The need for data privacy in India
Globally, India is ranked eighth in terms of reported data breaches as of the latest December 2023 quarter. Due to increased demand in services such as data digitization and cloud adoption, globally, companies have faced data breach incidents and thereby been imposed with huge fines for the failure to adhere to data privacy rules and regulations in their jurisdictions. The DPDP Act in India is expected to have a similar impact on the companies that may fail to comply.
The Digital Personal Data Protection (DPDP) Act, 2023 will have a considerable impact on various industries and businesses, dealing with the significant personal data privacy. Key sectors shall cover but are not limited to banking, insurance, telecom, e-commerce, GCCs, and healthcare, along with companies that process their employees’ personally identifiable information (PII).
Key data privacy concerns in an M&A transaction
- Potential sensitive data exposure from incompatible security protocols and systems.
- Data mapping gaps resulting in loss of governance, leading to non-compliance with privacy regulation.
- Outdated data security in legacy systems heightens vulnerability.
- Data loss or breaches during the physical and digital consolidation of data centers.
- Conflicts between the compliance standards of merging entities can lead to regulatory penalties.
- Legal restrictions on cross-border data transfers can disrupt business operations due to data transfer and sovereignty issues.
Impact of data privacy in M&A transactions
- Helping gauge any hidden data privacy risks and liabilities: M&A transactions include a significant number of checks as due diligence reports help the buyer identify data risks associated with the target company and potential obstacles in operating the business post-integration. Moreover, for transactions to be successful, adequate data privacy measures are essential.
- Ensuring alignment of buyer-target data privacy policies post-merger: The DPDP Act brings in the need to combine technology and data due diligence in the M&A process to ensure a comprehensive understanding of the deal and enable a well-planned post-transaction roadmap. As an initial step, there is a need to assess all aspects of Data Governance operations, identify commonalities and differences with other regulations, and consider the timeline and cost of compliance.
Operational complexity
Organizations may have limited visibility or expertise in Data Governance or support IT applications/infrastructure to sanitize the data environment. While M&As in the IT sector will benefit from the relaxed rules regarding cross-border data flow, data mirroring, and localization, other sectors will have to assess their position once the government announces the list of countries to which a data fiduciary may transfer personal data.
Businesses must understand personal data flows and processes, regardless of whether the deal is domestic or international. They need to identify the type of digital personal data collected, its purpose, and access by third-party processors. It is crucial to ensure that existing notice and data consent mechanisms for data principals (individuals) are adequate and to implement response and reporting procedures.
Road to compliance
Enterprises often face financial implications in implementing the necessary measures to safeguard data protection and privacy. Compliance with the DPDP Act entails building a data consent mechanism, data audits, technology monitoring and assessments, and appointing a data protection officer (DPO) to address grievances.
- Attaining consent: Obtaining consent from data principals is expected to escalate the cost associated with data transactions. In addition, several enterprises may introduce technology upgrades to allow and record access, authentication and encryption. Sectors like edtech and gaming are significantly impacted as they need to obtain explicit consent for children below 18 years of age.
- Increased scope of assessment: The scope of assessment has become wider as the due diligence process includes assessing a company’s vendors as well. A logistics company, for example, may have to invest resources in building awareness and compliance in its smaller third-party vendors.
- Compliance with multiple laws: With the introduction of the India DPDP Act, companies will now have to ensure that they comply with the requirements of different geographies. For instance, GDPR compliance for M&A, which governs the collection and processing of individuals’ personal information in the EU member states. Similarly, IT services and consulting companies must comply with various data security laws that apply regionally, such as M&A compliance with Healthcare Insurance Portability and Accountability Act (HIPAA), GDPR, California Consumer Privacy Act (CCPA), and Payment Card Industry Data Security Standard (PCI-DSS).
Organizations outside India may be subject to DPDP regulations. Therefore, achieving global compliance can be complex and resource intensive.
Road ahead
As further clarifications come in regarding various aspects of the DPDP Act in India, companies must gear up to meet the requirements of the Act to safeguard personal digital data. The data due diligence process in M&A will go through a series of changes as the parameters of risk assessment have expanded and now include aspects such as evaluating third-party access to the personal digital information collected by the target company. Companies with established data privacy measures will hold an edge in M&A transactions, and the effective implementation of enhanced measures could positively influence the deal's value. With the introduction of the DPDP Act, India has fostered trust between individuals and businesses, making the country more attractive to investors through clear data privacy regulations.