India: Data Localisation: India's Policy Framework

Last Updated: 26 September 2018
Article by NovoJuris Legal

The Personal Data Protection Bill, 2018 ("Bill") and the Data Protection Committee's ("Committee") Report (released on 27 July 2018) contains the framework and the policymakers' insight on protection of personal data in India. The recent Draft e-commerce policy indicates Government's thought process on storing data in India. The Reserve Bank of India (RBI) in April this year mandates that all data generated by the payment systems in India, is to be stored in India. The Ministry of Health and Welfare has published the draft legislation called Digital Information Security in Healthcare Act, to safeguard e-health records and patients' privacy. Thus, all these new rules/policies/regulations (collectively referred as "the Data Protection Framework") indicate a very strong direction that the Government wishes to undertake on data localisation, which helps in enforcing data protection, secure nation's security and protect its citizen's data, better control on transmission of data outside the country and more.

We believe initial steps were taken when under the Companies Act, 2013, the maintenance of books of account in electronic form, required copies to be kept in servers physically located in India.

Many questions abound that the Government take fast paced measures in enabling the infrastructure to build data-centres, which in-turn requires land clearance, electricity etc., ability to keep the operational costs for SMEs low, jump-starting initiatives on artificial intelligence, delicate balance to be maintained on surveillance and protection. On a positive note, this provides entrepreneurial opportunities in building data centres, alternative energy/ solar grids etc.

Data Localisation under the Data Protection Committee's Report and the Bill

Chapter 6 of Committee's Report provides compelling arguments on 'Transfer of Personal Data Outside India', where the Committee notes Laissez Faire economy of data, i.e. where free flow of data is the norm and to restrict as an exception. It also recognizes that an embargo on data crossing borders as curbing personal liberty of people. The Committee recommended that even if the intended destination is across borders, all data to which Indian laws would apply would need to be stored locally as well. The Central Government may decide that certain data may not be permitted to be taken out of the country and requiring its processing to be done locally. To highlight sections 40 and 41:

  • The Central Government shall determine categories of sensitive personal data which are 'critical' in nature having regard to strategic interests and enforcement, this personal data can only be processed in India.
  • Transfer of other non-critical personal data will be allowed subject to one serving copy of it being stored in India.
  • Cross border transfers of personal data, other than critical personal data will be through model contract clauses with the data transferor being directly liable to the data principal.

Mandatory Data Localisation being prescribed under different aspects

Localisation of Payment Systems Data mandated by RBI: Even before the release of the Committee's Report and the Bill, data localisation was touched upon by RBI in its Notification of 9 April 2018, where it directed all payment system providers to ensure that all data relating to the payment systems are to be stored in systems situated only in India. Under the said notification, the RBI includes 'full end-to-end transaction details', 'payment instructions' and other information collected, processed, carried, etc. to be within the ambit of data which is required to be stored. The maintained are to be annually audited and reported to RBI.

Localisation of Data under the National E-Commerce Policy: The Draft National Policy Framework (the "National e-commerce Policy") concerning the 'Digital Economy' seeking to regulate the 'e-commerce' sector in India, proposes localisation of several categories of data involved in e-commerce. The intent stated is to create a 'facilitative eco-system' to promote India's digital economy through measures such as, data generated by users in India from sources such as e-commerce platforms, social media, search engines, etc., and all community data collected by Internet of Things (IoT) devices in public spaces are to be stored exclusively in India and sharing of such data within the country is proposed to be regulated.

The localisation of data is not absolute and cross-border flow is allowed for a handful of cases, such as for software and cloud-computing services involving technology related data-flow (which are free of any personal or community implications) and other standard exceptions consistent with the views expressed in the Committee's report.

Localisation under the draft amendment to Drugs and Cosmetics Rules, 1945

The recent draft amendment proposed to the Drugs and Cosmetics Rules, 1945, for regulating e-pharmacies, makes it clear that e-pharmacies web-portals have to be established in India for conducting its business in India and data generated to be stored locally. The draft rules states that under no means the data generated or mirrored through e-pharmacy portal shall be sent or stored by any means outside India.

Data Centres in India

For the data to be stored locally, data centres need to be established, regulated and function under the law. The demand for companies to host their data in India stemmed from security perspective. The major issues with data localisation is not only of cyber security but also jurisdiction. Cloud computing softwares have taken advantage of the economies of scale and an infrastructural architecture across the world. Thus when there is a threat presumed in one part of the world, the algorithm would move the data to another location or even in multiple locations. In addition to this the Cyber Security Report, 2017 released by Telstra have reported that businesses in India were most at risk to cyber security attacks. Further the organisation in India have experienced the highest number of weekly security incidents of all Asian countries surveyed.

The Privacy Bill provides that the Central Government to notify categories of personal data for which the data centres have to be established in India and the Authority to be established under the legislation to be responsible for the compliances. Further for achieving its goal of facilitating India's 'Digital Economy', the National e-Commerce Policy purports to grant "infrastructure status" to data centres and server farms in India. An infrastructure status by getting listed under the Harmonized Master List of Infrastructure Sub-sectors by the Department of Industrial Policy and Promotion (DIPP) entails that it'll be easier to get credit to enter into these operations. This would be accompanied by tax-benefits, custom duties rebates and also 2-year sunset period before localisation becomes mandatory. However, these incentives are only being considered and not promised as of yet.

Cost-Benefit Analysis on Data Localisation

In Chapter 6 of its report, the Committee takes up a detailed analysis of the benefits and repercussions of adopting mandatory data localisation in India. Benefits as stated in the report include:

  • Reduction in the costs of enforcement of India's own laws because of easier availability of data within its jurisdiction, the cost and time spent on co-ordinating with foreign agencies for access to requisite data being reduced.
  • Overseas transactions of data involve reliance on fibre optic cable networks spread around the world, which are vulnerable to attacks and perhaps localisation of data may reduce this security risk.
  • Having copies of all data collected in India will be a huge boost to the digital infrastructure as the domestic industry will now be able to harness a lot of data. For instance, the report points out that developments in Artificial Intelligence will see a great boost from this.
  • As a matter of national security, the complete localisation of critical data prevents any foreign surveillance of India's internal affairs.

The report also states that the localisation of data can have its costs too, however it severely downplays them. The report recognizes that to make storing of data mandatory in India, will result in a burden on the domestic enterprises which use foreign infrastructure like cloud computing for running their businesses. The implications include the increased costs of doing business for small and medium businesses, also there may be the danger of monopolization in the digital infrastructure because only a few firms would have the expertise and capital to invest in creating huge data centres in India. However, the Committee states that they are not persuaded by this argument and are confident that the potential of the Indian market will adequately trump the additional cost of setting up the infrastructure.

Our observations

Digital India and building a thriving Digital Economy in India, building strong competencies in artificial intelligence, protecting nation's security and data of its citizens are very critical and is now becoming mandatory for India. Establishing a strong domestic infrastructure is a big commitment for the Government, which includes making available vast tracts of land, uninterrupted power supply to the data centres and such other pre-requisites. It is to be seen how India can harvest the long term benefits.

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