Data Protection As A Closing Condition: Rethinking Risk Allocation In Indian Tech Deals

Introduction

Data protection has historically been considered a compliance issue during transactions, which is generally identified during diligence and only tackled after closing, often addressed through generic representations, warranties and, in some cases, post-closing covenants. However, with the evolving regulatory framework in India, this approach is increasingly inadequate to address a material category of transaction risk. With the enactment of the Digital Personal Data Protection Act, 2023 (“DPDP Act“) and the subsequent notification of the Digital Personal Data Protection Rules, 2025 (“DPDP Rules“), data protection has moved beyond a compliance hygiene issue to become a core regulatory obligation with direct financial and operational implications for businesses.

For companies operating in the technology sector such as software-as-a-service providers, consumer platforms, financial technology companies, health technology companies, and artificial intelligence-driven enterprises, business models are often fundamentally dependent on the collection, processing, and monetisation of personal data. In such cases, failure to comply with the requirements under the DPDP Act and the DPDP Rules presents a material regulatory and commercial risk. Accordingly, in appropriate high-risk or data-intensive transactions, compliance with the DPDP Act and the DPDP Rules should be evaluated not merely as a post-closing obligation, but as a condition precedent to closing, with transaction documentation clearly allocating responsibility for identified risks.

The Indian Data Protection Framework: A Brief Overview

Prior to the DPDP Act, data protection obligations in India primarily stemmed from the Information Technology Act, 2000 (“IT Act“), particularly Section 43A¹ read with the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011. These provisions imposed liabilities on parties that failed to implement reasonable security practices while handling sensitive personal data and information. In practice, compliance under this framework was largely operationalised through internal information security policies, contractual safeguards with service providers, and industry standards such as ISO certifications.

The DPDP Act is a significant departure from the earlier fragmented regime, as it establishes a comprehensive statutory framework specifically governing the processing of digital personal data. It introduces a compliance model built around accountability obligations for data fiduciaries, and the DPDP Rules operationalise this framework and provide clarity on compliance requirements. The framework also establishes the Data Protection Board of India as the primary enforcement and adjudicatory authority, marking a transition from a largely compensatory civil liability model to an active regulatory enforcement regime. These obligations operate alongside sector-specific regulatory requirements, including those prescribed by financial sector regulators and health-sector frameworks.

Why Data Protection Compliance May Need To Be a Condition Precedent

The DPDP Act provides for substantial monetary penalties, including penalties that may extend to several hundred crore rupees per instance for failures relating to reasonable security safeguards, breach notifications, and obligations concerning children’s data. These penalties are designed to be dissuasive and can materially impact transaction economics. In this context, failure to appropriately allocate data protection risk may expose acquirers to significant financial and regulatory exposure.

Further, from the viewpoint of a transaction, not having regulatory certainty also constitutes risk. While the DPDP Act provides clarity on compliance requirements, parameters such as enforcement priorities, penalty frameworks and regulatory expectations have not yet been established. With this uncertainty, parties to transactions face the risk of inheriting historical compliance gaps that may only surface post-closing, particularly in the event of a complaint, data breach or a regulatory inquiry. In such a scenario, having data protection compliance obligations as conditions precedent would serve to reduce the uncertainty by requiring the responsible party to remedy the identified compliance gaps and risk before the control shifts to the buying party.

In many transactions involving technology being acquired, personal data becomes a core business asset. Similar to the risk that comes with a defective title in an intellectual property transaction, if a target company’s dataset has been collected or processed in a manner not compliant with applicable law, the buyer’s ability to lawfully continue using that data post-closing may be restricted. This risk is particularly relevant where datasets are used to train or refine artificial intelligence models, or where data monetisation forms a central component of the target company’s business model.

In acquisition scenarios, particular attention must also be paid to whether existing notices and consents adequately cover post-closing processing activities, especially where there is a change in data fiduciary identity, expansion of processing purposes, or modification of cross-border data transfer architecture. However, deal practice is increasingly reflecting a risk-calibrated approach. While not every transaction will warrant data protection compliance as a standalone condition precedent, market practice is increasingly moving toward risk-based structuring. In practice, this may translate into a combination of targeted pre-closing remediation obligations, staggered closing mechanisms, or enhanced bring-down conditions, depending on deal timelines and remediation complexity.

The Need for Enhanced Due Diligence for Data-Driven Transactions

Where data protection is treated as a closing condition, due diligence exercises must move beyond mere policy reviews to be more rigorous and operationally focused to recognise the gaps and violations. This includes assessing actual data collection, processing, and sharing workflows; notice and consent implementation across user journeys; data retention and deletion architecture; vendor and processor governance; cross-border data transfer mechanisms; and cyber incident detection, escalation, and reporting readiness. Any lapses, including in monitoring, logging, or internal escalation processes can significantly increase post-closing exposure.

Data Protection as a Part of the Conditions Precedent, Representations, and Indemnities

Parties to a transaction must ensure that the conditions precedent involving data protection compliance should be narrowly tailored, objective, and in line with the findings during the diligence stage, as using broad and unqualified language will often prove to be insufficient. For instance, parties can consider incorporating language which addresses the need to establish a basic data governance structure, implement minimum security safeguards, complete the data mapping exercises, remediate datasets which are likely to be high-risk, and disclose and resolve the known data breaches and complaints.

Along with the above, transaction documents must also contain dedicated representations and warranties which provide clarity on the nature and scope of the personal data being processed, shed light on the existence and effectiveness of security protocols and implementation of policies, disclose prior incidents, investigations and regulatory dealings, and give details of vendor and data processor arrangements. It is of note that data protection representations often require a longer survival period than generic business representations, as it is common for non-compliance to be discovered well after closing. Lastly, in cases where the compliance gaps which are identified or disclosed cannot be fully remedied prior to closing, the parties should seek targeted indemnities.

As regulatory expectations evolve globally, transaction structuring tools in data-intensive transactions are becoming increasingly sophisticated and risk-specific. Several of these approaches are already well-established in mature transaction markets such as the United States and Europe. In India, while adoption remains selective, early signals of similar structuring approaches are beginning to emerge in complex technology and regulated sector transactions and are likely to gain relevance as enforcement expectations and regulatory scrutiny increase. These include escrow-backed indemnities linked to specific data remediation milestones, deferred consideration structures tied to regulatory clearance or completion of compliance remediation, transitional services arrangements focused on post-closing compliance stabilisation, enhanced information covenants between signing and closing requiring ongoing disclosure of regulatory or incident-related developments, and, in limited cases, regulatory risk insurance products. While these mechanisms may not yet be standard across all Indian transactions, they provide useful reference points for allocating regulatory risk in data-intensive and highly regulated sectors.

Conclusion: Toward Protection as a Standard Closing Requirement

It is now more important than ever for parties to adopt a disciplined approach for identifying and remedying the data protection related risks and lapses before closing. Transactions that proactively incorporate data protection risk assessment into closing frameworks in a manner which is supported by essential representations, targeted indemnities, enhanced covenants and appropriate financial protections are better positioned to withstand regulatory scrutiny and preserve long-term deal value. Early integration of privacy, technology, and transaction counsel is becoming critical in complex technology deals.

Footnote

1. Section 43A of the IT Act.

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