How proposed data reform will affect venture capital

The committee studying non-personal data and data governance frameworks has issued a draft report for consultation. The report particularly affects digital businesses including fintech and payment service providers, as it proposes a new regime for non-personal data protection laws. The Personal Data Protection Bill, 2019 (PDP bill), covers personal data and this report recommends separate legislation for non-personal data. The legislation would include areas such as big data and metadata, data sharing, data business, and infrastructure requirements.

The report highlights the amount of data generated and used due to global adoption of smartphones, the internet and cloud-driven applications. Such data has high economic and social value and has been exploited by a handful of companies that have become monopolies. The report suggests that regulation will maximize the benefits of such data, ensuring greater access, improved service delivery and innovation in both the public and private sectors particularly benefitting the startup ecosystem.

The report envisages a regime in which data are treated as “assets” and have precise value. Businesses which derive their value from data, such as Amazon, Uber and Google have become monopolies. Large data-driven companies own most data, creating entry barriers for newer companies. The report recommends mandatory sharing of metadata in exchange for “fair” consideration. This regime includes mandatory sharing of crucial proprietary data that is produced from the application of the mind on raw data and might lead to huge market disruption.

While it may be argued that raw data and metadata should be freely available, proprietary data and insights should not. Companies invest heavily in the collection, processing and maintenance of raw data through technology. Mandatory data-sharing will reduce the competitive advantage of these companies and render their investments worthless. It will be a disincentive to data science spending, slowing innovation and eroding the value of those companies in the sector. This would negatively impact foreign investment, which would instead flow to those countries that recognize the right to own proprietary data.

The report acknowledges the conflict between robust intellectual property laws that protect the interests of data owners and the fair sharing of data. Mandatory data sharing will create an implicit, and perhaps even an explicit compulsory copyright licensing framework. Copyright laws will have to be amended to permit mandatory data sharing while protecting ownership rights. IP forms a large part of the valuation of fintech and technology startups and ambiguity will lead to erosion in valuation.

Mirroring the PDP bill, the report recommends that sensitive or critical non-personal data be stored on servers in India. However, this will restrict access to global markets and technologies, including affordable cloud servers. Local storage obligations may adversely impact the profits, productivity, and competitiveness of startups, thus impacting their valuation and compliance requirements.

The report uses a new term, data business, while stating that it is not an independent industry sector, rather a horizontal classification cutting across different industry sectors, such as banking and finance, consumer goods, private research and universities. Beyond a certain data-related threshold, businesses will have to register themselves as data businesses. Initial registration requires the disclosure of business IDs, or country codes and country business IDs, business names, brand names, data traffic and cumulative data collection information. The nature of the data business and the types of data collected have to be stated. Such a system will apply not only to commercial organizations but also to governmental and non-governmental bodies. Once data traffic and collection exceeds a specified limit, any data business has to submit such metadata as classification, volume, and so on concerning the data user and the community from which data are collected.

While the government is trying to reduce unnecessary compliance obstacles, these requirements will only increase the burdens on startups. The report raises more questions than it answers. Businesses and global tech groups have urged the government not to accept the report as it does not balance the public good and the interests of businesses and innovators. The government should address the concerns of these stakeholders before taking any further action.

Vineetha MG is a partner and Pratik Patnaik is a senior associate at Samvad Partners

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