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IT Rules 2021: How will SaaS companies like Freshworks and Zoho be affected?

Indian Software-as-a-Service (SaaS) companies like Freshworks and Zoho could be unintended victims of the new Information Technology (IT) Rules, 2021. Notified in February, the IT Rules 2021 prescribe regulation for internet intermediaries, while creating a new definition meant for social media platforms. While SaaS products don’t necessarily function like social media companies, the rules seem to make no distinction between them.

Why it matters: India is a SaaS powerhouse with around 8,000 SaaS companies serving clients in India and abroad with about 75 percent of the demand coming from overseas markets. It currently has six SaaS unicorns: Zoho, Freshworks, Icertis, Druva, HighRadius, and Postman. Bain and Company recently published a report stating India’s SaaS landscape is “on the cusp of a transformation” and is expected to bring in revenues close to $20 billion and capture close to 9% of the global SaaS market by 2022. Given these facts and figures, any unnecessary and onerous responsibilities placed on SaaS companies by the new IT Rules will adversely affect the growth of this sector.

A bit of context: According to the IT Rules 2021, a social media intermediary is defined as “an intermediary which primarily or solely enables online interaction between two or more users and allows them to create, upload, share, disseminate, modify or access information using its services.”

SaaS companies typically host an application on their servers and make it available to customers (generally companies) over the internet. “The rules do not specify the ambit of the social media intermediaries, however, the functions performed by the SaaS companies are similar in nature to that of a social media intermediary. It follows all the essentials i.e. interaction between users and allowing them to create, upload and share,” Aditya Chopra, Managing Partner, Victoriam Legalis, told MediaNama.

Loose definition of social media intermediary: Suvigya Awasthy, associate partner, PSL Advocates & Solicitors, concurred with Chopra: “The said Rules fails to lay down a strict or exhaustive definition as to what social media intermediaries include. The Rules on a broader pane covers any and every such platform which allows interaction between two or more users, whichever the purpose may be. It can be argued that these platforms, in the absence of any definite court precedents or Government’s clarification, would also fall under the loose definition of social media intermediary under the new IT Rules 2021.”

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SaaS companies not remotely similar to platforms like Twitter and Facebook: The broad and unclear definition used in the IT Rules has created confusion because there are many companies, which do not resemble traditional social media platforms like Facebook and Twitter, that fall under the ambit of the new rules. Earlier we reported on how business messaging products like Slack and Microsoft Teams might be impacted by these rules as well. Another interesting example of an unintended victim is Byjus. It is a SaaS company providing a learning platform to its users, but since its functions satisfy the definition provided in the Rules, it can be seen as a social media intermediary, said Chopra.

“The government instead of soft-touch monitoring, has opted for open-ended Rules that willingly covers all the small and medium digital platforms and companies on the mere ground of the interaction between the users.” — Suvigya Awasthy, associate partner, PSL Advocates & Solicitors 

Lack of clarity on who is a user: It gets murkier when you consider the customers of companies that use CRM and customer support software. These end-customers interact with multiple employees of the company through channels like email, chat, and text, and could be considered users of the software as well. SaaS providers that have more than 5 million registered users in India will be considered “significant social media intermediaries,” and will have to adhere to additional rules. But the applicability of this lacks clarity because we do not if users, in this case, are companies that SaaS providers supply to, or the employees of such companies, or the customers of such companies. The number of users varies widely depending on who is considered as a user.

Rules should make a distinction: “Just as the Intermediary Rules make a business-based distinction among social media, digital media and other intermediaries, prescription of further classification of ‘social media intermediaries’ and explicit exclusions, such as for products with limited out-reach, or business transaction-based services, would provide express clarity,” Avisha Gupta, Partner at L&L Partners, told MediaNama.

An earlier leaked version of the rules indeed exempted intermediaries that enabled “commercial or business oriented transactions” from being categorized as social media intermediaries. Such an exception would have given more clarity, but experts say it might have been removed because it would then exempt platforms like WhatsApp Business from adhering to the rules.

SaaS companies are an unintended inclusion: “The open-ended definition of ‘social media intermediary’ does raise questions on the potential inclusion of several SaaS based businesses within its ambit. However, a holistic read of the Intermediary Rules suggests such inclusion to be entirely unintended. Many such businesses despite enabling online interaction for sharing of information, are significantly different from the traditionally understood social media companies,” Avisha Gupta said.

Chopra, however, was more cautious: “In order to be to avoid unnecessary legalities, it can be stated that it is important for SaaS companies to follow the rules provided for social media intermediaries.”

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MediaNama has reached out to Zoho and Freshworks for their response. The article will be updated once we receive them.

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