheet, would that suffice as a valid license agreement?For a valid license, not only must the license terms be set out in writing but should also be in the form of a binding definitive document. A non-binding term sheet would not constitute a license agreement as held in the case of PVR Pictures Limited vs. Studio 18 by the Delhi High Court in 2009.
- What terms are essential to a license agreement and should form an integral part of any license agreement?
- Definition of Licensed Property;
- Right to grant sub-licenses; and
- What is an exclusive license and a non-exclusive license?An exclusive license excludes the use of the licensed rights for anyone but the licensee. It must be clear whether that is meant to exclude the licensor itself from making use of the intellectual property. A non-exclusive license can be granted as often by the licensor to as many licensees as desired. Most commercial software licensed today is licensed on a non-exclusive basis.
- Difference between exclusive license of IP and assignment of IP?There are numerous instances where the licensor has granted an exclusive license and the licensee has claimed that the same is an assignment of the IP. An exclusive license is not an assignment, when you license IP, you are granting the licensee permission to use your IP in a particular way while still retaining an interest in the IP being licensed. When assigning IP to another, there is a transfer of ownership from the assignor to the assignee. This is a permanent arrangement, and you cease to hold an interest in the IP once it is assigned. The terms of the license must explicitly state that it is a license (whether exclusive or non-exclusive) and define the mutual obligations. Most importantly, the clause on royalty payment should be drafted in a manner that does not give rise to implications that any downright payment is towards assignment of the IP.
- What is royalty?One of the goals of licencing is to enable the proprietor of IP to receive quantifiable sums of money based on a licensee’s use of such licensed IP. The royalty is the consideration amount to be provided to the owner/licensor of the IP for the grant of the license. The consideration may be a lump sum payment or a continuous periodic fee payment, also known as royalties or a combination of lump sum fee and periodic payments.
- How is royalty determined?The parties to a license are free to select the basis of royalty calculation that meets their commercial requirements. The most common method is the expression of the royalty as percentage of the revenue, other methods include:
- A single up-front payment;
- A pre- determined amount that is paid periodically;
- A charge based on units of manufacture or sales; and
- On early stage technology, royalties can be based on development costs.
- Who owns any improvements, enhancements and modifications to the licensed IP?A person may create and design an improvement of an existing technology or a feature that enhances the use or functionality of the technology. The new invention may come about as a result of an idea that relates to the use of the licensed IP, or it may actually be the result of modification of that IP in order to produce any enhancement. An ”improvement” in the context of IP licenses, usually means a development within the field of the licensed technology that enhances the usability, functionality, efficiency, performance or other characteristic of the original IP. A license agreement must spell out what constitutes an improvement and who owns such improvement and all IP that vests in the same. The license agreement also needs to provide for ownership of IP if there is any joint development.
- Is stamp duty payable on license agreements?Stamp duty refers to a tax on a transaction which is paid to the government and the tax is levied on the instrument recording the transaction. Stamp duty is payable on license agreements and the rate of stamp duty payable varies in each State. Prior to the execution of a license agreement, it is important to understand if the benefit of executing the license agreement in a particular state and availing lower stamp duty rates(if possible).
- What are the consequences of not paying stamp duty?Under the Indian Stamp Act, 1899, if adequate stamp duty has not been paid on a document, such document cannot be admitted in evidence for any purpose nor can it be acted upon, registered or authenticated.
- Is registration of a licensing agreement mandatory?The acts governing different types of IP include provisions regarding the requirement of registration of a license agreement. Where the statute mandates registration of the license agreement, both the licensor and licensee must ensure that the same is registered within the prescribed time period.
- Patents – The Patents Act, 1970 states that a license agreement must be registered and that a licensee should apply in writing to the Controller of Patents for registration of his title.
- Trademark – The Trade Marks Act, 1999 does not make registration of a license agreement mandatory, however it does provide for the concept of ‘registered user’. Provisions have been set forth to register any person other than the registered proprietor as the registered user for the use of the mark in commerce. The act provides that registered user can file infringement proceedings in his own name.
- Copyright – The Copyright Act, 1957 does not make registration of the license agreement mandatory.
- Design – The Designs Act, 2000 requires that an application for registration of title under a license agreement is filed with the Controller within six months from the execution of the license agreement. A license agreement in respect of which no entry has been made in the register cannot not be admitted in evidence in any court in proof of the title to copyright in a design or to any interest therein, unless otherwise directed by the court.