The Information Technology Act, 2000 ("IT Act"), which was enacted with the basic premise of providing legal sanctity to electronic commerce, has today morphed into a one-stop shop ranging from solutions for regulating data privacy to providing responses to cyber incidents by the National Computer Emergency Response Team.
Nonetheless, the IT Act crossed a major milestone recently, when the Ministry of Electronics and Information Technology issued a gazette notification amending Schedule 1 to the IT Act1, and in the process heralding a shift in the manner of executing certain instruments and contacts.
While the IT Act was instrumental in facilitating the digitalisation of payments, a vast majority of the documentation that accompanied such payments continued to be paper dependent. Now this is about to change.
Long awaited digitalisation, finally on the anvil:
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 of the IT Act effectively excluded all Negotiable Instruments from its purview other than a cheque. Negotiable Instruments, as defined under Negotiable Instruments Act, 1881 includes a promissory note, a bill of exchange and a cheque. Hence, promissory notes and bills of exchange which were hitherto excluded, have found their way into the digital world, alongside the cheque, slowly but surely. 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")2.
The RBI Report of the Working Group on Discounting of Bills by Banks, represented way back in September 20003, 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 they can be processed in real time.
To ensure that transactions do not depend on physical Power of Attorneys for delegating power to the relevant stakeholders, a further amendment was carried out to the First Schedule of the IT Act, whereby, Power of Attorneys empowering any entity regulated by the Regulatory Authorities would now come under the governance of the IT Act. This will enable Power of Attorneys to be digitally executed so that the entire transaction is a seamless flow.
Areas for further impact to be explored
It is hoped that in due course of time, this initiative be 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, and both domestic and cross-border trade benefits from such initiatives.
This will prove to be a game changer and provide both the banking industry as well as the Information Technology Industry, with new opportunities to innovate digitally powered business-friendly solutions. One of the positive outcomes of this would be increased competition in the marketplace that will put the borrower in an advantageous position vis-à-vis his bargaining power with the lender, when unlike in the past, the borrower had to sign on the dotted line.
These are welcome amendments, aimed at providing a thrust to e-commerce, quietly but surely.
Are Real Estate Transactions finally hived-off from paper?
While these amendments are game changing, another innocuous line has been inserted in Section 2(ii) which states "serial number 5 and the entries relating thereto shall be omitted". 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 immediately catapults agreements like Sale Deeds and Lease Deeds into the digital arena and makes the IT Act applicable to such transactions. It is hoped that the methodology of executing such agreements would be in "electronic form" or in the form of an "electronic record" as defined under the IT Act.
The applicability of the IT Act not only permits the digitalisation of the transaction, but also allows for legal recognition of the electronic record and the digital signature that has been affixed on the electronic record4. The rules as to admissibility of electronic records in evidence and compensation in case dishonour is proved, automatically becomes applicable.
Instruments yet left untouched by the amendments under the IT Act
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". While it is understandable that these transactions, being 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.
The impact of technology
While contracts for the sale or conveyance of immovable property or any interest in such property are ideal opportunities for the implementation of blockchain technology, it is a matter of time before other beneficial instruments like Trust Deeds and Wills also make a beeline towards benefitting from such technologies.
The block chain technology 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.
Conclusion:
The amendments it is hoped will also be followed up with a framework to effectively ensure that Cheques, Bills of Exchange and Promissory Notes are honoured without fail, hence making the financial system, both dependable and robust. Accompanying penal provisions in case of default, will also need to be put in place so that there is no room for ambiguity when it comes to interpreting default.
Real Estate transactions will not only be expected to close expeditiously, but will narrow, if not eliminate the space for disputes and any possible fraudulent transactions.
The transactions currently left out of the applicability of the IT Act, should also with the creation of a robust framework, be brought into the digital arena so that all transactions go online with time.
Footnoes
1. S.O.4720(E) - Ministry of Electronics and Information Technology Notification, New Delhi, 26th September 2022
2. Pare 2(i) of S.O.4720 (E).
3. RBI Report of the Working Group on Discounting of Bills by Banks dated 28 Sep 2000.
4. 10A of the IT Act -. Validity of contracts formed through electronic means. —Where in a contract formation, the communication of proposals, the acceptance of proposals, the revocation of proposals and acceptances, as the case may be, are expressed in electronic form or by means of an electronic record, such contract shall not be deemed to be unenforceable solely on the ground that such electronic form or means was used for that purpose.
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