Expanding the ambit of IT Act in a bid for increased digitalisation

– Neha Sinha, Assistant Legal Advisor | finserv@vinodkothari.com

Introduction

The Information Technology Act, 2000 (‘IT Act’) allows digital execution of documents by way of electronic and digital signatures. While the reach of IT Act is wide, certain contracts and transactions were excluded from its ambit. The First Schedule of IT Act enumerates the documents or transactions to which IT Act is not applicable and such documents or transactions cannot be signed digitally. Recently, the Ministry of Electronics and Information Technology has released a notification amending the First Schedule of the IT Act. The amendments are as follows:

1. Entry No. 5 of the said Schedule included “any contract for sale or conveyance of immovable property or any interest in such property”. Contracts for sale of immovable property fell outside the scope of the IT Act and hence, could not be signed digitally. The Amendment has omitted the Entry No. 5, thus, bringing contracts for sale or conveyance of immovable property within the ambit of the IT Act. This amendment allows a contract for sale of immovable property to be executed digitally.
2. Entry No. 2 of the said Schedule contained power-of-attorney, thus, excluding it from the purview of the IT Act. The amendment allows the application of the IT Act to those power-of-attorney that empower an entity regulated by the RBI, National Housing Bank, SEBI, IRDAI and PFRDA to act for the person executing it. Hence, a power-of-attorney in favour of entities regulated by these bodies can now be executed digitally.
3. Entry No. 1 of the said Schedule, excluded the application of the IT Act to negotiable instruments other than a cheque. Hence, negotiable instruments could not be signed digitally, but cheques were exempt from this provision and they could be signed digitally.  The amendment has included other negotiable instruments and brought them within the purview of the IT Act. Now, a cheque, a demand promissory note or a bill of exchange issued in favour of or endorsed by an entity regulated by the Reserve Bank of India, National Housing Bank, Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India and Pension Fund Regulatory and Development Authority, can be signed digitally.

Digitalisation of Transactions

Section 5 of the IT Act gives recognition to electronic signatures. Besides, contracts formed through electronic mode are also valid and enforceable in the eyes of law.^[1] There are different types of electronic contracts (‘e-contracts’), viz., click-wrap agreements, browse wrap agreements and shrink wrap agreements.^[2]

Digitalisation of conducting trade and businesses has massively contributed to the growth of the economic ecosystem. Digital execution of contracts allows seamless transaction and a secured channel for formation of contract. As a corollary, digital lending has developed in India. In view of the expanding business of digital lending, RBI has issued Digital Lending Guidelines to govern the loan facilitation processes by regulated entities (banks and NBFCs).^[3] In digital lending, the process is conducted online, without the physical interface of the lender and borrower. Moreover, National E-Governance Services Limited (NeSL) has launched the Digital Document Execution (DDE), a platform for paperless execution, stamping and storage of contracts relating to loans.

Digital execution of documents is being increasingly preferred by businesses and masses, specifically financial sector entities, as it is hassle-free, swift and efficient. In light of the developments in the digital conduction of business, it is only apt that the ambit of IT Act be also increased to include more transactions. 

Implications on businesses

Traditionally, instruments for sale/conveyance of immovable property and power-of-attorney have needed physical intervention of parties. Physical presence of parties was necessary for authenticating the document. These transactions could be executed only by putting wet signatures (ink based signatures). Notably, contracts for sale/conveyance of immovable property and power of attorney have to be compulsorily registered under the Registration Act, 1908.

Commercial relations are increasingly being entered into by way of e-contracts and digitally executed contracts. Digital execution is especially advantageous where parties are located in different places. However, while digitalisation was permeating every commercial sphere, negotiable instruments (except cheques), power of attorney and contracts for sale/conveyance of immovable property were still kept outside the scope of digitalisation in terms of digital execution. In case of contracts for sale/conveyance of immovable property, physical execution was required until now due to the very nature of the instrument. Sale, mortgage, gift, lease, etc., requires valuation of property. This necessitates the need for physical presence of the parties while entering into this transaction.

Power of attorney, negotiable instruments and sale/conveyance of immovables require documentation for judicial purposes. A physical authentication of these documents prevents questions regarding their validity and any such question on execution can be tackled by way of proof of ink signatures put down  by parties. 

These documents can be authenticated digitally by affixing electronic or digital signatures in accordance with the IT Act and the related rules. Digital execution will facilitate ease in conducting business and increase the efficiency in transactions by expediting the process. Since contracts pertaining to mortgages can now be executed digitally, financial institutions engaging in mortgaging activities would benefit from this amendment as it would streamline the whole transaction. Moreover, digital signatures such as DSC, Aadhaar authentication or signature through DocuSign are secured and hence cannot be tampered with. Digitally secure mode of authentication eliminates possibilities of forgery and cheating.

It is pertinent to note that the amendments are focused towards financial institutions. It is evident that the legislation aims to increase the reach of digitalisation. By bringing the said transaction within the scope of IT Act will give impetus to business and trades. This marks a shift from the traditional notions of documentation and execution of instruments and paves way for digital transactions.

^[1] Information Technology Act, 2000, section 10A.

^[2] For details on electronic contracts, refer to our resources here, here and here.

^[3] For details on Digital Lending Guidelines, refer to our resources here and here.