Legal Requirements of Mobile Applications & Ecommerce Business in India

Today, there is an app for almost everything, from buying vegetables to fixing up an appointment with a doctor. Smartphone and Internet penetration has ensured Indians now have the services they need at their fingertips. Though shopping apps still command a high percentage of market share, we are lately seeing creative and valuable applications in the Indian Market. However, there are several legal issues to consider when developing an e-commerce mobile app, especially for a Startup. Apart from the laws that any offline company must adhere to, like the Income Tax Act, Service Tax Act, Companies Act, etc., a mobile app-based company must also adhere to the IT Act, Copyright Act, Patents Act, etc. The situation is trickier when it’s a Startup. Not only do they need to ensure incorporation documentation, Founder’s agreement, Business registration, Vendor agreements, etc, but they also have to manage daily operations while juggling with next round funding from investors. As part of this article, I will focus only on the legal requirements that a mobile app-based e-commerce business in India should ensure to be on the right side of the law.

Following are the primary legal requirements which a mobile app-based business in India should keep in mind

1. Founder Agreement
2. Business Registration (including opening Bank account, applying for a PAN, Service Tax registration)
3. Service Rules, Employee Handbook, Vendor Agreements (NDA & NCAs)
4. IP, Copyright, Trademark, Designs, Trade Secrets (Ownership and Infringement)
5. App Platform, App charges and data security
6. Disclaimer, Terms of Use and Privacy Agreements

Founder Agreement: To have a detailed Founder Agreement is what lays the foundation stone of your Startup. The equity distribution, vesting provisions, co-founders’ obligations, roles and responsibilities are the most important aspects of a Founder’s Agreement. Starting a business with partners isn’t too dissimilar from marriage. And when the reality sets in, a Founder’s Agreement is your most trusted friend. I encourage it to be one of the first documents for a co-founded startup. However, there is always time to create one.

Business Registration: Deciding to start a Partnership versus LLP versus a Private Limited depends on the nature of your business and your funding requirements. While a Private Limited company may be best suited for funding requirements, I suggest LLP for most mobile app-based e-commerce businesses. LLP can be formed under the Limited Liability Partnership Act of 2008, which provides the benefits of limited liability to its partners and allows its partners the flexibility of organizing their internal structure as a partnership based on an agreement. At the same time, L, LP has the basic features of a corporation, including a separate legal identity. Filings with the Ministry of Corporate Affairs, Opening Bank Account, Service Tax registration(if turnover is expected to be over 10L), and PAN (5L and above turnover) are all part of the process. They may take valuable time, especially when it’s a creative product/service to be launched.

Service Rules, Employee Handbook, Vendor Agreements (NDA & NCAs): Service rules are the essential conduct rules any Organization creates for its employees and itself to follow. Any misconduct, punishment, and even punitive compensation as part of Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal), 2013 should be mentioned in the Service rules. An employee handbook should have employee benefits, leave policy, anti-harassment policy, computer use policy, etc. A copy of this should be given to the employee, and an acknowledgement must be taken. Vendor agreements should have non-disclosure, non-compete and non-circumvention clauses apart from the “work for hire” clause, explained under IP.

IP, Copyright, Trademark, Designs and Trade Secrets: IP is created when the first line of code is written. However, your IP can be secured at the conceptual stage under the Indian Patents Act as a Provisional Patent. However, complete specifications must be filed within 12 months per section 9 of the said Act. IP is country-specific, and if your mobile App is going to be used outside of India, it’s advised to get it Patented for other countries from where the business is expected. There are broadly five types of Intellectual Property Rights (IPRs) that a startup needs to protect to leverage its intellectual property, namely: (i) Patents, (ii) Copyrights, (iii) Trademarks, (iv) Designs, and (v) Trade Secrets. Where all or part of the App’s development has been outsourced, the vendor agreement should ensure that the startup company has acquired all IPRs for the software through a properly drafted “work for hire” clause. IPRs need not only be protected but also ensured that you are not infringing on someone else’s IPR.

App Platform, App charges and data security: Distribution of your App over Android, IOS or Windows is an important consideration and depends upon your target market audience.

From a legal perspective, all charges, including in-app charges, should be made available and not hidden, especially if the App is free to download and there are in-app purchases. As per the IT Act, 2000, under section 43 (h), it’s an offence to charge the services availed by one person to the account of another person. The other legal consideration is the permissions you seek from your users, e.g., reading their SMS or MMS like Facebook!! The data collected by a mobile app is far more precise for target advertising than website data. Thus, data collection, storage, and protection are sensitive areas that must be cautiously addressed.

Disclaimer, Terms of Use and Privacy Agreements: All mobile apps require a Terms of Use and Privacy Policy available to their users as part of the Intermediary Rules as part of IT Rules, 2011. A grievance officer’s name and contact is also a legal requirement. Though most users may ignore this, none of the mobile app-based businesses can afford to ignore it due to its vast punitive implications. While the Terms of Use explain the conditions on which the service is being delivered, the privacy policy explains what will and will not be done with the information collected from them. Disclaimer helps to establish/limit one’s rights and liabilities concerning the user of a particular product or service. It is used in situations that involve an element of risk or an area outside the control of a mobile App-based business.