The Indian automotive industry is one of the largest in the world, and accounts for about 7.1% of India’s GDP. The recent statistics reflect the growth trajectory that the sector has undergone in recent years and the potential it holds in the near future. In the period April-February 2017-18, exports grew 15.81%. The production of passenger vehicles, commercial vehicles, three wheelers (“3W”) and two wheelers (“2W”) grew at 14.41% year-on-year between April-February 2017-18 to 26,402,671 vehicles. It is in fact expected that India will be a leader in 2W and 4W market globally by 2020. The sector has attracted foreign direct investment (“FDI”) worth US$18.413 billion between April 2000 to December 2017.1 Indian exchange control laws permit 100% FDI in the automotive manufacturing sector as well as IT/ITES services. Thus, the sector has immense potential for manufacturing, job creation and employment opportunities, innovation and sustained development of the Indian economy.
The sector is expected to grow exponentially with the coming of electric vehicles (“EVs”) in India. The Government of India (“GOI”) is quite keen on promoting EVs currently to control vehicular pollution and fuel consumption. As far as autonomous vehicle (“AV”) technology is concerned, India seems to be at a nascent stage in embracing this technology. Indian Government is apprehensive of job losses and unemployment due to automation. Road infrastructure and net/wireless connectivity would need an overhaul to support the technology in India. In spite of these roadblocks, Indian automotive players such as Tata, Mahindra and several tech start-ups (such as Flux Auto, Auro Robotics, ATI Motors, etc.)2 are in advanced stages of developing their models. As the technology evolves, the Government as well as the automotive and tech players should be prepared beforehand for solutions to a broad range of complex legal issues with this technology.
Further, NITI Aayog, also National Institution for Transforming India, the policy think tank of the GOI, in a recent discussion paper on ‘National Strategy for Artificial Intelligence’ viewed potential of AVs in India as follows:
Globally, research on autonomous vehicle has spurred advances, especially in AI fields of computer vision and robotics. Due to the extremely high market potential, over the past two years, most of the large investments in AI have been made in the field of autonomous vehicle as it is widely tipped to be the first large scale commercial application of AI to be adopted. Moreover, due to the congestion and chaotic conditions of Indian traffic, AI algorithms trained on Indian driving data have the potential to be very robust. Error rates of object classification have fallen from 28.5 percent to 2.5 percent since 2010 according to the Stanford AI index. Therefore, current techniques are mature enough to be used in Indian conditions.3
Applicable laws in India
The road transport system in India is largely regulated by the Motor Vehicles Act, 1988 (“Motor Vehicles Act”), along with the Central Motor Vehicle Rules, 1989 (“Motor Vehicle Rules”). The Ministry of Road Transport, Highways & Shipping is the nodal authority for implementation and monitoring under the Motor Vehicles Act and the Motor Vehicle Rules. The Motor Vehicles Act and the Motor Vehicle Rules are premised on the requirement of a human driver/control over a motor vehicle.
Partial automation or assisted driving such as cruise control / automated or assisted parking systems installed in cars seem, to an extent, permissible under the current law as long as a driver has effective control at all times of the vehicle. However, fully automated systems/driverless AVs are not permitted under the current law since the primary premise of the current regime is effective control of the driver at all times. Therefore, the introduction of AVs will require considerable amendments in the current regulatory framework.
A major development in the sector was the introduction of The Motor Vehicles (Amendment) Bill, 2017 (“Amendment Bill”) in the Parliament. The Amendment Bill has been passed by the Lok Sabha, lower house of the Parliament in April 2017, and is pending approval of the Rajya Sabha, upper house of the Parliament, and thereafter the Presidential assent before it becomes a law. Among several other crucial changes, the Amendment Act proposes that the Central Government will have the power to exempt certain types of mechanically propelled vehicles from the application of the provisions of the Motor Vehicles Act so as to promote innovation and research and development in the fields of vehicular engineering, mechanically propelled vehicles, and transportation. It is expected that once the Amendment Bill is passed, innovation in the transport sector ,such as semi-autonomous and fully autonomous vehicles, both passenger and commercial, would be possible, and testing of such vehicles in India could be permitted subject to prior approval of the Government.
Licensing for drivers
As mentioned above, the Motor Vehicles Act predominantly regulates the road transport system in India. The Motor Vehicles Act provides in detail the requirements for licenses to be obtained by drivers, registration of motor vehicles, control of motor vehicles through permits, traffic regulation, insurance, liability of the owner, offences and penalties, etc.
Broadly, the licensing requirements, inter alia, include:
- No person under the age of 18 years can drive a motor vehicle in any public place unless he holds a driving license issued by Regional Transport Authorities/ Offices (“RTA/RTO”);
- A person above the age of 16 years can drive a motor cycle with engine capacity not exceeding 50 cc;
- No person under the age of 20 years can drive a transport vehicle in any public place;
- Person to whom a license is issued should be of sound mind, and physically fit;
- The Motor Vehicles Act allows “persons” with licenses to drive motor vehicles in public places and the scheme of the Act indicates that “persons” mean only natural persons, i.e. human beings, and not artificial ones such as corporations/robots/automated systems.
Therefore, the current framework prescribes a license for a human driver, and age restrictions as eligibility for obtaining such a license. Since an AV would be controlled by internal processors/automated instructions, the question would arise whether the age restriction would still be relevant then. If the AV technology requires human intervention for giving automated instructions (e.g. as instructions for pick-up and drop-off locations, timing for an AV for pick-off or drop-off, etc.), perhaps certain age restrictions/person giving instructions to AV to be mentally or physically fit may still be relevant. The regulatory framework, including the licensing requirements/eligibility, etc., would therefore need a change as and when this technology comes, and depending on the way the technology would function.
Special permission for testing purpose
News reports suggest that certain companies have started testing their AVs in India, however, they are restricted to private compounds. AVs cannot be operated or tested on public roads as of now under the current law without specific approvals. However, as discussed above, if the Amendment Bill becomes the law in its current form, the GOI will have the powers to permit AV testing.
Registration of the vehicle
- Every vehicle needs registration with the RTA/RTO. We would assume that the licensing requirements even for AVs will continue for identification purposes as and when technology comes;
- A driver’s license mentions the class of vehicle, e.g. motorcycle without gear/with gear, light motor vehicle, transport vehicle, road-roller or motor vehicle of specified description. AVs are not included as of now, and we would assume that a separate category for AVs as a class of vehicle may be introduced in future;
- It may be noted that the laws are silent about the ancillary aspects such as testing, safety standards and levels of permissible automation. Some of these will need to be introduced in the laws from a safety and control perspective on AVs;
- The State Governments holds the power to restrict the use of vehicles “in the interest of public safety”, as well as ‘make regulations for the driving of motor vehicles’. The State Governments may take different stands on permissibility of AVs in respective States. This may lead to complexities as well as multiplicity in the regulations and standards in different States. Currently, none of the States have permitted driverless cars in India.
Duty of driver in case of accident and injury to person
In a case where a person is injured, or a property is damaged, the Motor Vehicle Act requires the driver to:
- take all reasonable steps to secure medical attention for the injured person;
- report the circumstances of the accident to the nearest police station etc.
These provisions may be redundant in the case of AVs or driverless cars. Appropriate mechanism and continuous surveillance along with automatic alerts in case of accidents or emergency via internal control systems may be required to alert the relevant authorities including police stations, emergency contact persons and hospitals in such situations as the technology evolves.
No fault liability
The Motor Vehicle Act provides for award of compensation resulting from an accident causing death or permanent disablement, arising out of the use of motor vehicles. In such cases, strict liability on the owner or on their behalf by the insurance company is applicable. In case of award of compensation, it is based on the principle of “No Fault.” In case of death or permanent disablement of any person resulting from an accident arising out of the use of motor vehicle, the owner of the car:
- in respect of the death of any person, may be liable for fixed compensation of INR 50,000/ USD 800 and the amount of compensation payable in respect of the permanent disablement of any person is a fixed sum of INR 25,000/USD 400;
- the claimant is not required to plead and establish that the death or permanent disablement in respect of which the claim has been made was due to any wrongful act, neglect or default of the owner or owners of the vehicles concerned or of any other person.
Similar or even more onerous liability may be imposed on the owner of AV in case of accidents/permanent disability caused by AVs due to instructions installed/given by the owner for operation of the AV (subject of course to exceptions in case of tampering/hacking of internal controls).
A major setback currently for the car manufacturer to import cars to India is the inefficient indirect tax regime. Automobiles manufactured or imported into India are subjected to myriad of indirect taxes. For imports, duties applicable are Basic Customs Duty, Integrated Goods and Service Tax (“GST”) and Compensation Cess. On a local supply within India, only Integrated GST and Compensation Cess are levied. The rate of tax/duty applicable depends on the exact classification of the automobile in question. Indian laws provide incentives for use of EVs in the form of lower duty/taxes on automobiles using an electric motor for propulsion vis-à-vis internal combustion engines. Evidently, there is no such incentive or distinction in the current tax regime for AVs in India. Perhaps, certain favorable tax reforms would also give an impetus to importing AVs in India in the future.
In India throughout 2016, the total number of road accidents was reported to be 480,652 causing injuries to 494,624 persons and claiming 150,785 lives in the country.4 GDP of India takes a 3% hit every year due to road accidents, equivalent to over $58 billion in value.5
In driver-controlled vehicles, human error or negligence are the main reasons that lead to road accidents or fatalities. With AVs, human intervention may be replaced with manufacturing defects or system error in automated software or internal controls. While this is expected to reduce road fatalities, it would also expose liability of various stakeholders, including the manufacturer of the automated/driverless cars, the consumer/owner of AV, the software developer that has developed and installed the automated software and controls, other AVs on the roads, government authority, etc. While the product liability law has evolved over the years in India with judicial pronouncements, it is expected that the courts would need to assess and opine on new and complex questions around liability due to AVs in the near future.
Applicable laws in India
The law applicable to sale and purchase transactions in India is the Indian Contract Act, 1872 (“Contract Act”) and the Sale of Goods Act, 1930 (“Sale of Goods Act”), wherein the latter applies to all transactions of sale and purchase of goods (which will include driverless/automated cars or vehicles). In addition to this, a special legislation, namely the Consumer Protection Act, 1986 (“Consumer Act”) provides statutory protection to consumers. The Indian legal system borrows from the principles of common law, most of which (including tort of negligence) have been codified in statutes such as the Consumer Act.
Sale of Goods Act
The Sale of Goods Act requires that the goods shall be reasonably fit for the purpose made known to the seller by the buyer expressly or by implication. However, the provisions are subject to the principle of caveat emptor. That is, it is for the buyer to satisfy himself that the goods which he is purchasing are of the quality which he requires or if he is buying them for a specific purpose, that they are fit for that purpose.
The law of consumer protection codified in the Consumer Act provides a consumer with remedies for the sale of defective products and against deficient services. The Consumer Act is a special legislation codifying the rights of consumers to receive quality products and services.
Under the Consumer Act, a “defect” is defined as any fault, imperfection or shortcoming in the quality, quantity, potency, purity or standard which is required to be maintained by or under any law, under any contract, express or implied or as is claimed by the trader in any manner whatsoever in relation to any goods. This definition of “defect” includes inadequate warnings or instructions against any potential harm or damage to the vehicle. A “Deficiency in Service” is defined as any fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of performance which is required to be maintained by or under any law or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service. The car manufacturers as well as the software developers would fall within this purview, e.g. in respect of manufacturing or design defects, deficiency in after-sales services, etc.
Duty of care
Under the Consumer Act, the manufacturer and the dealer owe a duty of care to all “consumers.” The question that arises here is, what level of ‘duty of care’ can the consumer expect from the manufacturer. Such duty of care shall not only fall on the car maker or the manufacturer but may fall on other companies or technology providers depending on the contract between the car manufacturer and such service provider.
Breach of the duty of care
- Standard of Care: The standard of care imposed on the manufacturer under the Consumer Act is one of “reasonable diligence.” The negligence for which a consumer can claim compensation must cause some injury or loss to him. Although formally the law imposes a standard of “reasonable diligence”, a review of the Consumer Forums’ decisions suggest that they are in fact applying a rough-and-ready strict liability standard because once the fact of defect is established, or evidence is led establishing deficient services, the consumer’s grievance would be redressed.
- Product Defect: The determination of whether a product is defective is a question of fact. Once it is determined that the goods were in fact defective, the Consumer Forum would seek to remedy the situation for the consumer.
- Deficient Post-Sale Service: Any form of injury or loss under the Consumer Act is deficient post-sale service. Such a claim is premised on “deficiency of service” on part of the manufacturer or service provider after having sold a product that may be defective or was otherwise not functioning as could reasonably be expected, or simply a claim for any deficiency in post-sale services. A manufacturer can be held jointly and severally liable with the technology service provider of AVs for deficient service depending on facts and circumstances.
Given increasing consumer awareness, consumer associations or media campaigns may compel a recall.
Remedies under the Consumer Act
- Generally, remedies under the Consumer Act are available when a consumer suffers a loss or an injury because of a defective product supplied by the manufacturer or deficient services provided by the dealer, service provider and/or manufacturer. It is not mandatory that a consumer will only grant monetary compensation. Further, the Consumer Forum is not restricted to only reliefs specifically prayed for by the consumer.
- The Consumer Act provides for the following remedies for sale of a defective product and deficient services: order to (i) remove defects, (ii) replace goods, (iii) refund price or charges (accompanied by reasonable interest on the price paid by the consumer), (iv) pay adequate costs, and (v) otherwise compensate the consumer (including orders for punitive damages in suitable cases).
- The compensation ordered must be reasonable in relation to the extent of the injury.
- If a product has a safety concern and is likely to affect numerous consumers or where a defect is such that the ordinary terms of warranty would not adequately cover it, the manufacturer may recall its product from the Indian market. While there is no specific recall obligation under Indian law, the Consumer Act does prohibit sale of products that may pose a hazard to safety. Further, given increasing consumer awareness, consumer associations or media campaigns may compel a recall.
AVs cannot be looked at in isolation without considering the data privacy and protection aspects. So far as the technology is concerned, the AVs would operate with collecting, processing and storing personal data of the driver or the owner of the vehicle. Such data would definitely be capable of identifying the owner or driver of the vehicle. Several legal issues and challenges may arise due to collection, storage or processing of personal data as far as the individual is concerned, vis-à-vis the manufacturer or service provider for the automated / sensory technology in the AV.
Applicable data privacy and protection law in India
Presently, apart from the Constitution of India (which is enforceable only against the State), privacy rights are recognized in various statutes such as the Indian Penal Code, 1860, the Information Technology Act 2000 (“IT Act”), the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules 2011 (“SPDI Rules”) etc. Further, there are certain sensitive sectors such as banking, insurance, telecom etc. that have their specific regulations to address aspects of data privacy.
The concepts of ‘data privacy’ and ‘data protection’ are covered primarily through Sections 43A and 72A of the IT Act, and SDPI Rules formulated under Section 43A of the IT Act.
Failure to implement and maintain reasonable security practices and procedures by a body corporate in relation to ‘sensitive personal data or information’ (SDPI), as prescribed under Section 43A of the IT Act, attracts civil liability. On the other hand, Section 72A of the IT Act prescribes criminal liability for disclosure of ‘personal information’ in breach of lawful contract by any person or without the information provider’s consent.
Recently, in the case of Justice KS Puttaswamy v Union of India6 case (Privacy Case), the Supreme Court of India declared privacy as a fundamental right that is protected under the Constitution of India. This, however, is enforceable against the State and State actors alone. The Privacy Case has also highlighted the need to have a dedicated data privacy regime to regulate the collection and processing of an individual’s information by both State and non-State actors.
The GOI had recently constituted an expert committee (Committee) under the Chairmanship of retired Supreme Court judge, Justice B N Srikrishna, in order to study various issues relating to data protection in India and to suggest the contours of a new data protection legislation. The Committee has released a draft of the Personal Data Protection Bill, 2018 on July 27, 2018, which is subject to comments from the Ministry of Electronics and Information Technology. It will thereafter be tabled before the Parliament before it becomes a law. The draft bill has introduced several key concepts such as privacy by design, encryption, de-identification, etc. which will strengthen security practices in new age technologies.
Data, obligations and liability
The data collected, processed or stored pursuant to use of AVs would essentially be in the form of AV identification/registration number, location or sensor data, etc.
Per the current law, a person ,including an intermediary, may be subject to criminal liability if it discloses personal data that it has access to while providing services pursuant to a lawful contract with an intent to cause wrongful loss or gain. Therefore, the manufacturers or the service providers/ developers (hardware or software providers or network providers) would be bound by these obligations. There also may be instances of joint-controller, or commercial back-to-back arrangements among manufacturers and service providers. Since AV technology is evolving, the laws may need to be adapted to address the complexities around the technology, and liabilities of various parties involved depending on the nature of their involvement.
Further, under the SPDI Rules passwords, financial information, physical, health condition etc. are classified as Sensitive Personal Data Information (“SPDI”). The manufacturers or service providers/developers may result in collecting or accessing a huge amount of such SDPI of the driver or owner of the vehicle or other automated connected vehicles, e.g. by tracking the trips made to hospitals, religious institutions, etc. or financial information in case toll payments are made. When manufacturers or developers get access to such SDPI, they would need to employ and demonstrate use of reasonable security practices for collection, storage or processing of such sensitive data, and a breach could pose civil sanctions as per the current law. It is expected that the new law may broaden the definition and scope of personal data given the emergence of newer technologies and big data, so would the liabilities and obligations of data controllers and processors evolve to respond to the challenges posed by the automated technology.
Consent and exceptions
Under the current law broadly, an entity that collects SDPI is required to obtain prior written consent from the information provider. Therefore, manufacturers and developers would need to take consent from the driver/owner of vehicle to access, collect, store or process his SPDI. Keeping pace with automated technology, the law may need to also permit consent to be updated in the machines’ processors/automated systems.
Further, with respect to SPDI, the data subject has the right to update the information or withdraw consent at any point, and hence systems will need to be incorporated in autonomous vehicles to enable these rights of the vehicle users. The current law also incorporates principle of proportionately i.e. only data that is necessary and proportionate needs to be shared and collected by the controllers/processors for a lawful purpose.
Exceptions to the consent of the data provider is available under the SDPI Rules in such cases as if Government agencies require such information for verification of identity, or for prevention, detection, investigation including cyber incidents, prosecution, and punishment of offences. In such cases, the manufacturers or service providers may need to share location data/travel patterns/driver identity with the regulatory agencies, e.g. in case of terrorist attacks/cyber crimes, etc.
The current law also places transparency obligations for SPDI, i.e. the body corporate collecting or dealing with sensitive data, wh should keep the user informed on what and where the data has been used, intended recipients of such data, and that data should not be retained longer than the purpose for which it is collected. The body corporates manufacturers or developers of AVs in this case, collecting, storing or processing SPDI will need to have robust privacy policies in place and such policies will need to be disclosed on their websites with all requisite details.
Per the current law, sensitive personal data can be transferred to third parties only with prior consent from the information provider and subject to the transferee (whether situated within or outside India) providing same level of protection to the SPDI as prescribed under the SPDI Rules.
The law will definitely need to evolve and adapt to the technological and operational requirements of AVs, e.g. in case of vehicle to vehicle communication.
The IT Act also contains provisions in relation to tampering with computer systems or networks or hacking of such systems intentionally to cause public or individual harm or delete/ destroy/alter any information in computer source or network or diminishes its value or utility. Some of these provisions will be relevant to safeguard against any system hacks or tampering of the AVs. The law may still need to evolve depending on how the technology unfolds and exposes hacking and other security risks to AVs.
The automobile industry has witnessed a surge in research and development of AVs. Apart from automobile companies, non-automobile or tech companies have also invested in research and development in this sector. The development and deployment of AVs will thus require carmakers and suppliers to develop, purchase, or license a great deal of technology outside the scope of their traditional product development. The sector continues to draw huge investments and new players are constantly entering this segment. This has made the sector highly competitive and every player is keen to develop the technology before others. Though technological developments by way of collaborations between various players in this industry and harmony in usage of the same is a rising trend in this sector, there has also been a rise in intellectual property right (“IPR”) filings to gain the first-movers’ advantage as well as protect their technologies.
Intellectual property in India
As of today, India provides statutory protection to most IPRs which include patents, trademarks/service marks, designs, copyrights, geographical indications, plant varieties and semiconductors integrated circuits layout. Under the various statutes and by virtue of being signatory to various treaties/conventions, foreign parties/entities have been successfully filing and also enforcing their IPRs in India. Typically, an AV system would involve a bundle of intellectual property with the most concentration being patents, copyrights and semi-conductor integrated circuit layouts. Trademarks and design may also be applicable.
In line with the global scenario, companies/AV manufacturers/service providers will surely attempt to expand their share of market through protection and exploitation of their respective intellectual property rights.
In India, a new product or process involving an inventive step or feature and capable of industrial application constitutes a patentable invention in India. However, not all inventions are patentable and the Indian patent law specifically excludes certain inventions (for instance, software per se and business methods are not patentable). The term of a patent is 20 years from the date of filing the application, subject to payment of annuities. Test for patentability in India is substantially the same as those employed by well-known jurisdictions outside India. In essence, any invention/development which satisfies the criteria of patentability, will be considered patentable. Patent applications/patents in the field of AV systems would include a plethora of technologies which would include core automotive technologies, electric motors, electronic sensors, geospatial technologies, communication technologies, etc. Various patents have already been filed by manufacturers and developers including Nissan that have sought about five patents on technologies relating to autonomous vehicles.7
Copyright protection subsists in respect of literary, dramatic, musical and artistic works, cinematograph films and sound recordings. Registration is not mandatory but is advisable for evidentiary purposes. The term of copyright varies for different types of work. In general, the term of copyright is for the life of the author plus 60 years. In India, software/computer programs are considered as literary work and are protectable under the copyright statute. Both the object code and the source code are protectable under copyright law. In relation to AV systems, various software, flow-diagrams, user interface, and databases (arrangement) can be protected as copyright.
Design registration is also available for a part of an article capable of being made and sold separately... It has been a trend in the automobile industry to come up with novel shapes/configuration of various components as well as the automobile itself.
New or original features of shape, configuration, pattern, ornament or composition of lines or colors as applied to any article whether in two dimensional or three dimensional form or in both forms by any industrial process or means, whether manual or mechanical or chemical, separate or combined are eligible for design registration. Design registration is also available for a part of an article capable of being made and sold separately. Like a patent, a design application also goes through examination before being registered. Design registration is valid initially for a period of ten years from the date of the application and is renewable for another five years. Thus, the maximum protection for a registered design is 15 years. It has been a trend in the automobile industry to come up with novel shapes/configuration of various components as well as the automobile itself.
During the lifecycle of developing AV systems/vehicles, there ought to be developments in terms of aesthetic appearance of various components which can be protected under the designs law.
A mark capable of being represented graphically and capable of distinguishing the goods or services of one person from those of others qualifies for registration as a trade mark, as the case may be. Packaging of goods and combination of colors also qualify as trademarks. Sound marks, 3D marks and shape marks have also been allowed to be registered in India. Well-known trademarks are recognized in India, and it is also possible to request the Trade Marks Registry to include such marks as well-known marks in the Trade Marks Registry’s records. Where a trade mark is not being used in India, application for registration of it can be made on a ‘proposed to be used’ basis.
Semiconductor integrated circuits layout designs
Semiconductor integrated circuits layout designs are registrable in India. Novelty and originality are requirements for registration. Once registered, the term of protection is ten years.
Confidential information and trade secrets are at present protected by common law and contract law. There are three essential requirements for breach of confidence to exist. The information must have the necessary quality of confidence and must have been imparted in circumstances importing an obligation of confidence and finally there must be an unauthorized use of the information to the detriment of the party communicating it. In the process of evolvement and development of new technologies used in AVs, the same shall involve several confidential data that shall be extremely confidential/critical to the AV manufacturers/service providers and may be subjected to high risk of breach of confidentiality.
AVs will bring about a shift in the regime followed by the insurance industry mainly due to two reasons; (i) increase in automotive safety; (ii) shifting of liabilities in case of accidents.
It is debated by top manufacturers around the world that by introduction of AVs, the pattern of ownership of the vehicle may also change. Today, the majority of vehicles are personally owned by people and hence these vehicles are individually insured. However, the manufacturers are of the view that, there shall be shift in the ownership from individually owned vehicles to the manufacturer retaining the ownership of the vehicles. Such a shift in the ownership of vehicles may require the insurance companies to re-evaluate the profitability and scope of insurance. Especially as the kinds of motor insurance provided in India is traditional and limited.
Applicable laws on insurance in respect of motor vehicles in India
In India, insurance in the automotive sector is broadly governed by the Insurance Act, 1938 and Motor Vehicle Act. The insurance contracts are governed by the Contracts Act and the Sales of Goods Act;
Currently, motor vehicle insurance covers the risks to third parties arising out the use of motor vehicle and the risk of damage caused to the vehicle. Further, subscribing to an insurance policy for coverage of certain risks are made compulsory and coverage for other risks are optional at the instance of the owner. Accordingly, motor vehicle insurance policies can be divided into two, namely, third-party insurance i.e. compulsory in India and comprehensive policy. Third-party insurance provides protection from legal liability to a third party following an accident that causes injuries, death, or property damage, whereas, a comprehensive car insurance plan covers: (i) loss or damage due to natural calamities; (ii) loss or damage due to man-made calamities; (iii) personal accident; and (iv) third party legal liability.
Compensation amounts are calculated by courts on the basis of several factors such as age, and earning capability of the victim, and may go up to several crore rupees. With the compensation amounts increasing, claims being paid by insurance companies have been increasing. Consequently, insurance premiums are increasing regularly.
Effect of AVs on the insurance industry
Increase in automotive safety
Effect of increased safety by introducing AVs
More than 90% of car crashes in India are thought to involve some form of driver error. By eliminating the factor of driver error, the road transport may get safer and thereby eliminating chances of an accident. If such prediction is true, the same shall have direct implication on the insurance companies, as the extensive need of insurance required today in India may not be felt with AVs in operation.
Shift in liability of accident
- Currently, the liability may fall upon the driver, the owner of the car or the manufacturer due to involvement of driver error in most cases.
- By eliminating the role of drivers and increased dependence on the technology of the manufacturer and the developers, this will lead to a shift in liability to the manufacturer and the developers.
- Further, as already discussed, the shift in the ownership of the vehicles will also lead to a shift in the liability. For example, if the consumer is hiring a car from Uber, Uber being the car owner shall be liable to subscribe to the insurance and shall be liable in case of an accident. The consumer in such cases shall not bear any liability.
- Similarly, the burden of “strict liability” as imposed on the owner of the car today, may shift to the car aggregators or the manufacturers.
Currently, insurance companies have provided cover to drivers in respect of road accidents that are caused due to human error. The manufacturers and infrastructure providers will now need to be the subject of liability, rather than the direct consumers (drivers). It will lead to a fall in premiums, change underwriting models which earlier depended on driver behavior, and might even eliminate the need for car insurance for the drivers. The insurance sector will have to adapt their business models accordingly.
However, while accident related premiums are bound to come down in the long term, there will be different risks that need insuring, such as the risk of an algorithm failing or cyberattacks relating to driverless cars.
Globally, the automotive sector is at a crossroads; there’s a steep rise in the growth trajectory for this segment with the disruption in technology, introduction of electric and autonomous vehicles, the need for mobility and speed, the need to ease traffic congestion, reduce road accidents and accidental deaths, and of course the need for a cleaner environment. As mentioned in the earlier part of this white paper, FDI inflows in automotive sector increased exponentially last year. In fact reports suggest that M&A activity in this segment increased in India in spite of downrun of deals last year due to GOI’s demonetization step and introduction of new GST regime. Acquisitions have significantly increased in India in the tech business/IT/ITES space as well.
The fast progression to the digitized world will pose its own set of opportunities, risks and challenges. All industries, including the automotive sector, will need to keep pace with the emergence of new technologies, by either developing/innovating in-house or through inorganic growth by acquiring other companies via M&A.
Finding right structures for transactions
M&A's can be structured through a combination of structures, such as through (i) investments, (ii) joint ventures, (iii) acquiring businesses as a whole or identified assets and liabilities i.e. business or asset sales, or (iv) mergers and demergers approved by the National Company Law Tribunal. Each structure will have its nuances and will depend on various commercial, legal, regulatory, financial and tax considerations. The Indian Government allows 100% FDI in automotive manufacturing as well as IT/ITES sectors. Therefore, it is possible for international players to have a direct presence via a local subsidiary in India.
Acquisition of business or investments
Generally speaking, from a strategic standpoint for an established automotive player, acquiring existing targets with requisite emerging technologies would add to its competitive edge and help it integrate newer technologies timely, as compared to developing the know-how in-house, which may be time sensitive. Therefore, acquiring existing businesses with innovative technologies is often a key driver for strategic M&As, subject to successful integration of existing and new operations from a management, as well as an organization, perspective. The acquirer may choose to structure the acquisition by either acquiring the company or business as a whole, or only the identified assets and liabilities if it does not wish to acquire a certain part of the business. As mentioned above, the structure will depend on various factors, including the timing of the acquisition which may depend on third party/ regulatory approvals. The acquisition would also need to be examined from an anti-trust perspective under the Competition Act, 2002 in India. Acquisitions of shares or voting rights or assets or control or M&As that breach the specified asset or turnover threshold (combination) must be notified to the Competition Commission of India (“CCI”) and cannot be effective without the prior clearance of the CCI. This is generally the acquirer’s responsibility. However, in some cases of M&As, the responsibility lies on all the concerned parties to the M&A. It will also need to be assessed if the arrangement is anti-competitive or results in adverse effect on competition within India. Further, if acquisition is of a publicly listed Indian company beyond prescribed thresholds, then a public offer gets triggered.
Indian laws also permit cross-border M&As, i.e. in-bound and outbound mergers. Recently, the central bank of India, the Reserve Bank of India (RBI) released the cross-border merger regulations. While inbound mergers were permitted so far, however, an outbound merger i.e. merger or amalgamation of an Indian company with a foreign company has been permitted under the Companies Act, 2013. The law on this aspect is new and still evolving, however, it will open opportunities and avenues for more cross-border M&A, including in the automotive sector and emerging technologies globally. Global players will be able to access Indian technology/automotive companies, and vice versa which will lead to dynamic technology growth beyond borders and geographical markets.
The automotive sector in the AV space is technology-oriented. India has been the IT-hub for over a decade for global players. Given India’s competitive edge on the technology side, international players would see tie-ups and joint ventures with Indian market players as key to their market entry in India. The local expertise of a joint venture partner would be a significant strategic advantage. With the GOI’s impetus to local manufacturing through the “Made in India campaign” and with emerging tech-focused start-ups in India, joint collaborations should rise significantly. The know-how on regulatory nuances, the local network and affiliations of an Indian partner would help. However, the parties will need to agree and deliberate on individual rights and obligations, the nature of the contribution of each partner, and exit and expansion strategies, etc.
The key to a successful merger or acquisition lies with seamless and smooth post-acquisition integration of the acquirer with the target, and its operations, management, employees, and processes. This needs considerable time and effort on the management side since the target could perform at its optimal level and acquirer will benefit with the acquisition only if synergies are achieved post acquisition. Both the acquirer and the target would need to consider and work towards the legal, regulatory, personal/employees organisation, operations, and finance aspects for a successful integration of businesses for maximum optimization of acquired business and technology.
Despite the integration risks and challenges, the advantages of inorganic growth by acquiring businesses with emerging technologies will be the key to growth of this sector in the future.
The recent government initiatives (which are mainly focused on EVs) or the Amendment Bill, including its previous drafts, do not suggest any strong indications that AVs may be permitted in India any time soon. The same is also evident from the statement made by Mr. Nitin Gadkari, Minister of Road Transport and Highways of India in July 2017, which read, “We won’t allow driverless cars in India. I am very clear on this. We won’t allow any technology that takes away jobs. In a country where you have unemployment, you can’t have a technology that ends up taking people’s jobs…”8 Job losses and unemployment seem to be greatest concern of the GOI for bringing this technology to India. However, contrary to Mr. Gadkari’s views, one would assume that this may in fact lead to the generation of more skilled jobs in IT/ITES, engineering, artificial intelligence/robotics, automotive, software development and related sectors in India. In spite of the GOI's reluctance towards AVs, the market leaders, as well as start-ups, are quite keen to develop and implement this technology in India in the near future, subject, of course, to the development of adequate road and traffic infrastructure to support AVs.
- 2017(10) SCALE1
- https://www.thehindu.com/business/nissan-seeks-autonomous-vehicle-patents-in-india/ article19095040.ece