Leading law firms shed light on the cutting-edge practice areas that are receiving the attention of India’s top legal minds


INTERNET PLATFORM LIABILITY

Intermediary liability in India – moving goalposts

The internet has revolutionized the way we interact; however, it has also brought with it a host of problems such as hate speech, terrorist recruitment, fake news, illegal lobbying, and personal data theft. A number of these issues involve the new gatekeepers of the internet, online social media platforms, and their regulation will be at the forefront of legal development in the near future.

Vikram-Jeet-Singh-BTG-Legal
Vikram Jeet Singh

The concept that an intermediary is only a neutral pipeline for information is no longer sacrosanct. Germany’s new social media law, Netzwerkdurchsetzungsgesetz, makes platforms liable for the content they carry. In India, the Supreme Court and the government have repeatedly called for the regulation of intermediaries. The Supreme Court has in the past made intermediaries responsible for actively monitoring content to ensure that they are compliant with child and women protection laws.

There are two questions in the context of growing calls for regulation in India:

  • Are we moving from a “did-not-know” standard to a “ought-to-have-known” standard, and to what extent is this practical?
  • Do we need a new hypothesis of intermediary liability, which is limited but varies with degrees of potential severity?

Section 79 of the Information Technology Act, 2000, provides intermediaries with qualified immunity, as long as they follow the prescribed due diligence requirements and do not conspire, abet or aid an unlawful act. However, the protection lapses if an intermediary with “actual knowledge” of any content used to commit an unlawful act, or on being notified of such content, fails to remove, or disable access to it.

Prashant-Mara
Prashant Mara

The internet has revolutionized the way we interact; however, it has also brought with it a host of problems such as hate speech, terrorist recruitment, fake news, illegal lobbying, and personal data theft. A number of these issues involve the new gatekeepers of the internet, online social media platforms, and their regulation will be at the forefront of legal development in the near future.

The demand for a further dilution of intermediary defence has come from two sources in India — the copyright protection laws; and the public order and heinous offences laws.

Delhi High Court in MySpace Inc v Super Cassettes Industries Ltd seems to hold that in cases of copyright infringement, a court order is not necessary, and an intermediary must remove content upon receiving knowledge of the infringing works from the content owner. It seems that the intermediary protection provided in this case was considerably less than the “actual knowledge” requirement under section 79 of the IT Act, as read by the Supreme Court in the Shreya Singhal case.

Incidents of sexual abuse, lynching and mob violence have been reported from videos and messages circulated on these platforms. The government has taken up these matters with intermediaries on at least two occasions, asking them to find effective solutions to the misuse of their platforms. The government has indicated that if they do not find solutions, they are “liable to be treated as abettors” and “face consequent legal action”. This may mean that intermediaries are prosecuted as abettors under the Indian Penal Code.

It is likely that a regulatory alternative will emerge that will water down the overarching protections available to intermediaries. Hence, intermediaries may have to take a proactive role in policing content. As long as there is broad consensus on what “high-risk” content is, intermediaries should be allowed to evolve a self-regulatory mechanism to address it. Obvious examples are child-harming content, and material that incite violence, religious intolerance or enmity. As noted in the German regulation, such content should be banned or removed within 12–24 hours. For other objectionable content, such as copyright violation, a longer process of adjudication/discussion can be specified.

It may be useful for intermediaries to come together and design a cross-platform format for users to report illegal content, which can then become the basis for guidelines on self-regulation. Such pro-active diligence should be recognized in any future law as being sufficient a criterion to preserve the safe harbour defence. One-off misses in removing high-risk content should not impose a liability if intermediaries can demonstrate that a process was available.

Admittedly, this will be a subjective determination, but as we have seen in the case of the General Data Protection Regulation, some level of subjectivity has become unavoidable in legislation governing online behaviour.

In the absence of a solution from the industry, governments and regulators may go for an extreme “banning” approach, or try to affix “criminal liability” on the intermediaries.

The Supreme Court has, in the Prajwala case, shown willingness to work with intermediaries to find solutions. The choice may come down to intermediaries, whether to work with regulators and evolve a standard of intermediary liability, or to take up a reactive, defensive view on regulations.

BTG-Legal-lawyersVIKRAM JEET SINGH and PRASHANT MARA are partners at BTG Legal. They can be contacted at vikram@btg-legal.com and prashant@btg-legal.com.


BANKRUPTCY & INSOLVENCY

IBC: Ensuring dissenting creditors get fair deal

A resolution plan passed under the Insolvency and Bankruptcy Code, 2016 (IBC), binds all stakeholders of the company including any dissenting creditors. Providing a 66% voting threshold by value for approval is a useful tool to ensure that a revival plan is not held to ransom by minority financial creditors.

DHANANJAY-KUMAR-
Dhananjay Kumar

Before 5 October 2018, regulation 38(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, required that a resolution plan provide for payment of liquidation value (the estimated realizable value of the assets of the corporate debtor if the corporate debtor were to be liquidated on the insolvency commencement date) due to dissenting financial creditors (including abstaining creditors) prior to any recoveries being made by the assenting financial creditors.

The guiding principle appears to be that the outcome of a successful corporate insolvency resolution process (CIRP) for creditors cannot be worse than a liquidation with a “hypothetical liquidation value” being calculated as per the “liquidation waterfall” prescribed under section 53 of the IBC, applying pre-insolvency entitlements of the creditor.

This was consistent with the principles in the UNCITRAL Legislative Guide on Insolvency Law, 2005, which was treated as the benchmark in the report of the Bankruptcy Law Reforms Committee. There was, however, no restriction in the CIRP regulations on additional amounts being paid to the dissenting financial creditors with the floor being the liquidation value.

The National Company Law Appellate Tribunal (NCLAT), in its order in the Sirpur Paper Mills case, viewed regulation 38(1) as providing a prescriptive amount for dissenting financial creditors and observed that the Insolvency and Bankruptcy Board of India (IBBI) had gone beyond its mandate to prescribe amounts to be paid to dissenting financial creditors in a resolution plan.

The Sirpur Paper Mills decision set the ball rolling for an amendment by the IBBI to regulation 38(1) on 05 October 2018 doing away with, among others, the minimum pay out of the liquidation value to dissenting financial creditors. The amendments to the CIRP regulations, while seeking to address the issue of unfair treatment accorded to similarly situated creditors, appear to have thrown the baby out with the bathwater.

The amendment does not pay heed to recognition of existing creditor rights accrued under general law (described as a cardinal principle of corporate insolvency law by some scholars of insolvency law). By not “guaranteeing” creditors liquidation value on their pre-insolvency accrued rights from resolution proceeds, a creditor who struck a good bargain at the time of contracting the loan with the debtor stands to lose.

For example, say a creditor with a debt of ₹100 had exclusive security over an asset worth ₹90 (as a liquidation value), therefore such creditor’s hypothetical liquidation value should be ₹90 (minus its share of insolvency process costs).

However, if a resolution plan provides for 50 paise on a rupee to all creditors, following the NCLAT order and the amended CIRP regulations, the resolution plan will have to provide the same treatment to the creditor, leading to an outcome that would be worse than liquidation for the creditor. It will not change the situation even if the creditor votes against the resolution plan as the approved plan is binding on it under the IBC (and will presumably take away existing rights). The scenario worsens if the resolution plan contemplates disposal of the charged asset as part of the business plan.

Comparing this position with other developed insolvency regimes clearly shows the shortcomings:

  • Under chapter 11 of the US Bankruptcy Code, a secured creditor cannot be “crammed down” (i.e. a chapter 11 plan cannot be forced on them), unless the creditor retains its security over the assets or the proceeds from the asset, or otherwise retains the ability to realize the equivalent of the security.
  • In the context of the UK’s company voluntary arrangements (CVA), upon a challenge to the approved CVAs, courts in England test whether the aggrieved creditor is being unfairly prejudiced in a CVA on two comparators (Prudential Assurance v PRG Powerhouse): the vertical approach (that is whether the plan provides the creditor less than it would expect to receive in a hypothetical liquidation); and the horizontal approach (that is whether the creditor is being treated differently than other creditors in its class in a hypothetical scheme of arrangement).

In the context of the UK’s approach, the NCLAT and the amended CIRP regulations seem to follow only the horizontal approach for testing the “fairness” of the resolution plan and ignore the vertical approach. In light of the cardinal principle highlighted above, this may need a rethink.

Cyril-Amarchand-MangaldasDHANANJAY KUMAR is partner and co-author GAUTAM SUNDARESH is an associate in the restructuring and insolvency practice at Cyril Amarchand Mangaldas. They can be contacted at dhananjay.kumar@cyrilshroff.com and gautam.sundaresh@cyrilshroff.com.


DATA PRIVACY

Indian data privacy bill: the road ahead

The European Commission recently released a set of statistics reflecting on the “compliance, enforcement and awareness” of the General Data Protection Regulation (GDPR), which has been in force for over 10 months now. It shows a growing number of complaints and data breach notifications in Europe, and fines being imposed. This clearly indicates the success of the GDPR framework.

India has a lot to learn from this as the proposed Personal Data Protection Bill, 2018, is in the pipeline. The bill is expected to bring about a huge shift in personal data protection regime in the country.

Tejas-Karia-Shardul-Amarchand-Mangaldas
Tejas Karia

TIME-BOUND TARGETS

The provisions of the bill require the government to notify the proposed act within 12 months from enactment. The government is required to establish a Data Protection Authority (DPA) within three months from the notification date, and within 12 months the DPA is required to notify the grounds of processing personal data, as well as codes of practice for several aspects under the proposed act.

The remaining provisions of the proposed act will come into force 18 months from the notification date, whereas the government may notify the provision mandating mirroring of personal data within India at its discretion. Overall, it is expected to take 18 months from the notification date for the provisions of the proposed act to fully take effect.

IMPORTANCE OF BY-LAWS

The government and the DPA also has the responsibility to formulate by-laws on several granular aspects of data privacy. The present Information Technology Act, 2000, has provisions for disclosure of personal information and implementation of reasonable security standards for sensitive personal information, which are supplemented with by-laws. While the proposed act has detailed provisions granting substantive rights to data principals, there are several key areas where it leaves scope for the government or the DPA to frame rules and regulations.

Shashank-Mishra-Shardul-Amarchand-Mangaldas.
Shashank Mishra

RESPONSIBILITIES OF GOVERNMENT

The government has the power to establish the DPA, and appoint its chairperson and members. It also has the power to permit cross-border transfer of personal data to a particular country, sector or international organization. Both these powers are to be exercised in a time-bound manner upon the notification of the proposed act. The government also has to prescribe an adjudication mechanism under the proposed act – including an appellate tribunal, or notify an existing tribunal as the appellate tribunal. Given the merger of the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) with the Cyber Appellate Tribunal, the government may notify the TDSAT to be the appellate tribunal under the proposed act as well. Further, the government may also notify what biometric data are barred from being processed by data fiduciaries, companies or entities that are collecting data, and exempt certain data processors from the proposed act.

RESPONSIBILITIES OF THE DPA

The DPA has been vested with the power to specify additional information that data fiduciaries may need to provide to data principals. The DPA may also specify categories of personal data that are sensitive, grounds for processing such data, and additional safeguards for, or restrictions on, processing it. The DPA has been granted the power to specify factors for age verification by data fiduciaries for processing personal data of children as well as to notify their guardians. While data principals have substantive rights under the bill, the DPA has to specify the period within which a data fiduciary is required to comply with the requests of data principals, and also the time period for reporting a data breach. The DPA may also specify classes of data fiduciaries or circumstances or operations

where data protection impact assessment is mandatory, and where a data auditor has to be engaged, along with related aspects of audit and record keeping. The DPA is also required to classify and register significant data fiduciaries. The role of the DPA in particular would be important in arriving at a holistic framework, given its expansive responsibilities. The law, however, would have to evolve based on issues reaching relevant agencies such as the DPA, appellate tribunal and ultimately the Supreme Court.

Shardul-Amarchand-Mangaldas-&-CoTEJAS KARIA is partner and head of arbitration, and SHASHANK MISHRA is a senior associate at Shardul Amarchand Mangaldas. They can be contacted at tejas.karia@AMSShardul.com and shashank.m@AMSShardul.com


TAXATION

Interim union budget: hits and misses

Few would disagree that the first term of the Modi government brought in bold tax reforms, including the introduction of a nationwide goods and services tax, demonetization and a crusade against “black” money, abolition of the capital gains tax exemption on on-market transactions, and closure of the Mauritius tax treaty route.

Amit-Singhania-Shardul-Amarchand-Mangaldas
Amit Singhania

It is small surprise that despite the convention of governments presenting a modest budget before general elections (scheduled for May), the business community harboured some hope that the Modi government’s interim budget would address a few, if not all, tax issues affecting them.

However, sticking to convention, the government did not make any significant policy or tax-related announcements. The policy announcements were largely agrarian/rural focused or targeted small and medium-level enterprises.

Instead, the government espoused its 10-year vision for the economy and set out a 10-point agenda that focuses on building India’s social and physical infrastructure, expanding rural industrialization, developing a digital economy, promoting a healthy and pollution-free nation, developing India’s space programmes and achieving food security, giving perhaps a glimpse of the future for proposals in the annual budget later this year.

The government once again called on its mantra of minimum government and maximum governance as the way forward to becoming a US$5 trillion-dollar economy in the next five years, and aspirations of becoming a US$10 trillion-dollar economy in the subsequent eight years thereafter.

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Gouri Puri

On the income tax front the changes were centred on the lower to middle income group of individual taxpayers. The introduction of a complete tax rebate for individuals with an annual income of up to ₹500,000 (US$7,000) was a key highlight. Even tax savvy individuals in higher income brackets of ₹650,000 or so can have this rebate by investing in approved retirement plans, medical insurance, etc.

Additionally, the standard deduction for salaried individuals has increased from ₹40,000 to ₹50,000. The proposal for raising the threshold for deduction of tax at source on interest earned on bank and post office deposits, from ₹10,000 to ₹40,000, is also slated to provide much relief to small taxpayers who would otherwise have to claim a refund of excess taxes deducted at source in their tax returns. Similarly, the government’s proposal to increase the threshold for deducting tax at source on annual rent, from ₹1,80,000 to ₹2,40,000, will fare well with middle income earners, reducing their compliance burden.

The interim budget also provides tax breaks for investments by individuals in a second home. Indian tax law levies tax on notional rental income arising from house properties (even where such a house property is not rented). However, one self-occupied house property is exempt from such notional rent taxation.

The budget has extended such exemption to two self-occupied homes per individual. Similarly, Indian tax laws allowed individuals a rollover benefit for reinvestment of long-term capital gains, realized on the sale of an existing home, to purchase or construct a house. Such rollover benefit has now been extended to reinvestment in two residential properties for long-term capital gains of up to ₹20 million. Although aimed at benefiting the salaried class, these tax proposals would certainly also give impetus to India’s housing market.

Additionally, the interim budget has extended the 100% tax holiday provided to businesses developing affordable housing by one more year, i.e. from 31 March 2019 to 31 March 2020. Moreover, the benefit of exemption from notional rent accorded to builders and developers holding house properties as inventory is proposed to be extended from one to two years from the end of the financial year in which the building is completed.

On a separate note, the finance minister, Piyush Goyal, has shared the government’s ongoing work on a path-breaking technology

that would improve taxpayer services such as processing of tax returns within 24 hours, and simultaneous refunds to taxpayers. His promise of an electronic anonymous assessment process with no personal interface should go a long way in bringing transparency to tax administration and compliance.

As individual taxpayers celebrate, the business community will need to be patient until the final budget is announced in July. Until then, the government has maintained the status quo, promising a more transparent tax administration in the future.

Shardul-Amarchand-Mangaldas-&-CoAMIT SINGHANIA is partner and GOURI PURI is a principal associate at Shardul Amarchand Mangaldas. They can be contacted at amit.singhania@AMSShardul.com and gouri.puri@AMSShardul.com