New Electronic Records

The Information Technology Act, 2000 governs cyber incidents and data protection in India. A recent amendment permits certain negotiable instruments and real estate contracts to be executed digitally. Though narrow in scope, this change could significantly impact the financial and real estate sectors, fostering innovation and modernization.

This article was first published in The Mint. You can read the original at this link.

The Information Technology Act, 2000 (IT Act), is a salad bowl of disaggregated regulatory objectives, uncomfortably arrayed cheek-by-jowl in the same statute. This is the law that deals with cyber incidents and under which the National Computer Emergency Response Team has been established as the nodal agency for incident response. It is also the statute that lists all the different cyber crimes one could fall foul of. In the absence of a comprehensive privacy law, this is also the font of data protection regulation in the country, given that the rules issued under Section 43A of the Act are the closest we have got, so far, to a privacy regulation. And when websites have to be blocked, content taken down or digital communication monitored, it is the provisions of this law that are invoked.

Even though most of the provisions of the IT Act are regularly invoked by the government for some reason or the other, Chapters III, IV and V have remained comparatively under-utilised. This is surprising, as these are provisions that provide legal sanctity to electronic records and digital contracts, stipulating how they can be adduced in evidence and the circumstances under which they will be deemed valid. Given how extensively digital transactions are used throughout the country, one would have thought that we would have had reason enough by now to invoke them, either in relation to e-commerce, digital finance or any one of the myriad online transactions that are carried out every day.

Excluded Documents

One of the reasons why this might be the case is that various types of documents (trusts, wills and agreements for the conveyance of immoveable property, negotiable instruments or powers of attorney) have been specifically excluded from applicability of the IT Act. This means that the Act’s provisions that bring digital documents on par with their physical equivalents cannot be applied to these excluded documents. That is probably why despite the remarkable digitisation of some parts of the financial sector (payments, for instance), we continue to struggle to digitise all but the simplest of financial transactions.

But this might change very soon. Last week, buried under flashier headlines was an amendment to the Information Technology Act so innocuous that I would have missed it, had it not been specifically pointed out to me. The ministry of electronics and information technology had issued a gazette notification amending Schedule 1 to the IT Act to permit some categories of negotiable instruments and powers of attorney to be executed digitally. At the same time, it removed without qualification all restrictions on the applicability of the IT Act to real estate contracts, thereby permitting agreements pertaining to the conveyance of any right or title to immovable property to be executed digitally.

So, what will this mean for the financial services and real estate sectors?

Financial Sector Digitisation

Truth be told, the amendments to Schedule 1 pertaining to negotiable instruments and powers of attorney are quite narrow. They only extend the electronic record provisions of the IT Act to cheques, demand promissory notes, bills of exchange and powers of attorney issued in favour of, or endorsed by, regulated entities. By necessary implication, this excludes all such documents exchanged between non-regulated entities, such as corporate entities, small businesses or even you and me. After the amendment, post-dated cheques issued to banks, Electronic Clearance Service instructions for loan repayments, instruments that can be used to pay premiums on insurance policies, etc, can be executed digitally, but you and I will still not be able to issue cheques to our vendors by email.

Still, even this seemingly small amendment could have a significant impact. In the right hands, it could catalyse the creation of new and innovative digital instruments that could be used to support new digital lending marketplaces being created to democratise access to credit. This in turn would give borrowers an opportunity to choose from a range of loan products made available by different lending companies vying with one another for the borrowers’ business—a welcome change from what happens today, when they have no option but to accept whatever conditions lenders propose.

Real Estate Digitisation

But by far the most significant impact of this amendment will be on the real estate sector, considering that agreements relating to the transfer of rights and title to immoveable property will now be legally enforceable even if executed digitally.

The real estate sector has been painfully analogue for the longest time. The growing interest in new business models—co-working offices, co-living spaces, fractional ownership and the like—have been stymied because it has not been legally possible to replace archaic processes with more modern workflows.

This amendment gives us the opportunity to do that. To be clear, there is still work to be done. We still need to find digital solutions for other essential components of a real estate transaction—the payment of stamp duty and registration of those transactions that legally require it. However, the fact that real estate agreements that are digitally executed have now been placed on par with physical documents signed with pen and ink is an essential first step to digitising all these other processes.

If we can build on this foundation, we will be able to use technology to transform the country’s real estate sector.