Digital Execution of Documents in a Post-lockdown Era: Indian Law and Practice – By Pradeep Ratnam, Senior Partner, Krishnamurthy & Co.

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I. BACKGROUND

The Covid-induced lockdowns across India have meant a catena of life altering consequences ranging from the material to the mundane. For commercial transactions in M&A and financing, the disablement of essential public and private transactional services (notarization, stamping, offices, printers, photocopiers, and travel to name a few) – have dealt a serious blow to the prospect of a ‘physical signing’.  Whilst government mandated ‘formal’ lockdowns have begun to ease, informal restrictions on physical movement and infrastructure may remain. Also, unsaid, is the enduring stigma around physical contact that may remain – including the fear of prolonged physical proximity during a signing, the prospect of sharing stationery, stamps and seals, of the thought of hundreds of execution pages changing hands amidst multiple signatories. In this context, virtual and electronic executions may be the new normal, at least for some time to come.  

The law in India on electronic execution of documents (‘digital signing’) has evolved favourably in recent years, with statutory amendments and case law recognizing the validity of electronic contracts. In certain sectors such as fintech and platform-based trade receivable financings, e-signings and ‘click-wrap agreements’ are the norm. M&A and debt transactions have continued to rely on the physical and have, traditionally speaking, been far less adaptable to electronic executions. Necessity now, may need to be the mother of all invention.

This note therefore analyses : (A) the law on electronic signatures in India, and its application in a rapidly evolving landscape of service providers in electronic execution; and (B) the different methods by which electronic signatures can take place, and (C) whether these methods could be deployed for a full-fledged virtual execution of deals given the physical constraints in place today.

II. THE LAW ON ELECTRONIC SIGNATURES 

India’s Information Technology Act, 2000 (“IT Act”) recognises duly constituted electronic contracts as valid. Further, an amendment to the Indian Evidence Act, 1872 (“IE Act”) provides that electronic contracts are admissible as evidence in a court of law, subject to certain standard tests and protocols. Furthermore, Indian case law on the subject has been liberal and enabling. Not only are electronic contracts recognised, the Supreme Court of India – as long back as 2010 – validated a contract where the offer and acceptance were unconditionally conveyed over email [1]. In a later case, the Madras High Court [2] accepted the validity of electronic auction of property under SARFAESI Act, 2002, suggesting the increasing acceptability of electronic agreements in commercial transactions under Indian law.

For an electronic document to be valid, it should be capable of electronic storage and accessible in its original form i.e. in a format that is demonstrably tamper-proof (e.g. watermarked and encrypted) whenever called for in a future reference. The document should also be capable of being produced when required electronically, without human intervention. All of these are achievable given strides in technology (such as cloud based third party signature applications), digital security and regulatory enablers. These make a compelling case for incorporating and adopting electronic executions and digital signings as the new norm.

III. DIGITAL SIGNATURE CERTIFICATES AND ELECTRONIC SIGNATURES – A PRIMER

There are two kinds of electronic signature formats that are currently available under Indian law. These are:

(1) Digital Signature Certificate or DSCs:  Under the IT Act, a party may sign a document using a ‘digital signature’. To obtain a digital signature, a person will need to apply one of the Certifying Authorities (CAs) recognised by India’s Ministry of Corporate Affairs (MCA), to issue a Digital Signature Certificate (DSC). A DSC is, essentially, a secure digital key that certifies the unique identity of the individual signatory who is e-signing the document. The concerned document and the digital signature on it are then encrypted together with a watermark/tamper-proof seal. DSCs are popular in domestic transactions in India because they are ‘explicitly’ recognised by the MCA and thus by the Government of India giving it an appearance of being more legitimate compared to new and emergent electronic signing technologies. 

(2) Electronic Signatures offered by private third party applications: Instead of a DSC, a party signing a document may also use cloud based third party applications (TPA) such as Adobe or DocuSign, that are rapidly gaining popularity for their user-adaptability, security features and seamless cross border use across countries with technology neutral e-signature laws.  TPAs have useful features such as:

The features above go the extra mile to ensure fraud-proofing and security in contract executions. Moreover, some TPAs offer features such as allowing a single party to control the execution. For example, once the ‘execution version’ of a document is in agreed format, a law firm orchestrating the signing can actually ‘control’ the electronic signing process through the TPA platform or portal, and thus ensure that each signatory affixes her electronic signature to the document. The ‘signed’ document is then returned to the custody of the originator (for example, the law firm) for storage or for transmission by email to all the parties involved. TPAs also offer features that are the electronic equivalent to ‘initialing every page’, by allowing the digital imprint of each signatory to appear on every page of the document being signed. 

In terms of validity, enforceability and evidentiary value, Indian law does not discriminate between DSCs and other forms of secure electronic signatures through TPAs. The legal test is simply that of immutability – i.e. a guarantee that the document is encrypted and tamper-proof, capable of storage and recall in original form, and containing definitive marks of source identification such as the IP address used, the identity of the person signing, and date and time of e-signing. The rest is up to the commercial comfort of the parties, business familiarity and assurance of seamlessness – especially when multiple signatories or multiple signing locations or country jurisdictions are involved.

IV. PLANNING A VIRTUAL EXECUTION IN A DEAL – AND WHAT IT MIGHT TAKE

This section examines to what extent can electronic processes replace the absence of physical signing. Up until the point in time that ‘Execution Versions’ (EV) of transaction agreements and definitive documents are agreed between the parties, the process– whether physical and virtual – will be the same. Virtual signings differ from the point in time when ‘EVs’ and agreed forms of agreements and resolutions are frozen, ready for signature. 

The table below ‘buckets’ a typical signing checklist into three colour coded categories – green, yellow and red, depending on how amenable to electronic signature various documents are. These range from:

V. SUMMING UP – RISKS AND MITIGANTS 

At a time when panic regulations and ordinances are the norm, our accommodative legislative framework on electronic execution offers a beacon of hope. Together with emerging technologies that provide fast and secure cloud-based e-signing applications, parties to M&A and financing transactions have a genuinely credible alternative to physical signing. However, below are some of points to keep in mind : 

(1) Documents that cannot be signed electronically: Where documents are legally required to be signed in physical form, transaction parties should therefore consider including provisions for risk mitigation, such as consideration holdbacks, and (in debt deals) additional interest until such documents are satisfactorily executed and registered post lockdown. Where feasible, parties may also consider including a specific indemnity, hold harmless provision and a further assurances clause that will specifically bind an obligor to undertake physical signing within a stipulated period post lockdown.

(2) Have an electronic signing protocol: For lawyers orchestrating an e-signing, consider having in place a detailed e-signing protocol before execution. This protocol should set out all the steps and requirements for electronic signing, which parties will affirm over email. Once the e-signing is concluded, the entity in control of all “electronic originals” (e.g. the law firm or security trustee) will confirm electronic ‘custody’ of executed versions. Each signatory should provide an unconditional affirmation over email (or in a digitally signed undertaking) agreeing to be bound by the same.

(3) Affidavits and sworn statements:Depending on lockdown easing, consider procuring affidavits or undertakings from the signatories, estopping a party from disowning or challenging an electronic signature on a later date. 

(4) Counterparts : In multiparty agreements, if some parties are able to sign in physical form, ensure that the contract has a counterparts clause allowing for the same.

(5) Articles: Check that the constitutional documents of the company in no way restricts the use of electronic signatures, and signing without a company seal. If required, the Articles may need to be amended first and filed with the MCA

(6) M&A involving foreign parties: Where one signatory is not in India, parties will need to check whether the foreign country follows open technology neutral e-signature laws that are compatible with laws in India. Certain third-party electronic portals operate across countries and may be used to sign a common document. Alternatively, if compatible services are not available, the parties will need to accede to a private e-signature protocol. This will include mutual recognition of the execution version of the document and ‘virtual exchange’ wherein parties sign electronically in counterparts, with each party thereafter transmitting the signed version via email to the other.

(7) Stamp duty: E-signing by signatories spready across different states in India could prove expensive from a stamp duty perspective. Unless the Indian Stamp Act, 1899 is amended, digital signings will be liable for stamp duty at the highest rate of stamp duty amongst such states. 

(8) Technology Risk : Lastly, like all conundrums facing new and emergent technology, there are risks to e-signings – including cyber-security, hacking and fraud, and questions around the credibility and robustness of new third party applications and the solutions that they offer. Some applications offer a level of assurance against hacking, etc.  Before using a portal or TPA service, check the terms and conditions for the level of protection that is offered.

Annexure 1

Procedure for e-signing

DSC

A person that has a digital signature can simply affix the digital signature on the pdf version of the document in the following manner:

a) Open the pdf version of the document to be signed.

b) Click on the tool section at the top of the menu.

c) Click on the Certificates option, then select digital signature to be affixed.

d) Drag the digital signature on the page to be signed.

e) A pop-up will come, enter the password to authenticate the digital signature and then the document will be digitally signed.

Third party applications (for instance, on Leegality):

a) The originating party (OP) has to upload the final version of the document (after it is agreed by all parties) in PDF format on to the TPA portal.

b) The OP shall insert the details of the signatories, including email address.

c) Following this, a hyperlink will be shared with the concerned person on her mobile/email.

d) The recipient will authenticate themselves by giving details of their Aadhar and an OTP sent to the number registered with that Aadhar card.

e) In case of multiple signatories to the document the portal automatically compiles the document. Further, the OP can ensure through the ‘Settings’ tabs to give parties the option to replicate signature on each and every page.

f) Each signature affixed on a document shall carry the date and time at which such document was signed. In addition to this, there is an audit trail which is shared by each portal, which provides the parties with all the details regarding the execution like the IP Address used to sign the document along with the device used for affixing the electronic signature.

[This article includes excellent research inputs from Swapnil Sant, Associate, K Law]

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Pradeep Ratnam is a Senior Partner at K Law (Krishnamurthy & Co.) His practice areas include Mergers and Acquisitions, private equity venture capital, Infrastructure (renewable energy, conventional power, roads, EPC contracts, water, telecom and ports), Regulation, PPP, Banking, Finance and Project Finance, Restructuring, and Commercial Arbitration and Disputes. In addition to commercial contracts and transactional work, Mr. Ratnam’s bouquet of value-added legal services includes pre-litigation advice to banking and finance clients, NBFCs and fintech companies on wide ranging matters such as pre-litigation advisory, restructuring, mediation and arbitration. Mr. Ratnam also appears before the Delhi High Court, NCLT, Central Electricity Regulatory Commission (CERC), Securities Appellate Tribunal (SAT) and in the Supreme Court of India where he continues to represent financial institutions, consortium lenders, distress debt funds, private equity and asset reconstruction companies and promoters on a range of issues. Mr. Ratnam did his LL.B from National Law School of India University and his LL.M from University of Warwick. 

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[1] Trimex International FZE Ltd. Dubai Vs. Vedanta Aluminium Limited

[2] Tamil Nadu Organic Private Limited Vs. State Bank of India AIR 2014 MAD 103

[3] States like Delhi, Himachal Pradesh and Karnataka can print stamp paper for an amount up to Rs. 500 using the portal of Stock Holding Corporation of India Limited (SHCIL). Parties in other states like Haryana and Maharashtra can use e-Gras and e-SBTP for procuring non-judicial stamp paper. Alternatively, there is a third party application like e-drafter which a party can use to procure non-judicial stamp paper.

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Disclaimer: The views or opinions expressed are solely of the author.

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