The application of information technology has reached almost all sectors of our lives. However, regulation of this sector is necessary due to the risks posed to financial and commercial transactions, national security systems, banking and communication networks and all other sectors and individual availing of the benefits of the internet and the Information Highway.
The rapid development of information and communication technologies has revolutionized business practices and brought in an era of ‘electronic commerce’ which needs legal protection and safeguards to prevent abuse of technology. Some of the most important issues that arise with respect to information technology laws in India are as follows.
The Information Technology Act, 2000
The Act aims to facilitate the development of a safe environment for growth of electronic commerce by creating a body of law governing electronic contracting, security and integrity of electronic transactions, the use of digital signatures and other incidental issues. The Act is based on the Model Law on Electronic Commerce with Guide to Enactment 1996 created by the United National Commission on International Trade Law (UNCITRAL) to offer national legislators a set of internationally acceptable rules as to how best to overcome legal obstacles and encourage e-commerce.
The Model Law has informed the debate on electronic commerce legislation as it contains rules and norms that validate and recognize electronic contracts, sets default rules for contract formation, defines the characteristics of valid electronic signatures and writing and contains rules that support admission of computer evidence in courts. The Act also contains elements of Singapore’s Electronic Transactions Act, 1998.
The IT Act’s primary purpose is to ensure that information is not denied legal validity or effect solely by virtue of it being in electronic and not paper form by authorizing the use of Electronic Data interchange, electronic records and electronic signatures. This is achieved by replacing paper instruments such as records, documents, signatures etc with their electronic counterparts.
The Act also deals with issues such as privacy, fraud, data protection, hacking, theft of electronic records and other offences in contravention of it’s provisions.
This is one of the most controversial issue in the area of IT laws because of the nature of internet transactions and website ownership in different countries vis a vis applicability of domestic laws. The IT Act extends to the whole of India and also extra-territorial jurisdiction in that it covers offences or contraventions of its provisions committed outside the territory of India by any person under Section 1.
With respect to nationality of offenders, that is considered irrelevant so long as the act or contravention involves a computer, computer system or computer network located in India (Section 75).
With respect to subject matter jurisdiction, the approach of the Act is termed Functional-Equivalent as it exercises jurisdiction over data in electronic form and emphasis is laid on giving electronic data the same level of recognition as is given to data on paper (Sections 4 & 5). Section 2(1)(r) specifies that where law requires any information to be in writing or printed, such requirement will be deemed to be satisfied if the information is in electronic form.
Electronic Contracts and Digital Signatures
The enactment of the Information Technology Act has rendered legitimacy to electronic documents thereby facilitating the formation of contracts using electronic medium. The sender of any electronic message is bound in law by his words.
Digital Signatures are considered to be ‘functional equivalents’ of paper-based signatures and a valid electronic signature has the characteristics of unique identification of a person, providing certainty of personal involvement and proof of legal intention. Section 15 prescribes that to achieve the above purposes, the signature creation data at the time of affixing the signature must be within the sole and exclusive control of the signatory.
Information Technology Offences
The Information Technology Act has brought in certain amendments to the Indian Penal Code so as to bring within its scope offences committed electronically. Further, it prohibits certain conduct or act under Chapter XI. Some broad offences are as follows :
- Privacy Violations – This includes the act of knowingly communicating to the public, the image of a private area of a person without his/her consent. Punishment for such offence includes a fine of upto two lakhs and/or imprisonment upto two years under Section 66E.
- Identity Theft – This offence is said to have been committed when fraudulent or dishonest use is made of an electronic signature or identification devices unique to a person. Impersonation is considered a serious offence under the IT Act under Section 66C.
- Obscenity – is said to have occurred when any material that appeals to the prurient or lascivious interests is published or transmitted in electronic form, the effect of which is to deprave and corrupt persons likely to have access to such material. Prohibited under Section 66F which also prescribes punishment in the form of imprisonment upto five years and a fine of upto ten lakhs. The publication of sexually explicit acts is also prohibited under Section 67A with the exception of the material being justified for public good or preserving heritage or religious identity.
- Cyber Terrorism – With the increasing number of terrorist attacks, accessing a computer resource by an unauthorized person with the intent of obtaining information that is restricted for reasons of state security, national interest, preserving foreign relations etc and using such data to cause injury to the nation is considered an act of terrorism and is prohibited under the IT Act.
- Apart from the above, casing damage to a computer, computer system by dishonestly accessing any data or causing the system any damage, disruption, deleting or altering of information etc is also considered offensive under the Act. Similarly, source code attacks which conceal, destroy or alter any computer source code that is mandated to be preserved by law is prohibited under Section 65 of the Act.
The IT Act also provides for the setting up of Cyber Regulations Advisory Committee under Sec 88 to advise the Central Government as regards rules and provisions under the Act. Passing of the IT Act has led to amendments in the Indian Penal code, the Indian Evidence Act etc.
Other issues that are of relevance are the various ways in which the Internet is abused by persons. ‘Phishing’ is a form of internet fraud whereby a person misrepresents his/her association with a legitimate association such as a bank, insurance company etc in order to have access to personal information and personal gain.
The high incidence of ‘Cyberstalking’ is another evil perpetrated by the internet. Cyberstalking or on-line harassment are situations where a stalker takes advantage of the ease of communication and access to personal information over the internet and the assured anonymity of the crime.
Domain name disputes have also arisen before Courts all over the world. Commonly known as ‘Cybersquatting’ , it involves the use of a domain name by a person with no trademark or any other rights over that name. The most common method is to make profits off a well established company name by slightly mis-spelling the name on the Domain so that search results will direct users to the ‘pirated’ website.
Money laundering is the term used to describe the act of converting ‘black’ or ‘dirty’ money into white money by giving the illegally obtained money, the appearance or cover of having originated from a legitimate source or activity. It is the method by which money obtained from crimes such as drug trafficking, mafia activities and other serious crimes or bribes accepted by public officials and politicians are channeled into the economy, essentially covering up the crime committed to obtain the money.
In India, the best known scandal is the Ketan Parekh one wherein large amounts of money were transferred to Swiss Banks to evade tax. Tax evasion and hiding of illegal activities are the common intentions behind this act which is done in three stages.
Placement which involves cash being deposited in banks or cash used to buy high value goods, property or business assets. This is followed by what is called ‘Layering’ via media wire transfers abroad (often using shell companies or funds disguised as proceeds of legitimate business) to deposit the cash in an overseas banking system. Finally, the illegitimate money is ‘Integrated’ by creating false loan repayments or forged invoices used as cover for laundered money.
In India, The Prevention of Money Laundering Act, 2002 (PMLA) is the primary legislation enacted to combat money laundering and the PMLA and the Rules notified thereunder were brought into effect from July 1, 2005.
The Act imposes obligation on banking companies, financial institutions and intermediaries to verify identity of clients, maintain records and furnish information to FIU-IND. FIU-IND is Financial Intelligence Unit – India which was set by the Government of India on 18th November 2004 as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions.
FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies in pursuing the global efforts against money laundering and related crimes.
PMLA defines money laundering offence and provides for the freezing, seizure and confiscation of the proceeds of crime. Section 3 of the Act makes the offense of money-laundering cover those persons or entities who directly or indirectly attempt to indulge or knowingly assist or knowingly are party or are actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property, such person or entity shall be guilty of offense of money-laundering.
Section 4 of the Act prescribes punishment for money-laundering with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine which may extend to five lakh rupees and for the offences mentioned specifically, the punishment shall be up to ten years.
Section 12 (1) prescribes the obligations on banks, financial institutions and intermediaries (a) to maintain records detailing the nature and value of transactions which may be prescribed, whether such transactions comprise of a single transaction or a series of transactions integrally connected to each other, and where such series of transactions take place within a month; (b) to furnish information of transactions referred to in clause (a) to the Director of FIU-IND within such time as may be prescribed and to (c) verify and maintain the records of the identity of all its clients. Section 12 (2) prescribes that the records referred to in sub-section (1) as mentioned above, must be maintained for ten years after the transactions finished.
Post the 9/11 terrorist attacks, the need to curb money laundering has become all the more urgent and countries have adopted stringent laws against financing of terrorist organisations such as The USA PATRIOT Act of 2001, and in the UK The Terrorism Act, 2000 and The Anti-Terrorist Crime & Security Act, 2001. The Reserve Bank of India’s extensive Anti-Money Laundering (AML) guidelines have also become effective from March 2006.
The AML norms such as “Know Your Customer” emphasize that banks must keep a record of their customers’ backgrounds in order to reduce and control the risk of money laundering. Under the UK law, it is a money laundering offense when a person enters into, or becomes concerned in, an arrangement which facilitates by whatever means the acquisition, retention, use, or control of criminal property by another person. This gives a much broader scope to the concept of money – laundering.
This refers to the act of buying or selling of a securities by a person who has access to privileged information that is not available publicly with the intention of making profits It is the trading that takes place when those privileged with confidential information about important events use the special advantage of that knowledge to reap profits or avoid losses on the stock market, to the detriment of the source of the information and to the typical investors who buy or sell their stock without the advantage of “inside” information. Such information, if released, materially affects the price of such securities.
Such action is considered as an offence under law due to the undue advantage one may have with respect to price sensitive information and the abuse of such advantage by a person. People who may have access to inside information include brokers, stock analysts, investment bankers, and company employees etc. Regulation by SEBI prohibiting Insider Trading is akin to several countries and provides investors against price rigging.
The first country to legislate against such acts that undermine investor confidence was the USA wherein the Securities and Exchange Commission is empowered under the Insider Trading Sanctions Act, 1984 to impose civil penalties in addition to criminal proceedings.
Information that could be price sensitive includes periodical financial results of a company, intended declaration of dividend, issue or buyback of securities, any major expansion plans or execution of new projects, amalgamation, merger, takeovers, disposal of the whole or substantial part of the undertaking and any other significant changes in policies, plans or operations of the company etc.
Insider Trading is prohibited as it causes a highly detrimental impact to small investors as well as the healthy competition in a free market wherein all participants, big and small are ‘informationally efficient’ or have access to the same amount of information. Insider Trading goes against the rules of fair play in capital markets.
In India, SEBI (Insider Trading) Regulations 1992, framed under Section 11 of the SEBI Act, 1992, are intended to prohibit and bring to an end the offence of Insider Trading. These Regulations have been amended since in the year 2002. Although the Regulations do not directly define the term insider trading, definitions have been provided for an ‘insider’ and ‘price sensitive information’.
According to the Regulations an ‘insider’ is any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access, connection, to unpublished price sensitive information in respect of securities of a company, or who has received or has had access to such unpublished price sensitive information.
Further, a ‘connected person’ means means any person who (i) is a director, as defined in clause (13) of section 2 of the Companies Act, 1956 (1 of 1956) of a company, or is deemed to be a director of that company by virtue of sub-clause (10) of section 307 of that Act or(ii) occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company whether temporary or permanent and who may reasonably be expected to have an access to unpublished price sensitive information in relation to that company.
Lastly, Price Sensitive Information has been defined as any information, which relates directly or indirectly to a company and which if published, is likely to materially affect the price of securities of company. Under the Regulations, penalties include a fine of Rs 25 Crores or three times the amount of profit made out of insider trading; whichever is higher , initiation of criminal prosecution by SEBI or orders with respect to affected transactions by SEBI.
Corporate Criminal Liability
A Corporation means a group of individuals coming together to carry on a business and in includes within its scope a company as defined under the Companies Act, 1956 in Section 2(7). Corporations are juristic entities meaning they are creations of law and are recognized as having a separate legal identity distinct from its shareholders.
Nearly three centuries after the industrial revolution, the structure and number of companies has increased tremendously with large corporations controlling huge amounts of capital and wealth in countries.
This has brought about previously unanticipated changes in the role and functions corporations play in the society. Shareholders are considered almost entirely dissociated from any liability of the company and corporations wield enormous amounts of power and have several interests besides shareholder interests to fulfill.
The purpose of attributing criminal responsibility to companies is to ensure that corporations do not act as a vehicle for illegal activities and go unpunished. The Doctrine of Corporate Criminal Liability has also been accepted to act as a deterrent for crimes and to hold corporations accountable to the state and the public.
Previously, due to the separate legal identity of companies, members and shareholders could not be held liable for certain acts. Moreover, imprisonment or other corporeal punishment could not be meted out to corporations. Thus, previously, a corporate veil was drawn.
However, the Apex Court in India has accepted the doctrine of Corporate criminal Liability which refers to the imposition of criminal liability on either the corporation or its employees and agents. The landmark judgment delivered in 2005 in the case of Standard Chartered Bank and Ors. etc. v. Directorate of Enforcement and Ors. Etc, the law has evolved to state that a company is liable to be prosecuted even if the offence is punishable both with a term of imprisonment and fine. In case the company is found guilty, the sentence of imprisonment cannot be imposed on the company due to impossibility and under these circumstance, the sentence of fine may be imposed.
It was expressly held that courts have the judicial discretion to do so in cases where the company is found guilty after prosecution for criminal offences. In case of natural persons however, the full punishment must be made applicable. Corporations can be held criminally responsible for a wide variety of crimes such as
Contempt in disobeying decrees and other court orders, directed to it, Conspiracy, Bribery etc.
The subject of corporate governance has acquired global limelight from relative obscurity after a string of collapses of high profile companies such as Enron, the
Houston, Texas based energy giant, and WorldCom, the telecom behemoth etc which led to attack on corporate practices in the US. However, with the recent Satyam scandal in India and a collapse of several investment banks, it appears that the problem exists in several countries. Satyam raised the veil on the complete lack of accountability in the company and prompted questions on corporate governance practices of the country’s biggest listed corporations.
Corporate Governance is the term given to a general set of customs, regulations, habits, and laws that determine to what end a firm should be run. Issues such as executive compensation, financial scandals, and shareholder activism are all tied up with CG.
In India, Report of SEBI committee (India) on Corporate Governance defines corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders.
It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.” Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization.
Some issues that principles of corporate governance seek to tackle include keeping a professional management. Although primarily corporate governance deals with effective safeguarding of the investors’ and creditors’ rights and these rights can be threatened in several other ways.
For instance, family businesses and corporate groups are common in many countries including India. Inter-locking and “pyramiding” of corporate control within these groups make it difficult for outsiders to track the business realities in these large organizations. Also, minority stakeholders lack any control or representation of their interests. This often leads to expropriation of minority shareholder value through actions like “tunneling” of corporate gains or funds.
It is the 1956 Companies Act that governs the functioning of joint-stock companies and protecting the investors’ rights. Perhaps the single most important development in the field of corporate governance and investor protection in India has been the establishment of the Securities and Exchange Board of India (SEBI) in 1992 and its gradual empowerment since then. From 1994, the Board for Financial Supervision (BFS) inspects and monitors banks using the “CAMELS” (Capital adequacy, Asset quality, Management, Earnings, Liquidity and Systems and controls) approach.
Audit committees in banks have been stipulated since 1995. Also, the CII Code for Desirable Corporate Governance developed by a committee chaired by Rahul Bajaj. The committee was formed in 1996 and submitted its code in April 1998.
The Companies Act, 1956 is the central legislation in India that empowers the Central Government to regulate the formation, financing, functioning and winding up of companies. It applies to whole of India and to all types of companies, whether registered under this Act or an earlier Act. It provides for the powers and responsibilities of the directors and managers, raising of capital, holding of company meetings, maintenance and audit of company accounts, powers of inspection, etc.
That is, it empowers the Central Government to inspect the books of accounts of a company, to direct special audit, to order investigation into the affairs of a company and to launch prosecution for violation of the Act. These inspections are designed to find out whether the companies conduct their affairs in accordance with the provisions of the Act, whether any unfair practices prejudicial to the public interest are being resorted to by any company or a group of companies and to examine whether there is any mismanagement which may adversely affect any interest of the shareholders, creditors, employees and others.
The main objectives with which this Act has been introduced are to:- (i) help in the development of companies on healthy lines; (ii) maintain a minimum standard of good behavior and business honesty in company promotion and management; (iii) protect the interests of the shareholders as well as the creditors; (iv) ensure fair and true disclosure of the affairs of companies in their annual published balance sheet and profit and loss accounts; (v) ensure proper standard of accounting and auditing; (vi) provide fair remuneration to management and Board of Directors as well as to company’s employees; etc.
Moreover, the Ministry of Corporate Affairs, Government of India, has set up National Foundation for Corporate Governance (NFCG) in partnership with Confederation of Indian Industry (CII), Institute of Company Secretaries of India (ICSI) and Institute of Chartered Accountants of India (ICAI) to foster a culture for promoting good governance, voluntary compliance and facilitate effective participation of different stakeholders etc.
The Companies Bill, 2004, also contains some important provisions relating to corporate governance such independence of auditors, relationship of auditors with the management of company, independent directors with a view to improve the corporate governance practices in the corporate sector etc.
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