Lex WITNESS in association with The Trade & Regulatory Compliance Practice Desk at Saikrishna & Associates brings to you a detailed analysis on select updates and notifications.
The Ministry of Communications (“MoC”) had published the draft Indian Telecommunication Bill, 2022 (“Draft Bill”) on 21st September 2022 along with an explanatory note on the Draft Bill. The Draft Bill seeks to replace the Indian Telegraph Act, 1885, the Wireless Telegraphy Act, 1933 and the Telegraph Wires (Unlawful Possession) Act, 1950 and is open for public comments till 20th of November 2022.
The overhaul of the Telegraph Act was long overdue, particularly given the complexities arising in the Telecom Sector in the past decade, including a reference to the availability of spectrum etc. However, the Draft Bill also raises various concerns including the proposal to treat Telecom Service Providers (“TSPs”) and OTT communication services on equal footing. This potentially overlooks various critical distinctions between the two. Accordingly, the Draft Bill, if enacted in present form, will adversely impact innovation and consumer choice. While one can understand the concerns of the TSPs, whether these concerns are a valid basis to constrain other services is a question that will require debate. Additionally, whether the proposed regulation of OTT communication services will ultimately impact India’s long standing position on net neutrality, is equally in question. There is also a concern that the move to regulate OTT communication services is perhaps intended to set the clock back on the user consumption trends (voice/ messages). Given the above, the Draft Bill appears to be a mixed bag. Some would argue that the concerns raised due to the Draft Bill end up outweighing the benefits as India moves towards deploying 5G services in the coming years.
On 4th October, 2022, the Ministry of Consumer Affairs, (“Ministry”) notified the Legal Metrology (General) Amendment Rules, 2022 (“Amendment”) amending Rule 29 of the Legal Metrology (General) Rules, 2011 (“LM General Rules”) which pertains to the nomination of a Director under Section 49 (2) of the Legal Metrology Act, 2009 (“LM Act”) for offences by companies.
Under Section 49 (2) of the LM Act, a Director may be nominated by the company as the person responsible for the business of the company and Rule 29 of the LM General Rules prescribes the process of this nomination. Therefore, in case an offence under the LM Act has been committed by a company, the Director nominated shall be held responsible and shall be liable to be proceeded against and punished accordingly.
The Amendment adds a proviso under Rule 29 of the LM General Rules which now allows companies having different establishments/branches/different units to nominate an officer (other than the company’s Director) who has the “authority and responsibility for planning, directing and controlling the activities” at the said establishment/ branch/unit of the company.
According to the Ministry Press Release, the Amendment has been introduced for reducing the compliance burden of a company and is in response to the request made by various industries for allowing the nomination of persons actually having the authority and responsibility of the establishment/ branch/unit of a company (and should therefore be issued notices for violation in the respective establishments/ branches/units they are responsible for), instead of the Directors, who may not be directly involved in the day to day activities of the various establishments/ branches/units of the company.
The Amendment appears to be a step in the right direction as it takes into account the realities of company operations. As correctly noted in the Ministry Press Release, for companies having different establishments/ branches/units, it is likely that a Director will not be involved in the day to day activities of these establishments/ branches/units and therefore, would not have visibility over any on-ground activities, especially on short notice. This Amendment thus becomes extremely important from an Ease of Doing Business perspective, as the notice for any illegality arising at a company’s establishment/branch/unit would be served upon the person nominated as the person responsible for the business of the said establishment/branch/unit, and not the Director of the company, as was the case earlier.
The Department of Telecommunications (“DoT”), on 26th September 2022, notified the Prevention of tampering of the Mobile Device Equipment Identification Number (Amendment) Rules, 2022 (“IMEI 2022 Amendment”) amending the Prevention of tampering of the Mobile Device Equipment Identification Number Rules, 2017 (“IMEI Rules 2017”).
By way of brief background, the IMEI Rules, 2017 were introduced to prevent tampering with the unique 15-digit International Mobile Device Equipment Identification Number (“IMEI Number”), which is used to identify and validate a mobile device on a mobile network, in an attempt to deter cloning/counterfeiting and theft of mobile phones.
As per the IMEI Rules 2017, it is unlawful for any person other than the manufacturer to intentionally remove, obliterate, change or alter the unique IMEI Number or to intentionally use, produce, traffic in have control or custody of, or possess hardware or software knowing that it has been configured. For the purposes of these rules, a manufacturer is “a person who has lawfully obtained the right to assign a Mobile Device Equipment Identification Number to a mobile device before the initial sale of the mobile device.”
Thereafter, in February 2021, the DoT had introduced the Indian Counterfeited Device Restriction (“ICDR”) system for issuing IMEI certificates for import of mobile devices through various customs ports. The ICDR system replaced the IMEI Cloning and Duplication Restriction system, which was operated and maintained by Mobile Standard Alliance of India (MSAI). Further, on 4th July 2022, a Standard Operating Procedure (“SOP”) was issued for implementation of the Directorate General of Foreign Trade notification, dated 16th January 2015, which prohibited import of mobile phones with duplicate, fake and nongenuine IMEI.
Through the IMEI 2022 Amendment, the DoT has introduced a rule, namely Rule 4, stipulating mandatory registration requirements for both the manufacturer as well as the importer of the mobile device. As per the new rule, the IMEI number is to be registered with the ICDR portal of DoT in the following manner:
As per the February 2021 notification, the ICDR system was operationalized with effect from 28th January 2020. Accordingly, the IMEI 2022 Amendment appears to have been introduced to give legal teeth to the SOP and the registration requirements under this system.
Having said this, the twin timelines introduced by way of this amendment appear to put pressure on importers who are required to immediately register the IMEI numbers of the mobile devices imported by them.
While the intention behind introducing the IMEI 2022 Amendment is vested in the interest of stakeholders in the mobile ecosystem, the effectiveness of this system for preventing blackmarketing and mobile device tampering will become clear in the fullness of time.
The Division Bench (“DB”) of the Delhi High Court on 15th September 2022 in the matter titled “Lotus Pay Solutions Pvt. Ltd. & Anr. vs. Union of India & Ors. [W.P.(C) 8215/2020]” while dismissing a writ petition, has held that “payment aggregators” will fall within the definition of a “payment system” under Section 23A of the Payment and Settlement Systems Act, 2007 (“Act”). The DB also held that the Reserve Bank of India (“RBI”) has the power to issue guidelines for efficient management for such payment systems.
The writ petition was preferred by Lotus Pay Solutions Pvt. Ltd. (“Lotus”), assailing the three clauses of the RBI issued circular titled “Guidelines on Regulation of Payment Aggregators and Payment Gateways” (“2020 Guidelines”) released on 17th March 2020 which affected the working of payment aggregators by providing for the following:
Lotus submitted that it is engaged in providing “recurring payment solutions” for businesses through an authorized payment system known as National Automated Clearing House (“NACH”) and largely functions as a payment gateway. However, as one of its sponsor banks i.e., ICICI Bank does not have an internal NACH system, Lotus functions as a payment aggregator for ICICI Bank. In furtherance of the same, Lotus submitted that it largely acts as an “intermediary” and in doing so carries out the following functions – (i) collects funds from merchant clients/ e-commerce marketing companies; (ii) deposits these funds in the “nodal bank account” designated by a “Nodal Bank”. These funds are then remitted by nodal banks to Lotus’ merchant clients/ e-commerce marketing companies as per the agreed upon terms in the Nodal Account Agreement. A three-day settlement period is provided for transmission of funds.
According to Lotus, it provides an intermediary tool to payment systems to facilitate remittance of payments which cannot itself be treated as a “payment system”. Lotus submitted that payment aggregators who perform the work of intermediaries does not fall within the ambit of the definition of “payment systems” and are effectively “system participants” as defined in the Act.
The DB while considering Lotus stand analyzed the definition and functions of the “payment aggregator” and noted that in a digital payment transaction there is – (i) a payer; (ii) a beneficiary; (iii) the interface which is the payment aggregator which ensures that the money is transferred to the nodal account and the settlement of the amount is done in the next three days. The DB also noted that as per clause 8 of the 2020 Guidelines, payment aggregators are required to maintain an escrow account with a scheduled bank which shows that, in addition to an integration system, the payment aggregators also handle funds of the customer.
The DB then analyzed the definition of a “payment system” and noted that it includes a system that – (i) enables payment to be effected between a payer and a beneficiary; (ii) concerns clearing, payment or settlement service or all of them, but does not include a stock exchange.
The DB clarified that the payment aggregators, as it is concerned with handling the funds of the customer using technology, would be covered under the definition of the “payment systems” and the RBI has the power to issue guidelines for efficient management for such payment systems.
Considering the above, the DB upheld the validity of the Clauses 3, 4 and 8 and rejected Lotus’ writ petition by noting that:
The preceding paragraphs clearly show that RBI has laid great emphasis on customer protection and customer interest while drafting the said 2020 Guidelines which seek to ensure entry and survival of only those entities which meet the necessary criteria and obtain the necessary RBI authorization. The Delhi High Court by affirming that a “payment aggregator” will be included within the scope of a “payment system” (and thereby fall within the regulatory framework of the RBI), has confirmed that the norms and safeguards put in place for “payment aggregators” under the said 2020 Guidelines are valid and, the public interest element imbued in the framing of the 2020 Guidelines trumps the concerns raised by the petitioner company.
It is also worth noting that the Bench found merit in RBI’s submissions which was to the effect that separate legislation may have to be enacted for payment aggregators. However, given that the 2020 Guidelines appears to place the necessary checks and balances in place for a regulatory framework for payment aggregators, a separate legislation further regulating this space may run the risk of potential overregulation.
Advertisements form an important part of marketing strategies of businesses as they play a key role in influencing consumers’ buying behaviour. Advertisers use several approaches for marketing their products or service to the consumers to convince them to purchase the advertised product/service. However, advertising law in India prohibits/regulates advertisement of certain products that are injurious to health, such as cigarettes, alcohol, tobacco, and similar products. To circumvent this prohibition, advertisers employ brand recall through ‘brand extensions’ by making surrogate advertisements for such substances that are prohibited/regulated.
Indirect or surrogate advertisements pertain to the subtle promotion of goods and/or services (such as tobacco, cigarettes, alcohol etc.) that are prohibited from being advertised under law, by instead marketing them indirectly through products or services that can be lawfully advertised, such as water, soda, perfumes, music CDs, etc.
There has been a lot of discussion around whether there should be a complete ban on surrogate advertisements or whether they should be allowed under genuine ‘brand extensions’. This discussion was brought to the forefront recently, when the Central Consumer Protection Authority (“CCPA”) under the Department of Consumer Affairs notified the Guidelines for Prevention of Misleading Advertisements and Endorsements for Misleading Advertisements, 2022 (“2022 Misleading Advertisement Guidelines”), sparking concerns on the status of surrogate advertisements in India.
The 2022 Misleading Advertisement Guidelines, which broadly apply to all “form, format, and medium of advertisement”, define a “surrogate advertisement” as below –
The 2022 Misleading Advertisement Guidelines broadly prohibit surrogate advertisement for goods/services whose advertising is otherwise prohibited/ restricted by law, by circumventing such prohibition or restriction and by portraying it to be an advertisement of goods or services whose advertisement is not prohibited/restricted under law. Further, as per these guidelines, an advertisement would be considered as surrogate/indirect if the advertisement does the following:
A proviso to this particular provision states that mere use of a “brand name or company name” of the prohibited/ restricted goods or service will not be considered surrogate advertisement if the advertisement is “not otherwise objectionable as per the provisions set out in these guidelines”. However, the 2022 Misleading Advertisement Guidelines fail to provide any clarity as to what would amount to “mere use” of a brand name.
In addition to the 2022 Misleading Advertisement Guidelines, statutes such as the Cable Television Networks (Regulation) Act, 1995, the Cigarette and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003 etc., also prohibit indirect advertisement of identified goods, products or services that are harmful. However, they do allow advertisements relating to genuine brand extensions subject to fulfilment of specific conditions.
For instance, the ‘Advertisement Code’ as incorporated into the Cable Television Network Rules, 1994 (“CTN Rules”), prohibits surrogate/indirect advertisements on cable services, however, includes provisions that stipulate specific conditions for allowing such advertisements that are genuine brand extensions. Additionally, the selfregulation based Code of the Advertising Standards Council of India (“ASCI Code”) is generally accepted and largely followed by relevant industry members such as advertisers, advertising agencies, media, etc. The Advertising Standards Council of India (“ASCI”) has provided specific guidelines for qualification of brand extensions relating to indirect advertisements.
In March 2021, the Central Board of Film Certification (“CBFC”) issued a clarification on the criteria for qualification of advertisements relating to a ‘Brand Extension Product’ based on the combined reading of the Advertisement Code and the ASCI guidelines on brand extensions. As per the clarification, advertisers are required to follow certain steps before making advertisements for brand extensions meant for cable services. The steps include, registration of the brand extension product with the appropriate government authority, filing an application with the Ministry of Information and Broadcasting (“MIB”), along with the copy of the proposed advertisement after obtaining a certificate from a registered Chartered Accountant (“CA”) that the product carrying the same name as the prohibited products is distributed in reasonable quantity and is available in a substantial number of outlets where other products of the same category are available, and the proposed expenditure on such advertising is not disproportionate to the actual sales turnover of the product. All advertisements found to be genuine brand extensions by the MIB would then be previewed and certified by the CBFC to ensure compliance with the CTN Rules.
Clearly, through this clarification, an objective criterion has been prescribed for allowing brand extensions on cable services. On the contrary, the 2022 Misleading Advertisement Guidelines appear to be placing a blanket ban on all forms of surrogate advertisements, including genuine brand extensions.
The 2022 Misleading Advertisement Guidelines, are platform agnostic, i.e., they apply to advertisements across all platforms.
However, the guideline specifically pertaining to surrogate advertisement in the 2022 Misleading Advertisement Guidelines is ambiguous since it appears to not permit genuine ‘brand extensions’ of brands, logos, trademarks etc., associated with products whose advertisement is prohibited, which otherwise is allowed (subject to meeting specific conditions) under other regulations such as the CTN Rules and ASCI Code.
The proviso to the guideline on surrogate advertisements in the 2022 Misleading Advertisement Guidelines appears to suggest that the Central Consumer Protection Authority (“CCPA”) has assumed discretion to decide whether a particular instance of extension of a brand, which is usually associated with a prohibited product, is objectionable under the 2022 Misleading Advertisement Guidelines.
Accordingly, the CCPA may object to a thinly veiled advertisement of a liquor brand which is being promoted through an advertisement for products like mineral water (which is originally associated with consumption of alcohol), where the content of the advertisement, either indirectly or through innuendo suggests an association of the product under “brand extension” with the prohibited product. Another example of advertisement for which the CCPA can raise an objection would be one which uses a brand/logo of tobacco based products in relation to a mouth freshener.
The recent warning issued by the Department of Consumer Affairs (“DCA”), on 1st September 2022, to industry bodies asking them to ensure strict compliance of the provisions pertaining to surrogate advertisements in the 2022 Misleading Advertisement Guidelines corroborates this understanding. As per news reports, this warning was issued after the DCA observed that during globally televised sporting events such as the Asia Cup 2022, alcoholic beverages were being advertised under the garb of music CDs, club soda, and packaged drinking water and tobacco products were being promoted through advertisements for fennel and cardamom. Accordingly, the broad wording of the 2022 Misleading Advertisement Guidelines may lead to extension of powers and overreach by the CCPA.
Further, the 2022 Misleading Advertisement Guidelines are in addition to other laws and regulations, such as the CTN Rules and the ASCI Code. This potentially allows application of the 2022 Misleading Advertisement Guidelines to advertisements that otherwise would only have been governed by such regulations and laws. This overlap is likely to add to the confusion because it would allow a television advertisement, for example, to be placed under the teeth of the 2022 Misleading Advertisement Guidelines despite receiving certification and passing the muster under the CTN Rules.
Generally, genuine brand extensions are acceptable across the world as they are based on legitimate products or businesses. Brand extensions that are invested in products that are permitted under law provide an opportunity for businesses to diversify and expand into newer markets. A good example of brand extension and business expansion would be the brand ‘ITC’, a tobacco giant, which also diversified its presence in lifestyle, FMCG and hotel businesses under the same brand.
The ambiguity, overlap and the confusion stemming from the 2022 Misleading Advertisement Guidelines leaves the guidelines open to legal challenge.
In light of the above, laying down an objective criterion and providing guidance on the treatment of brand extensions under the 2022 Misleading Advertisement Guidelines is the need of the hour for reducing the burden of courts and providing a conducive environment for ease of doing business.
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