20 Nov 2017 15:26 IST

Maintaining records, the blockchain way

Adopting this route does not seem at odds with the Indian regulatory architecture

In an unprecedented development, in July this year, the state of Delaware in the US, home to almost 60 per cent of the Fortune 500 companies worldwide, amended its General Corporation Law to allow corporations to maintain shareholders’ lists and other corporate records on blockchain.

Briefly, the amendments mandate that such records be capable of being converted into legible paper form within a reasonable time and as long as the blockchain ledger could be used to, first, prepare a list of stockholders entitled to vote and second, record transfers of stock. This paves the way for a system where shareholders interact directly with the issuer and each other, without an intermediary, on peer-to-peer basis.

Given the benefits, many stock exchanges are evaluating the utility of blockchain as a way to register and trade shares. The Reserve Bank of India and the Securities and Exchange Board of India are also exploring ways of utilising blockchain in the financial and securities markets.

Blockchain is an online disintermediated ledger of digitally recorded transactions that is encrypted in the form of blocks, where each block is connected by a network of computers which stores these blocks, together forming the blockchain.

Scene in India

The Companies Act, 2013 (Act) legitimises the maintenance by an Indian company of books and records (such as register of share transfers, register of share issuances, register of members, etc.) in electronic form.

Serendipitously, Section 120 of the Act read with Rule 27 of the Companies (Management and Administration) Rules, 2014 (MA Rules) permits the board of directors to select any electronic mode of record-keeping so long as it meets the minimum conditions set out thereunder.

In terms of Rule 28 of the MA Rules, the obligation to provide adequate protection against unauthorised access, ensure against loss of the records and to take necessary steps to ensure security, integrity and confidentiality of records, is cast upon the person responsible for maintaining and securing the electronic records, as may be determined by the board.

Rule 29 of the MA Rules casts a duty on the company maintaining its records electronically to make those records available for inspection in electronic form or to provide copies of such records in physical form, as the case may be, on payment of a fee not exceeding ₹10 per page.

The rules at play

The inherent traits of immutability and hack-resistance make blockchain compliant with the security stipulations of Rule 27 of the MA Rules.

In contrast to conventional electronic record-keeping where the company centrally maintains records, with blockchain, such records would be kept at multiple locations with each computer participating in the blockchain network maintaining a copy of the complete ledger representing the full set of records.

Pertinently, there is no legal requirement that electronic corporate records be maintained at a single location and that too by the company alone; only a mandate on the company to ensure that such records are backed up daily.

Maintenance of records on blockchain would not be exclusively by the company but by the company and by each of the other participants; so long as the record is available for inspection electronically or copies of the record can be retrieved and made available for inspection physically, when demanded. The company should be in compliance with the requirements under the Act. However, the automated ledger would not be under the control of any particular officer or director of the company.

Hence, blockchain corporate record-keeping could result in the board of directors, as a whole, potentially facing liability where there is any lapse in security or data manipulation.

As blockchain technology develops further, issues of corporate liability for security lapses involving blockchain corporate records would warrant a closer look .

Not at odds

Summing up, Blockchain technology enables companies to harness the power of the network to facilitate simultaneous record-keeping in a secure, transparent and immutable manner. At the same time, it provides traceability and security of transactions while considerably reducing costs associated with processing, digitisation, and custodians.

While there have been no official statements on the matter from the Ministry of Corporate Affairs, a transition of corporate records to blockchain, prima facie, does not seem to be at odds with the present Indian regulatory architecture.

(The writers are Senior Associate and Associate, respectively, with Khaitan & Co, Mumbai. The article first appeared in The Hindu BusinessLine.)