India’s Most Critical Trade & Regulatory Compliance Digest

Ameet Datta, Suvarna Mandal | January 2023

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.

Ministry Of Information And Technology Notifies The Information Technology (intermediary Guidelines And Digital Media And Ethics Code) Amendment Rules, 2022

On 25th February 2021, the Ministry of Information and Technology (“MeitY”) notified the Information Technology (Intermediary Guidelines and Digital Media Ethics Code), 2021 (“IT Rules”) under the Information Technology Act, 2000 (“IT Act”). Later, on 6th June 2022, MeitY released the draft amendments to the IT Rules to address the “infirmities and gaps” in the IT Rules for public and stakeholder consultation. Recently, on 28th October 2022, MeitY notified the Information Technology (Intermediary Guidelines and Digital Media and Ethics Code) Amendment Rules, 2022 (“Amended Rules”). The Amended Rules include several proposed amendments which were circulated earlier in June 2022.

The Amended Rules amend/introduce the following provisions:

Amendments to Rule 3(1)(a) pertaining to multi-language access of privacy policy, user agreement etc.: The Amended Rules modify Rule 3(1)(a) to the extent that it requires intermediaries to publish on their

website the rules and regulations, privacy policy, and user agreement in English or any other language as mentioned under the Eighth Schedule of the Indian Constitution for access or usage of the computer resource in the language of the user’s choice. While Rule 3(1)(a) provides an option for publishing of the rules/regulations, privacy policy and user agreements in English or any language included in the Eighth Schedule of the Constitution of India, the terminating sentence of this sub-rule provides room for further confusion by seemingly mandating that intermediaries would have to provide the policies and agreements in the language of the choice of the user, greatly increasing compliance and costs for intermediary services. Further, Rule 3(1)(a) mandates that intermediaries ensure compliance with the privacy policy and user agreement.

Amendments to Rule 3(1)(b) and to grounds mentioned thereunder:

Reasonable efforts requirement: As proposed in the draft amendments which were circulated in June 2022, Rule 3(1)(b) of the Amended Rules mandate intermediaries to make reasonable efforts to cause the user of its computer resource not to host, display, upload, modify, publish, transmit, store, update or share any information that did not comply with grounds mentioned under sub-clauses to Rule 3(1)(b). The IT Rules mandated intermediaries to only inform users to not publish, host, modify, etc., certain types of offending information as mentioned under Rule 3(1)(b). However, the Amended Rules require intermediaries to take reasonable efforts to cause the user not to publish certain types of offending content on their platform. It may be interpreted to potentially suggest that intermediaries are now required to install mechanisms that can prevent users from uploading content that may violate the law. For instance, intermediaries may be required to put in place a content monitoring system that can identify ‘illegal content’. However, it can be argued that this may not be the case, as according to Rule 4(4) of the IT Rules, Significant Social media Intermediaries (“SSMI”) are required to “endeavor to deploy technology-based measures, including automated tools or other mechanisms to proactively identify information depicting rape or child sexual abuse, etc.”. Therefore, if Rule 3(1)(b) intended such proactive measures to be taken, it would possibly require an intermediary to deploy similar tools. Accordingly, there is a lack of judicial clarity with respect to the scope of “reasonable efforts” which must be implemented by intermediaries to ensure compliance under Rule 3(1) (b) as prescribed by the Amended Rules. Further, intermediaries should be prudent and neutral while implementing the (reasonable efforts basis) filtering mechanism under Rule 3(1)(b) to prevent violation of the user’s fundamental rights as envisaged under Articles 14, 19, and 21.

Rule 3(1)(b) of the Amended Rules also goes beyond the statutory mandate provided by Section 79 of the IT Act. This is because Section 79 does not require any positive act on the part of intermediaries to police its users in the manner prescribed under Rule 3(1) (b). Therefore, Rule 3(1)(b) effectively contradicts the scope of Section 79 of the IT Act. Further, it is necessary to note that provisions of parent legislation enacted by the Parliament cannot be “overruled” by Rules/ Notifications issued by the Executive/ Government which, however, seems to be the effect of Amended Rule 3(1)(b). Additionally, Section 79(1) of the IT Act does not mandate this level of proactive policing and content moderation by intermediaries as such intermediaries are deemed to not have “actual knowledge” of potential violations of law.

Also, this amendment contradicts the holding of the Supreme Court in Shreya Singhal v. Union of India (“Shreya Singhal”) which read down the ‘actual knowledge’ requirement under Section 79(3)(b) of the IT Act. As per the Shreya Singhal judgment, an intermediary is deemed to have actual knowledge if it receives an order directing it to take down content from a judicial authority or appropriate government agency and not in response to individual requests by citizens. It appears that this amendment requires intermediaries to pre-empt potentially violative information and take it down on their own volition when it is outside the statutory mandate of Section 79 of the IT Act.

Amendment made to Duediligence requirements under Rule 3(1)(b): The Amended Rules delete ‘libelous’ and ‘defamatory’ from the list of offending information prohibited under Rule 3(1)(b). The list of offending information now includes ‘misinformation’ and the promotion of enmity between different groups on the grounds of religion or caste with the intent to incite violence.

Insertion of Rules 3(1)(m) and 3(1)(n): The Amended Rules mandate intermediaries to take all reasonable efforts to ensure the accessibility of their services to users and reasonable expectation of due, diligence, privacy, and transparency. Further, Rule 3(1)(n) states that an intermediary shall respect all the rights accorded to the citizens under Articles 14, 19, and 21 of the Indian Constitution.
Grievance Redressal by Intermediaries: As per the Amended Rules, Grievance Officers shall “resolve” complaints within 15 days of receipt of complaints as against disposing off complaints as mentioned under the IT Rules. Therefore, the nomenclature has been modified under the Amended Rules. Further, any complaint that does not relate to the publication or hosting of information that leads to (i) infringement of IP, copyright, etc. or (ii) belongs to another person and to which the user does not have any right, or (iii) violates any law for the time being in force, will be acknowledged and resolved within seventy-two hours of such reporting. The amendment further requires the intermediary to develop safeguards to avoid any misuse by users. The IT Rules mandated Grievance Officers to dispose of any complaints within fifteen days from the date of receipt of such complaints. However, the Amended Rules create multiple timelines depending on the nature of the violation. The timeline provided for resolving issues related to the infringement of copyright under the Amended Rules is fifteen days which conflicts with the timeline mandated under the Copyright Act, 1957 (“Copyright Act”) and the Copyright Rules, 2013 (“Copyright Rules”). The Copyright Rules permit the issuance of takedown notices and place an obligation on the person storing infringing material to take measures, within thirty-six hours. The exclusion of the seventytwo hours timeline for infringement complaints appears to mean that intermediaries can take as long as fifteen days to take an action upon receipt of a complaint.
Constitution of Grievance Redressal Appellate Committee: The Amended Rules introduce a new rule, namely Rule 3A, for constituting a Grievance Appellate Committee (“GAC”). The GAC will act as the appellate authority against decisions of the Grievance Officer. Therefore, any person who is aggrieved by the decision of the Grievance Officer can prefer an appeal to the GAC for resolution. As per the Amended Rules, a GAC shall consist of a chairperson and two whole-time members appointed by the Central Government, of which one shall be a member ex-officio and two shall be independent members. Further, the Amended Rules enable an aggrieved person to file an appeal within thirty days from the date of receipt of communication from the Grievance Officer and require the GAC to resolve the appeal within thirty days from the receipt of the same.

The creation of GAC under the Amended Rules aligns with the proposed amendments that were circulated in June 2022. It will act as an appellate authority to deal with grievances arising out of orders passed by the concerned Grievance Officer. It is to be noted that the constitution of GAC does not bar the right of the aggrieved party to approach a court of law against the decision of a Grievance Officer, therefore, providing scope for conflicting orders to be passed by the courts and GAC. Further, the Amended Rules provide no clarity on the course of action an intermediary should pursue in case of contradicting orders by the GAC and courts. Further, the Amended Rules confer on the GAC “adjudicatory powers” of a tribunal in the absence of an enabling law that amounts to excessive delegation of power.

It is worth noting that any transfer of power to the GAC must conform to the standards as prescribed in Madras Bar

Association v. Union of India (“Madras Bar Association”). In this case, the Supreme Court held that tribunals that are vested with judicial power should possess the same independence, security, and capacity as the courts that the tribunal seeks to substitute. It also opined that members sharing the functions of the tribunal should possess expertise in law and should be competent to discharge judicial functions. Although the Amended Rules mention that the GAC will comprise three members out of which one shall be ex-officio and the other two shall be independent, the Amended Rules do not indicate whether such members would possess expertise in law. Additionally, the Amended Rules do not prescribe any procedure for the appointment of the GAC members.

The Firm’s Take

Despite the extensive consultation process, and industry-wide discontent, the Amended Rules retain several provisions as proposed by the draft amendments. The provision mandating intermediaries to take reasonable efforts also raises several fundamental doubts with respect to the function and role of an intermediary in the internet ecosystem. The lack of guidance on reasonable efforts may potentially cause confusion amongst the industry stakeholders due to the absence of a well-defined threshold. Further, conflicting timelines to resolve complaints relating to the infringement of intellectual property rights and the procedural lacunae in constituting the GAC may make the effective implementation of the Amended Rules challenging.

Moefcc Notifies E-waste (management) Rules, 2022

On 2nd November 2022, the Ministry of Environment, Forest and Climate Change (“MoEFCC”) notified the E-Waste (Management) Rules, 2022 (“New Rules”) in furtherance of the Draft E-Waste (Management) Rules published in May 2022 for public consultation. The New Rules supersede the E-Waste (Management) Rules, 2016 (“2016 Rules”) and the E- Waste (Management) Amendment Rules, 2018 (“2018 Rules”) (collectively referred to as “erstwhile Rules”) and will come into force from 1st April 2023.

Salient Features

Application: The New Rules apply to the following entities that are involved in the manufacture, sale, transfer, purchase, refurbishing, dismantling, recycling and processing of e-waste or electrical and electronic equipment (“EEE”):

Manufacturers
Producers
Refurbishers
Dismantlers and recyclers

The scope of application under the New Rules has been reduced in comparison to the 2016 Rules that were also applicable to:

consumers
bulk consumers (which as per the New Rules are required to ensure that e-waste generated by them is handed over to the registered producer/ refurbisher/recycler)
collection centres (which as per the New Rules are considered to be a third party that may be engaged by a producer for fulfilling Extended Producer Responsibility related obligations)
dealers (subsumed under the definition of a producer under the New Rules or may be third party engaged by the producer)
e-retailers (subsumed under the definition of a producer under the New Rules).

Exclusions: The New Rules will not apply to waste batteries, packaging plastics, micro enterprises, and radio-active wastes, all of which are specifically governed under other legislations.
Important Definitions: The following definitions have been added/ amended under the New Rules:

The term ‘Business’ has been introduced and means the manufacturing, production, assembling and import of electrical and electronic equipment as listed in Schedule I and refurbishing, recycling, disposal and treatment of e-waste;
The term Extended Producer Responsibility or ‘EPR’ has been redefined to specifically mean “responsibility of any producer of electrical or electronic equipment as given in Schedule-I for meeting recycling targets as per Schedule-III and Schedule-IV, only through registered recyclers of e-waste to ensure environmentally sound management of such waste”.
The term ‘Producer’ has been widened in scope and means any person or entity who, –

manufactures and offers to sell electrical and electronic equipment and their components or consumables or parts or spares under its own brand; or
offers to sell under its own brand, assembled electrical and electronic equipment and their components or consumables or parts or spares produced by other manufacturers or suppliers; or
offers to sell imported electrical and electronic equipment and their components or consumables or parts or spares; or
who imports used electrical and electronic equipment; irrespective of the selling technique used such as dealer, retailer, e-retailer, etc.

The term ‘Target’ has been limited in scope to mean the quantity of e-waste to be recycled through a registered Recycler by the producer in fulfilment of EPR.
The term ‘Manufacturer’, though largely unchanged as under the erstwhile Rules, has been limited to entities manufacturing EEE in Schedule I.

Registration of relevant entities on Central Pollution Control Board (“CPCB”) Portal: Unregistered entities are prohibited from carrying out any business under the New Rules, and in furtherance of the same registered entities are barred from engaging with other players that have not obtained the requisite registration. Accordingly, entities shall register on the CPCB portal (i.e. https://eprewastecpcb.in/) in any of the following categories namely:

Manufacturer;
Producer;
Refurbisher; or
Recycler

For entities falling under more than one of the aforementioned categories, a registration under the relevant categories will have to be obtained separately. Further, an entity’s registration may be revoked by the CPCB in case of inter alia any irregularity for a period up to three-years in addition to the levying of Environmental Compensation or ‘EC’.

Responsibilities of Manufacturers:

The following responsibilities have to be fulfilled by a Manufacturer (in addition to the registration requirement):

collection of e-waste generated during the manufacture of any electrical and electronic equipment and ensure its recycling or disposal;
file annual and quarterly returns in the laid down form on the portal on or before end of the month succeeding the quarter or year, as the case may be, to which the return relates.

Responsibilities of Producers: In comparison with the erstwhile Rules, it appears that the responsibilities of a producer have been significantly simplified. In addition to the registration requirement and annual/quarterly report filing requirement noted above, producers will be responsible for obtaining and implementing the EPR obligations and corresponding targets as well as creating awareness pertaining to the same.
EPR Regime and EPR Targets: Under the EPR regime, producers are required to fulfil their EPR through online purchase of EPR certificates from registered Recyclers only which they’re further required to submit online while filing quarterly return. The following EPR targets have been provided under Schedule III of the New Rules:

(where Year Y = Current Year; Year X = Average life of the product)

2023 -2024 – 60% of the quantity of an EEE placed in the market in year Y-X, where ‘X’ is the average life of that product
2024 -2025 – 60% of the quantity of an EEE placed in the market in year Y-X, where ‘X’ is the average life of that product
2025 -2026 – 70% of the quantity of an EEE placed in the market in year Y-X, where ‘X’ is the average life of that product
2026-2027 – 70% of the quantity of an EEE placed in the market in year Y-X, where ‘X’ is the average life of that product
2027-2028 – 80% of the quantity of an EEE placed in the market in year Y-X, where ‘X’ is the average life of that product
2028-2029 onwards – 80% of the quantity of an EEE placed in the market in year Y-X, where ‘X’ is the average life of that product

At present the New Rules do not prescribe what ‘X’ would be for various product categories.

Generation and Transaction of EPR Certificates:

Under the New Rules, producers will have to ensure that they purchase EPR certificates from registered recyclers/ refurbishers (as the case may be), that shall be valid for a period of two years from the end of the financial year in which they were generated.
The quantity eligible for generation of extended producer responsibility certificate shall be calculated by the following formula namely: QEPR = Qp x Cf where QEPR is the quantity eligible for generation of the certificate, Qp is the quantity of the end product and Cf is the conversion factor (quantity of inputs required for production of one unit of output)
Additionally, the New Rules specify that EPR certificates may be purchased on a quarterly basis, limited to the EPR liability of the current year plus leftover liability of preceding years plus five percent of current year liability. The details of such EPR transactions will have to be filed as a part of the relevant entity’s quarterly returns.

Onus on Manufacturers to Reduce use of Hazardous Substances: Similar to the erstwhile Rules, the New Rules require that producers do not utilise specific materials that are prohibited (such as lead, mercury etc.) in their components/consumables/parts/spares. Only equipment compliant with this requirement shall be permitted to be imported or placed on the market. However, a significant deviation in the New Rules is the introduction of unmoderated obligations on manufacturers to ensure that they use technology/methods to make the end product recyclable, and, also to ensure that components/parts made by different manufacturers are compatible with each other so as to reduce the quantity of e-waste.
Introduction of Environmental Compensation (“EC”) Regime: The New Rules introduce an EC regime that did not previously exist under the erstwhile Rules. EC may be levied on unregistered entities as well as any entities that may aid or abet the violation of the New Rules. Three or more violations under the Rules can result in the permanent revocation of registration over and above the levying of EC. Unfulfilled EPR that will be subject to EC cannot be absolved however, it may be carried forward for up to 3 years for meeting shortfalls
Prosecution: As per the New Rules, any person that:

provides incorrect information required under the New Rules for obtaining EPR certificates,
uses or causes to be used false or forged EPR certificates in any manner
wilfully violates the directions given under the New Rules, or
fails to cooperate in the verification and audit proceedings

will be prosecuted under Section 15 of the Environmental (Protection) Act, 1986 (“EPA”) (that lists the penalties, in the form of imprisonment and/or fine, for contravention of the provisions of the EPA and/or any Rules, Orders and Directions made thereunder) and such entities will also be liable to pay EC.

Verification and Audit power of the CPCB: Under the New Rules, the CPCB has the power to conduct random inspection and periodic audit of producers to verify compliance of the New Rules.
Steering Committee: The New Rules have introduced a Steering Committee which inter alia consists of members/ representatives from various ministries as well as producer and manufacturer associations. This committee will be responsible for implementation of the New Rules and will also preside over disputes that may arise as well as representations received in this regard. Further, the Steering Committee can take steps as it may deem fit for the implementation of the New Rules.

The Firm’s Take

The New Rules have introduced several provisions that help with enabling the ease of doing business. Much needed provisions such as paper processes for registering entities and filing returns have been digitised onto an easy-toaccess online portal, compliances for specific entities have been simplified and likely reduced, and there is increased representation in the Steering Committee for communicating point of views from different players in the industry at the time of formation of guidelines and policies under the New Rules.

However, the impact of these steps are greatly diminished due to onerous requirements such as separate registrations for entities that may fall under multiple categories. Similarly, the obligation placed on manufacturers for ensuring that components/parts made by different manufacturers are compatible with each other so as to reduce the quantity of e-waste, appears to be operationally challenging in the absence of Government mandates or standards governing the same. Such practical constraints, if not considered, can lead to imposition of EC and possible prosecution under the New Rules considering the usage of broad terms such as ‘aiding’ and ‘abetment’ in the relevant penalty provisions. Accordingly, from a compliance standpoint, it’ll be necessary for the industry to express its concerns to the MoEFFC highlighting such difficulties in implementing the requirements under the New Rules.

The Union Cabinet Approves The Guidelines For Uplinking And Downlinking Of Television Channels In India, 2022

The Union Cabinet approved the “Guidelines for Uplinking and Downlinking of Television Channels in India, 2022” (“Guidelines”) on 9th November 2022. The Guidelines have been issued with the intent to liberalise, consolidate and simplify the erstwhile 2011 and 2005 Guidelines on the subject, and inter alia deals with permissions to entities for Uplinking and Downlinking of Television (“TV”) Channels, setting up of Teleports, Teleport Hubs, use of Digital Satellite News Gathering (“DSNG”)/ Satellite News Gathering (“SNG”) Electronic News Gathering (“ENG”) systems, uplinking by Indian News agencies and temporary uplinking of a live event.

Salient Features

Online Process: Applications under the Guidelines can be made online on Broadcast Seva for setting up a teleport hub, Uplinking and Downlinking of TV channels, use of DSNG, SNG and ENG systems, registration of live events, operating a news agency, etc.
Setting up of a Teleport/Teleport Hub: Subject to fulfilment of eligibility conditions under the Guidelines, permission for setting up the teleport can be granted for a period of ten years and renewal of such permission can also be granted for 10 years by the ‘Ministry of Information and Broadcasting (“MIB”)’. Such permission is subject to payment of fees/royalty, roll out obligations regarding operationalization of the teleport, signing of the ‘Grant of Permission Agreement’ with the MIB, etc
Uplinking of TV Channel: Subject to fulfilment of eligibility conditions under the Guidelines, MIB can grant permission for uplinking of TV Channel for period of ten years and renewal of such permission can also be granted for 10 years by the MIB. This permit is subject to conditions such as payment of annual fees, fulfilment of roll out obligations regarding operationalization of the TV channel, compliance with uplinking in the specified frequency band, adherence to the Programme Code & Advertising Code, maintaining record of the content uplinked for a period of 90 days, and, provide monitoring facility for monitoring of programmes or their content by the MIB.
Downlinking of TV Channel: Subject to fulfilment of eligibility conditions, the MIB can grant permission for downlinking of TV channel for a period of ten years and renewal of such permission can also be granted for 10 years by the MIB. Such permissions are dependent on compliance with the Programme and Advertising Code, Sports Broadcasting Signals (Mandatory sharing with Prasar Bharati) Act, 2007, any other Code, standards, guidelines, etc. as prescribed by the MIB, keeping a record of programmes downlinked for a period of 90 days, providing monitoring facility for monitoring of programmes or content by the MIB/any other ministry, etc.
Live coverage of events: No specific permission is required from the MIB for live telecast by a non-news and current affairs channel. Only prior registration on the broadcast seva portal is required at least 15 days from the first date of the live event. Registration on the broadcast seva portal will allow entities to seek approval/NOC of other concerned authorities for broadcasting the event live.
Penalties For Violation: In case a channel broadcasts content which is in violation of the Programme Code and Advertising Code under the Cable Television Networks Regulation Act, 1995, it shall be liable for penal action. Such penal action can be in the form of an advisory, warning, apology to be rendered by the channel, channel to be off-air for specified number of hours/ days, any suspension/revocation of permission. For any other violations of the Guidelines, other than the violations under the Cable Television Networks Regulation Act, 1995, as referred to above, the MIB shall have to right to seek action as specified under paragraph 25 of the Guidelines.
Punitive Powers of the Central Government: MIB can suspend the permission of a TV channel for a specified period or cancel the permission given to such a channel on the grounds of public interest or national security. In case a permitted channel/ teleport/DSNG/SNG is found to be used for transmitting or uplinking any objectionable unauthorized content, etc. or fails to comply with the directives issued in this regard, the permission granted shall be revoked. Further, the company/LLP may be disqualified to hold any such permission for a period of five years, apart from the punishment under other applicable laws.
Transfer of Permission of a Television Channel or teleport: The Guidelines allow transfer of TV Channel/ Teleport to a company/LLP as permissible under the Companies Act/Limited Liability Act subject to a lock-in period of 1 year from date of operationalization.
Obligation of public service broadcasting: A company/LLP having permission under these Guidelines for uplinking a channel and its downlinking in India (other than foreign channels only downlinked in India) may undertake public service broadcasting for a minimum period of 30 minutes in a day on themes of national importance and of social relevance (there are 8 themes that have been identified in the Guidelines). The channels can appropriately modulate their content to fulfil the obligation referred above except where it may not be feasible, such as in the case of sports channels, etc.

The Firm’s Take

This revision of the guidelines on the Uplinking/Downlinking of channels/ Hubs/Teleports has been carried out after 11 years and was much needed. The Guidelines offer much needed relief in terms of offering permitted entities a simplified compliance regime and also enabling ease of doing business in the sector. For instance, instead of having to seek permissions for broadcast of live events, the Guidelines instead only mandate prior registration of live events with the MIB. Furthermore, as recognised by the Press Release of the Guidelines, LLPs/companies would now be allowed to uplink foreign channels from Indian teleports which would create employment opportunities and make India a Teleport-hub for other countries Additionally, instead of having an omnibus penalty clause, the Guidelines have prescribed penalties based on the severity of violations. Important measures such as a fixed 30-day timeline for grant of permissions and extension of terms of permission to 5 years/10 years is also laudable. The Guidelines have also liberalized the framework for transfer of a teleport/TV channel to a company/LLP subject a 1-year lock in period.

However, the mandate of putting permitted entities under the obligation to broadcast content on themes of national interest and social relevance for 30 minutes appears to be excessive and may impact the commercial interests of permitted entities who pay heavy fees for such permissions. Further, while the Guidelines provide a range of themes for public broadcast, the exact modalities for implementation of this obligation, including time slots of telecast, are not provided in the Guidelines and a specific advisory may be issued by the MIB in this regard. However, it is reasonable to expect that the conceptualisation and creation of such public service broadcasting should be left to the permitted entities.

The Reserve Bank Of India’s Digital Rupee Pilot Program Commences In The Wholesale Segment

On 1st November 2022, the Reserve Bank of India (“RBI”) commenced its pilot program on Digital Rupee in the wholesale segment. The use case for this pilot programme is “settlement of secondary market transactions in government securities”. As per RBI’s Press Release, “settlement in central bank money would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk”, making the inter-bank market more efficient. Nine banks have been identified by the RBI for the pilot programme for the wholesale segment

The RBI had announced the launch of the pilot programme at the time of issuing the Concept Note on Central Bank Digital Currency (“CBDC”). As the name suggests, CBDC is virtual money created by a central bank of a country and is recognised as legal tender by the central bank of that country. On 7th October 2022, the RBI had issued the Concept Note with the objective of creating awareness about CBDCs in general, and the e` (Digital Rupee), in particular. In the Concept Note, the RBI has defined CBDC as the legal tender issued by a central bank in a digital form which is the same as sovereign currency and is exchangeable with fiat currency.

As per the RBI, technological innovations are pushing the central banks, globally, to think about how the CBDCs could complement or replace traditional money. In light of the developments, the RBI had set up an Internal Working Group in October 2020 to study appropriate implementation architecture for introduction of CBDCs in India. This Internal Working Group had, in its recommendations, highlighted the need for a robust legal framework to back the issuance of e` as an alternate form of currency and for amending the Reserve Bank of India Act, 1934 (“RBI Act”) to define and cover features pertaining to the e`. As per the Concept Note, “the introduction of CBDC in India is expected to offer a range of benefits, such as reduced dependency on cash, lesser overall currency management cost, and reduced settlement risk”

The Concept Note classifies CBDCs into two categories – Wholesale (“CBDC-W”) and Retail (“CBDC-R”). CBDC-W is intended for settlement of interbank transfers and related wholesale transactions and CBDC-R is intended to be an electronic version of cash meant for retail transactions by inter alia, private sector, non-financial consumers and businesses.

In addition to providing a background on the technology behind CBDCs, the Concept Note also discusses some of the following key considerations for introduction of CBDCs on banking system and financial stability in India:

There is a need to provide a legal framework for providing the legislative mandate to the RBI to issue the CBDCs as well as introduction and amendment of the provisions of the RBI Act based on the form of CBDCs (either account based, or token based).
As regards privacy, the RBI acknowledged that it is essential to have privacy policy pertaining to customer data that will be collected by the banks while issuing the CBDCs and to secure the best interests of the citizens.
The Concept Note also provides guidelines in respect of cyber-attacks, which also affects the existing payment systems. The guidelines specify that security will be the primary concern along with setting up of a risk management framework for users within the CBDC network, testing of user interface to avoid exploitation of vulnerabilities, use of cryptography for a safe design, etc.
The RBI acknowledges that central banks are required to design the CBDCs in a manner that is compliant with the regulations and requirements pertaining to anti-money laundering and combating financial terrorism. As per the Concept Note, the ultimate responsibility for Customer Due Diligence needs to be clearly delineated and the design of CBDC should have the embedded mechanism for identifying and monitoring the transactions.

The Firm’s Take

The RBI has been dealing with the question of introduction and legality of a digital currency for quite some time, particularly in light of the increasing popularity of private cryptocurrencies. Although the RBI has been sceptical towards private cryptocurrencies, repeatedly warning users of its use as well as the associated financial risks, the central bank as well as the Ministry of Finance have taken steps towards defining the legal contours of virtual/ digital currency within the country. The amendment of the Income Tax Act, 1961, earlier this year, to introduce a tax on gains and income derived from virtual digital assets was one such step in this direction.

However, CBDCs are centralised and therefore different from the traditional cryptocurrencies that are decentralised and remain largely unregulated. Moreover, CBDCs are intended to act as an alternate form of legal tender whereas cryptocurrencies, at present, lack this ability given that the same have not been officially accepted by the RBI.

Having said the above, the launch of CBDCs in India has raised the expectation of the crypto industry and is being seen as a step towards the possible acceptance and eventual regulation of private cryptocurrencies in the country. The success of the pilot programme introduced by the RBI will be crucial in determining the fate of digital currency as well as cryptocurrency in India.

The Reserve Bank Of India’s Digital Rupee Pilot Program Commences In The Retail Segment

The Reserve Bank of India (“RBI”), vide a press release issued on 29th November 2022, launched its pilot program on Central Bank Digital Currency (“CBDC”) in the retail segments on 1st December 2022, one month after the launch of the pilot programme of the CBDC in the wholesale segment (which was intended for settlement of interbank transfers and related wholesale transactions).

The Central Bank Digital Currency – Retail (“e`-R”) pilot has been launched to test the “robustness of the entire process of digital rupee creation, distribution and retail usage in real time” among participating customers and merchants in select locations in closed user groups.

As per the RBI, the e`-R would represent the legal tender in the form of a digital token and would be issued through intermediaries, like banks, in the same denominations as the paper currency and coins that are presently used in the country. The e`-R would offer features of physical cash like “trust, safety and settlement finality” and will not earn any interests. The RBI allows for Person to Person and Person to Merchant transactions using the e`-R, which, in the case of transactions with merchants, can also be made using QR codes displayed at merchant locations.

The initial phase of the e`-R pilot will begin with four banks (of the total eight selected banks) covering four locations, namely, Mumbai, New Delhi, Bengaluru and Bhubaneshwar and will then gradually be extended to other banks, users and locations.

The Firm’s Take

The e`-R is structured as a token-based CBDC wherein the holder of the token is presumed to be the owner of such tokens. The e`-R will be held in digital wallets (once issued by the intermediaries) allowing instantaneous settlements without any intermediation of the banks, as is usually the case with cash in hand. This is different from other online transaction mechanisms such as the unified payments interface (UPI) which involves settlement of transactions through bank accounts.

With the adoption of the CBDC and its introduction in the retail segment, India has become one of the front runners, globally, in digitization of money by developing a new form of fiat money

The CBDC when implemented on a larger scale seeks to offer several long-term advantages such as reduction in operational costs involved in physical cash management, boost in innovation pertaining to cross-border payments and curbing violations in respect of money laundering, terror financing, tax evasions etc. and while the Central Government’s initiative of introducing the CBDC in the country is commendable, the success of the CBDC pilot programs (both in the wholesale and retail segments) will be critical in understanding the contours of the associated risks pertaining to financial stability and data protection and also in understanding whether India is ready to fully adopt this new form of money.

About Author

Ameet Datta

Ameet Datta is a Partner at Saikrishna & Associates. He is an IP litigator and TMT lawyer with over 22 years of experience and wide ranging expertise across IP Law, Technology law, privacy and data protection law, white collar crime cases around data breaches, and, media & entertainment law specifically in relation to licensing, content aggregation & acquisition, film & music production, distribution/ licensing, format rights, defamation and right of publicity. Ameet has extensive experience with the creative sector in terms of multiple litigations including licensing disputes before the Courts & the Copyright Board. Ameet is closely involved with Copyright laws, Technology regulations and policy matters. In 2010, Ameet appeared as an expert witness before the Indian Parliamentary Standing Committee overseeing amendments to the Copyright Act, 1957. Ameet has been highly ranked as a recommended lawyer for IP Litigation, and, telecoms, media & entertainment by Chambers & Partners (Asia Pacific), WTR1000; as a recommended lawyer for IP litigation by Legal 500, and recommended as an IP Star by MIP

Suvarna Mandal

Suvarna Mandal is a Partner at Saikrishna & Associates. She has nearly a decade of experience in providing trade & regulatory compliance advice to domestic and international clients for understanding and complying with a wide range of national, state as well as sector-specific legislations and regulations in the spheres of telecommunications, technology law, consumer law, environmental law, product compliance and safety regulations (including packaging standards, labels and safety standards), data protection and privacy, media law, advertising regulations, etc. She provides end-to-end compliance counselling to clients across various industries and sectors such as software services, consumer electronics, technology, telecom, media, intermediaries, e-commerce, online value-added services sectors, consumer goods and medical devices. Suvarna also works closely with clients’ Government Affairs team to prepare strategic policy documents, representations and formal communications towards policy development and policy reform efforts with the Government.