The government’s plan to cap foreign investment in digital media aims to control the influence of online news, and curb fake news, but the legislation leaves a lot of questions unanswered despite a clarification in October 2020. Freny Patel reports

India’s recently imposed restriction on foreign investment in digital media saw its first victim as American online news website HuffPost pulled the plug on its Indian arm last month. HuffPost India editor-in-chief Aman Sethi announced the closure of the website in a tweet on 24 November: “Today is HuffPost India’s last day”.

The government, in September 2019, issued Press Note 4 (PN4), introducing a 26% foreign direct investment (FDI) limit for companies engaged in uploading and streaming of news and current affairs through digital media platforms. Any foreign investment can be made only with government approval.

The decision to shut HuffPost India came following a so called “clarification”, issued on 16 October by the Department for Promotion of Industry and Internal Trade (DPIIT), which gave HuffPost India’s parent, Verizon, until October 2021 to dilute its shareholding to 26%. Instead of resolving doubts and confusion, PN4 has raised queries and concerns over its implementation, and calls for further clarity, as it could mean the loss of jobs not only for journalists but also their support staff.

Unlike print media, FDI in digital media was unregulated until September 2019, when the government issued PN4. It failed, however, to define the term “digital media”, or identify the timeline or grace period within which digital news plat- forms had to restructure the shareholding under the prescribed FDI levels. Quite a few digital media sites have foreign investment above the 26% threshold.

Yogesh Singh, a Gurgaon-based partner and co-head of corporate practice at Trilegal, says that the clarification has expanded the scope of the restriction to entities that originally may not have been covered under PN4.

“Previously, the terms ‘uploading’ and ‘streaming’ were not defined, and there was no clarity on whether the restriction applied only to entities involved in news content generation, or also to news aggregators and other intermediaries that act as platforms providing access to third-party news content,” says Singh.

Yogesh-Singh,-Partner,-Trilegal

“With the October clarification, it seems clear that all digital media entities streaming news over digital platforms, news agencies transmitting news (either directly or indirectly) to other entities, and news aggregators would fall within the purview of the restriction,” he says. “All of these entities would need to restructure their shareholding to align with the 26% limit and seek government approval in respect of their existing FDI within one year.”

Pioneer Legal partner Pritha Jha and associate Pavana Padmakumar point out another anomaly, as the October clarification states that the FDI threshold would apply to any digital media entity “registered or located” in India, without “suitably” defining which entities would be considered to be “located in India”. Jha questions whether the FDI cap applies to entities whose primary business is news, or does the rule equally apply to all digital content companies providing a platform that is used by news aggregators or news agencies?

Padmakumar says: “In the current environment, when the media and advertising sector is at an all-time low owing to the pandemic, complying with the FDI policy within a year from the date of issue of clarification seems extremely difficult in terms of divesting to an Indian buyer.”

Pavana-Padmakumar,-Associate,-Pioneer-Legal

If the Indian entity is part of a global media house, as in the case with HuffPost, finding an Indian buyer may not necessarily be an option.

Shinoj Koshy, a corporate M&A partner with L&L Partners advising on FDI into India, tells India Business Law Journal: “With the change in the law, many entities will have to dilute their foreign shareholding or choose to exit, which is likely to skew the negotiating power between the seller and the buyer.”

“The questions that arise are whether one would find the right people to work with and if there is investor appetite to buy into media companies during a pandemic that has affected media spends,” says Koshy. “The change in the law will have repercussions for news agencies and other digital media.”

Shinoj-Koshy,-Partner,--L&L-Partners

He says they are likely to review their business models, and could opt to shut down Indian entities and hire stringers or freelancers. This would affect Indian employees, both journalists and support staff. “The October clarification will need to be followed up with subsequent clarifications, as it has failed to deal with the consequences of an incumbent’s failure or inability to reduce its FDI to 26% within the prescribed time period,” says Koshy.

Trilegal’s Singh says Implementation of the 26% limit “would require quicker approvals from the government for existing investments”, and Indian investors willing to buy a stake in these entities.

“Indian-owned and controlled entities may restructure and transfer their digital media news business to a subsidiary without triggering the FDI approval requirements,” says Singh. “Another option could be to house their news businesses in overseas subsidiaries or group companies, by having their applications/websites hosted by foreign entities.”

Although investee companies are likely to look at potential Indian buyers for secondary investments to align with the FDI restriction, Singh believes that where they are not able to comply in time, or the government approval is rejected, concerns could arise, particularly where the company is under covid-related financial stress.

PN4 above RBI guidelines?

It is not clear whether PN4 will impact foreign news agencies like Bloomberg, Thomson Reuters, Agence France-Presse and others that have set up branch offices in the country.

Singh says PN4 is unlikely to apply to the Indian branch offices of foreign entities, as this is a restriction on foreign investment received by an Indian entity. A branch office set up per relevant Reserve Bank of India (RBI) guidelines is not a separate legal entity that would receive foreign investment, he adds.

Bloomberg Quint, an India-based digital platform, will equally not be impacted, as the parent company’s shareholding is below the 26% threshold. Bloomberg has a 25.97% stake in Bloomberg Quint, with seasoned media entrepreneur Raghav Bahl holding the majority stake through Quintillion Media.

Social media impact unclear

“The October clarification fails to define the term ‘news and current affairs’, which may impact social media platforms hosting a variety of content,” says Singh.

L&L Partners’ New Delhi-based partner, Kanika Chaudhary Nayar, says that one of the major challenges for certain platforms is whether they can be categorized as news agencies or aggregators, as the FDI regulations are unclear on the definition. “It raises concern for platforms such as Facebook, YouTube and Google, and whether these platforms can be categorized as news aggregators,” says Nayar.

“These companies generate advertising revenue in India, and therefore are said to be located/registered in India,” she says. While these platforms could either stop uploading Indian news, or move out of India and appoint a local representative to source ad revenue, neither option seems viable and “may indicate that the regulations may get challenged by such entities”.

However, as Koshy points out: “Nothing stops a publication from shutting down its Indian entity, but continuing the Indian news gathering and publication is possible through an overseas entity to cover the Indian market.”

While HuffPost’s Sethi tweeted the Indian site’s closure, he also said that the content had not been wiped out, and “is being migrated and should be back soon”.

Bagmisikha Puhan, a senior associate at TMT Law Practice, says that, “As the eye of the storm is the fake news streaming/stemming from the social media intermediaries, the construction of the phrase ‘user-submitted links’ may be broadly interpreted to scope in Facebook and Twitter, which have registered Indian entities (presumably owned by American parent companies).

“As the FDI cap will also apply to entities that collate content from various sources, this would include news aggregator apps like Inshorts and Dailyhunt,” adds Puhan. She points to the likelihood of the digital media sector coming under government scrutiny due to the existence of many prominent players with Chinese backing, such as Helo, UCNews, and Opera News. Hence, this policy could be aimed at purging internal control mechanisms.

Koshy adds: “Media is powerful and understandably governments would want to know who controls a media outlet.”

Media divide

There is a clear contrast between digital media and broadcasting. While FDI in broadcasting news and current affairs on TV channels is limited to 49%, that for digital media and print media are at 26%.

The clarification does not throw light on the impact of FDI restrictions on television broadcasters, which stream news online, says Singh. “We believe that the government might want such television broadcasters to comply with the requirements for broadcasting and digital media separately, and therefore segregate the two mediums of broadcasting.”

These concerns are valid when it comes to news made available over digital media, he says. The only issue is that the scope of the restriction imposed is quite broad, as it not only covers entities that purely generate content, but also platforms that do not disseminate news as a primary function.

“The approach, therefore, needs to be more nuanced than print media and broadcasting, especially for digital media platforms that host a variety of content other than mere news and current affairs,” says Singh. Indian-owned and controlled television channels with foreign investment could potentially transfer the business of digital streaming of news to a subsidiary without triggering the above FDI approval requirements, he says.

Clearance threat

In addition to the 26% FDI cap, digital news media entities need to adhere to two other conditions. First, the majority of the directors and the CEO of the company have to be Indian citizens. Second, the entity has to obtain a security clearance of all foreign personnel likely to be deployed for more than 60 days in a year – by way of appointment, contract or consultancy – before their deployment to India.

In the event that the government denies or withdraws security clearance, the investee entity will need to ensure that the person resigns, or his/her services are terminated. These “security conditions”, while already applicable to broadcasting, are not imposed on print media.

“With the underlying infrastructure being the internet, with wide and uncontrolled reach, the government seems to view digital media differently
than electronic or print,” says Vikram Doshi, a partner at PwC.

“Given that, comparatively, the internet is not as controlled or regulated as the traditional medium, and the potential for insensitive material, and unverified or biased reports and facts, are greater, it perhaps perceives a need to regulate the infrastruc-ture and players in some shape and form,” he says.

Nayar says the scrutiny associated with digital media can be attributed to the drastic surge in news consumption through online platforms. An unnamed government official was quoted in the media as saying the “threat of fake news, propaganda vehicles, foreign influence and interference in India’s domestic affairs” is more real than ever, “particularly from our hostile neighbours”, and PN4 was the government’s response to curbing these threats.

But Koshy says this policy is unlikely to have any effect on fake news. Instead, it could lead to “veiled censorship, as overseas employees need to get clearance from the government, which could be denied should the government feel a publication is reporting unfavourably”.He adds that“getting security clearance could prove to be an onerous task”.

There are better ways of fighting fake news, says Jha, of Pioneer Legal, citing the use of technology and third-party fact-checking firms. “The government’s move to cap FDI may negatively impact many genuine digital news businesses,” she says.

PN4 might aim to govern the ownership structure of digital news media entities registered or located in India, but it is very difficult to regulate all the sources of digital media based overseas, she adds.

It might seem as if the government is taking steps to ease the regulation of digital media and bring it on par with traditional media. However, in the era of the internet, and given that digital media has a faster reach and a wider range of viewership than its traditional counterpart, Singh predicts the Indian government will face difficulties in regulating digital media, especially if these platforms are hosted outside India.