Regulation and it’s role
Tech and software world
Welcome to our Original series at the duologue. The reading time to finish this one is around 6 mins. This time we are focusing on regulation in tech sector.
Regulation will define the future of Technology sector. Not to pass an off-hand comment right at the top but the world we current reside is experiences an accelerated digital adoption. The tech and software has eaten into all sectors of business and now every company can be termed as a tech company.
With this influx and importance of software, regulation will play a more central role in defining the opportunities, growth and challenges for companies.
Ben Thompson, the often quoted analyst on media, internet and business had a post outlining fissures in global internet being broken off into its regions. The fourth internet, Indian-counterweight with the recent unveiling of Jio’s ambitions was captured in the article.
It is increasingly impossible — or at least irresponsible — to evaluate the tech industry, in particular the largest players, without considering the geopolitical concerns at stake. With that in mind, I welcome Jio’s ambition. Not only is it unreasonable and disrespectful for the U.S. to expect India to be some sort of vassal state technologically speaking, it is actually a good thing to not only have a counterweight to China geographically, but also a counterweight amongst developing countries specifically. Jio is considering problem-spaces that U.S. tech companies are all too often ignorant of, which matters not simply for India but also for much of the rest of the world.
India Jio and Four Internets
The slow trend towards different internets coming to dissect the global internet is being put into work with varying forms of regulations from governments.
We try to document some cause and effect cases of regulation on different sectors that involves tech and software adoption growth in the recent past.
Multiple roles of regulation
Accelerant
Server farms are mega database warehouses where the cloud providers store your data by building physical server racks filled with petabytes of storage. They are categorised with the amount of MW power they consume. The higher the wattage, the bigger the facility.
In order to power this fourth internet we need server farms. But, the demand for these server farms was first witnessed due to regulation tweaking the due process of data storage for fintech firms in India. Through data localisation policy, Government of India mandated all transaction and financial companies to store data within the geography of India. So, companies ranging from real estate, multinationals, e-commerce cloud giants and Indian conglomerates all started working on building Server farms.
Going back to September of 2019, a report from Business Standard captured the trend.
According to Colt Data, the demand for cloud services in India is expected to grow by a 24 per cent compund annual growth rate till 2020, though others say it will be over 30 per cent overall year on year. The rush has been prodded by many factors but one key reason is the new and stringent government regulation on data privacy which will require foreign companies to store data within the country.
Great Indian Data centre rush : Corporates, startups, want share in business
So, What has been the progress, since?
AWS recently opened a server farm in Hyderabad with a further intent of investing more. There is a nice nugget from its press release that shows the importance of the regulation when Amazon shows off thier premier partners.
Customers and APN Partners welcome the news of the AWS Asia Pacific (Hyderabad) Region
Millions of active customers use AWS each month in over 190 countries around the world. Indian organizations that are moving their mission-critical workloads to AWS to drive cost savings, accelerate innovation, and increase agility include: Ashok Leyland, Aditya Birla Capital, Axis Bank, Bajaj Capital, ClearTax, Dream11, Druva, Edelweiss, Edunext, Extramarks, Freshworks, HDFC Life, Mahindra Electric, Ola, Oyo, Policybazaar, Quantela, RBL Bank, redBus, Sharda University, Swiggy, Tata Sky, YuppTV, Zerodha, and many more.
The trend is clear, companies working in the financial space will not resolve to store their data in cloud outside of India. Zerodha being the biggest brokerage firm is also a customer of AWS. It is using this region for its transaction storage purposes.
Amazon is not the only one. Residential developer Hiranandani has a new company, Yotta building co-location server farms in Mumbai which got booked out before being built. Co-location services include more than one company renting the rack-space(shelfs for storing servers). The company can be a database service provider or a cloud company as co-location company is responsible for building the infrastructure and renting out the space. Hence a wide array of companies showing interest in this sector.
So, how is it looking right now from a recent CRISIL report.
Industry capacity, which stood at ~360MW in fiscal 2020, is expected to expand more than threefold to reach 1,100-1,200 MW by fiscal 2025 on the back of $4-5 billion investments announced over the past three years for both brownfield and greenfield expansion of projects,” it said. CRISIL said the data centre expansion will be supported by growth in data volumes to support high growth in e-commerce, increase in usage of social media, greater preference for over the top (OTT) platforms, the government’s impetus to the Digital India initiative and rapid digitalisation of services across industries (Industry 4.0 and 5G).
The pandemic leap frogged a trend that started to accelerate with the local data storage regulation. This is an instance of a sector benefitting out of regulation and getting supercharged with the changed circumstances in post Covid-19 India.
Just like how regulation can create a new sector and help businesses in it, it can also have an adverse affect on an entire sector with its policies.
Detractor
One such case would be the irrelevance of Payment wallet companies that were struck down by the mandatory KYC and two factor authentication rules enforced by RBI. It was 1-2 punch for wallet companies as RBI simultaneously rolled out UPI, which nulled the value proposition of many wallet companies. Load money for instantaneous transactions and pay without OTP, both of which were present in UPI. The Ken had a story detailing the regulators reasoning behind the regulation.
The latest RBI guidelines are a set of do’s and dont’s, but its intent is easy to miss. And that is, even though wallets are a legitimate innovation, RBI doesn’t want to let them get too large and out of control says a senior banking official. So it made the conditions to operate wallets similar to the entity it is most comfortable with—Banks.
“In RBI’s view banks were most palatable. Then came Non-Banking Financial Institutions. PPIs were just a dalliance,” says the senior banking official quoted above, not wanting to comment on RBI’s intentions on record.
Bystander
And they are cases when regulation is absent and it leads to heavy losses for the end consumer. This comes clear in the recent spree of people being harassed( leading to few cases of deaths as well) by the Instant Loan applications on the playstore. This space which was not technical illegal followed some unethical and illegal practices. Harping back to The-Ken’s reporting on the issue of Instant Loan Apps( Quoting at length)
“No one is going to commit suicide for dues of Rs 1 lakh ($1,360). It was the constant debt cycle and the harassment of collection agents that killed him,” Makwana tells The Ken over the phone. “Even after his death the collection agents harassed me, my family and my brother’s friends,” he says.
Abhishek Makwana’s death is among the many suicides reported over the last few months, driven by these loan apps and their collection methods. Police have been making arrests in major Indian cities such as Hyderabad, Bangalore, Chennai, and Pune so far in connection with these cases.
[...]
These apps are illegal at many levels. Users’ data is stored in China, with the apps also requiring repayment of the entire amount in one go. The collection practices employed by these lenders range from abusive language and threats to blackmail and the creation of WhatsApp groups to shame the borrower. All of these run afoul of the Reserve Bank of India’s rules. (We’ve previously detailed how collection agents operate.)
Instant Loan App crisis is made in China
The issue gained traction as people were desperately looking to find sources of credit for their needs. Other Financial avenues were time consuming compared to these loan apps. People fell for the ease and gave up too much in the process for quick access to credit. The pandemic accelerated the adoption and regulation was late to catch up.
Destroyer
There are also cases when industry people went head on with the regulators and won in the court of law. The Bitcoin exchanges which were outlawed by RBI through a swift regulation was struck down by the supreme court. This did not change the legal status of crypto exchanges as there is a bill in the legislative looking to ban all virtual currencies.
According to the judgment, the RBI’s circular was not proportionate. It also pointed out the contradiction in the RBI’s stand where it insisted that virtual currencies are not banned in India, but the circular had then gone on to ban all trading around them.
The bench said that by banning trading and the VC exchanges, the virtual currencies have been disconnected from their lifeline. “What is worse is that this has been done (i) despite RBI not finding anything wrong about the way in which these exchanges function and (ii) despite the fact that VCs are not banned,” the court said.
Supreme Court removes ban on cryptocurrency trading in India: What happens next
These are just few instances about the impact of regulation at large in a sector. A regulation can range from being an enabler, detractor, destroyer or bystander. Even with so many colourful stages, it is possible to find a new role for the regulator and their regulation in a given sector as they keep evolving in this digital world.
The coming year and the decade will result in a environment where tech and software will not be left to be on its own. Tech and software being central to each industry will play a dominating role in the future prospects of companies in each sector. Resulting in drawing the attention of regulator to attempt to make the sector fair, which might lead to any of the above described direction as we witnessed with examples.
Entrepreneurs heeding well to objections and adapting to the changing circumstances will be better off than boyhood wonder founders who we have come to associate as geniuses running software companies. For them a new frontier (Meta verse, AR, VR, Crypto ......) will emerge which will look like a tool at first before engulfing the entire world.
The Duologue is an effort by Vivek and Bheem to have a dialogue about varying topics.
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Very well structured article!!! Nice job!!