The Information Technology Act, 2000 (“IT Act”), was initially enacted with the intention of providing legal sanctity to electronic commerce. Little did one know that the IT Act would be used as an omnibus legislation catering to topics as unrelated as regulating data privacy, to topics such as providing responses to cyber incidents by the National Computer Energy Response Team.
Nevertheless, a major milestone was crossed recently when the Ministry of Electronics and Information Technology issued a gazette notification (hereinafter referred to as “Notification”) amending Schedule 1 to the IT Act, and in the process heralding a breakthrough in the manner of executing crucial banking documentation.
While the journey to paperless transaction is expected to be wrought with challenges, mainly arising from last mile implementation issues, it will nonetheless be a gamechanger, not only in banks and financial institutions, but also in the lives of the common man.
The IT Act as it stood, excluded from its applicability, the documents or transactions specified in the First Schedule to the IT Act. The First Schedule to the IT Act effectively excluded all Negotiable Instruments from its purview other than a cheque. Hence except for the solitary cheque, all other Negotiable Instruments stood excluded from the applicability of the IT Act.
However, now a demand promissory note and a bill of exchange, finds mention, in the same breath, as the cheque, hence broadening the applicability of the IT Act, not just to the “cheque” but also to demand promissory notes and bills of exchange. Just as paper cheques got slowly replaced or augmented by transfer instructions placed under the Payments and Settlements Systems Act, 2007, with the introduction of this amendment to the First Schedule of the IT Act, it is expected that similar provision be made for the handling of bills of exchange and promissory notes digitally, provided they are issued by one of the regulators viz., the Reserve Bank of India (RBI), National Housing Bank (NHB), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI) and Pension Fund Regulatory and Development Authority(PFRDA)(“Regulatory Authorities”) [Pare 2(i) of S.O.4720 (E)].
The RBI Report of the Working Group on Discounting of Bills by Banks, represented way back in September 2000, that in many instances, the goods reach much earlier than the documents. Hence the thrust by the Government to digitalise bills of exchange and promissory notes, so that this logistic nightmare becomes a thing of the past.
Since many of these transactions are carried out by an authorised attorney, there was a need to ensure that there are no unnecessary delays arising from having to create a paper trail evidencing delegation of power. This need was addressed when a further amendment was carried out to the First Schedule of the IT Act, excluding the exclusion of Power of Attorneys, from the applicability of the IT Act. In other words, Power of Attorneys are now included within the realm of applicability of the IT Act except that the entity delegating such authority will have to be one regulated by the IT Act.
While the reasons on why the applicability of the IT Act is restricted to certain instruments and documents executed by just the Regulatory Authorities, is not far to see, it is expected that this drive to digitalise documents and the executions thereof, is extended to the unregulated sector as well so that the net is widened, and private players are also afforded the benefit of secure digital transactions. This will lead to effective plugging of stamp duty pilferages and fraudulent transactions in the money laundering world, if it is coupled with an effective digital trail backed by new technologies like the block chain. Eventually both domestic and cross-border trade will stand to benefit from such initiatives.
Flowing from these initiatives will be innovative solutions that are digitally powered and business friendly. These business-friendly solutions, in addition to making the business and financial world a more lawful and ethical place, have the potential to create an egalitarian marketplace where the borrower and the lender are on an equal playing field, giving the borrower enough scope to bargain and achieve a favourable deal.
These are welcome amendments, aimed at providing a thrust to e-commerce, quietly but surely.
One innocuous line in Section 2(iii) of the Notification which states “serial number 5 and the entries relating thereto shall be omitted” could, if implemented successfully, create a tectonic shift in the manner in which sale and conveyance of land takes place in India. Serial No.5 of the First Schedule states, “Any contract for the sale or conveyance of immovable property or any interest in such property”. This omission, causing the IT Act to be applicable to such transactions, immediately catapults agreements like Sale Deeds and Lease Deeds into the digital arena. It is hoped that further clarity is provided on the manner of implementing these notifications so that the digitalisation of sale and conveyance deeds and their execution becomes an early reality.
The IT Act not only permits the digitalisation of the transaction, but also provides for legal recognition of the electronic record and the digital signature that has been affixed on the electronic record.
This leaves us with Serial No.3 in the First Schedule which states, “A trust as defined in Section 3 of the Indian Trust Act, 1882 (2 of 1882)”, and Serial No.4 in the First Schedule which states, “A will as defined in clause (h) of section 2 of the Indian Succession Act, 1925 (39 of 1925), including any other testamentary disposition by whatever name called”.
Both these instruments have been left untouched by the IT Act.
While it is understandable that these transactions, being largely in the unregulated sector, would be difficult to oversee, it is hoped that with time, robust processes are put in place to give effect to a legal framework that encompasses digital record keeping in the areas of Trusts, Wills and other forms of testamentary dispositions.
While contracts for the sale or conveyance of immovable property or any interest in such property are ideal opportunities for the implementation of technologies like the blockchain, there is no harm in exploring whether the benefits which flow from such technologies cannot be extended to instruments like Trust Deeds and Wills.
Technologies like the blockchain can be used to facilitate the storage of original documents and record of transfer of title at every stage, thereby making it virtually impossible to either defraud the beneficiaries of the transaction or the exchequer.
The amendments it is hoped will be backed up with effective implementation so that Cheques, Bills of Exchange and Promissory Notes are honoured without fail, thus ensuring a dependable and robust financial system.
There needs to be a real time connectivity between real estate disputes pending in court and the records of title at the registry, so that potential purchasers are aware. Nevertheless, it is expected that real estate transactions will not only close expeditiously, but will narrow, if not eliminate the space for disputes and any possible fraudulent transactions.
Those transactions which haven’t been considered favorably for the IT Act to apply, should also, over time, be brought into the digital arena so that all transactions can go online.
Christopher Manoharan is a Senior Partner at Kochhar & Co, Chennai.