Data PrivacyDPDP Act: Challenges and Business Impact for SMEs and Startups

INTRODUCTION

In the digital era, the term data has evolved for businesses spread across various economic sectors. The rise of e-commerce, fintech, and digital startups has led to massive personal data collection, making privacy a central concern. In a landmark step and paramount legislation, Indian legislators have passed the Digital Personal Data Protection Act (hereinafter referred to as the “DPDPA” or the “Act”), 2023 to provide a broad framework for the protection and responsible use of personal data. For small and medium enterprises (hereinafter referred to as “SMEs”) and startups that constitute the backbone of innovation in India, the opportunities and challenges coming from the Act are all intertwined.

This article aims to clarify the main provisions of the Act that are relevant to SMEs and startups, identify practical obstacles they face in complying with the proposed regulations, evaluate the commercial implications of conforming to this changing regulatory framework, and provide practical advice for these businesses to leverage compliance challenges to improve their competitiveness.

KEY COMPLIANCE REQUIREMENTS

The Act has laid down a comprehensive set of legal principles for the protection of personal data of individuals and how businesses operate while collecting, processing, storing, and using that data. For SMEs and startups, it is of utmost importance that they understand these key compliance requirements and implement them in order to work legally and also build trust in the digital ecosystem. Some key compliance requirements are:

• Role and Responsibilities of Data Fiduciaries– The types of entity considered under the DPDP Act as data fiduciary includes startups and SMEs, among others, and any entity that decides the why and how of the processing of personal data.
• Consent Management– Lawful data processing under the DPDP Act requires a valid and specific consent of the data subject.
• Data Subject Rights– The other very important facet of the DPDP Act is data principals, who have meaningful editorial rights over their personal data. These rights include being informed on how their data is processed, asking for rectification of inaccurate information, asking for erasure for certain situations, and for restricting or halting the processing under certain scenarios.
• Security Safeguards– The protection of personal data is one of the foremost aspects of the Act that dictates that the providers must, under all circumstances, consider the application of security safeguards.
• Data Breach Notifications and Record-Keeping– In matters involving a breach, accidental loss, unauthorized access, disclosure, or alteration of personal data, data fiduciaries are mandated to promptly inform both the Data Protection Board and impacted individuals. Hence, an incident response plan in place for the breach is a much-needed requirement, which clearly defines the steps for detection, reporting, investigation, and remediation.

PRACTICAL CHALLENGES AND BUSINESS IMPACT

The Act aims to provide a strong legal framework for privacy but goes much further than just rhetoric for SMEs and startups. Compliance saturates every aspect of company operation, and smaller companies face challenges due to limited resources and expertise. A few of these challenges have been highlighted here:

• Resource Constraints and Expertise– Like big corporations, which can maintain their compliance department, SMEs operate with a very lean staff and small budget. Hiring consultants is a very expensive affair, and very often, finding professionals conversant with both law and technology is an impossible task.
• Consent and Data Rights– Consent has to be tracked by SMEs since the Act lays down very tough rules surrounding the issue of consent. These systems also have to provide for withdrawal of consent and the synchronization of data across platforms. Alongside this, requests for access, correction, or erasure have to be handled timely and efficiently.
• Technical and Infrastructural Challenges – Small firms largely rely on rather old IT systems that do not have any form of privacy by design. However, upgrading them with encryption, minimization, and audit logs is very costly.
• Financial and Operational Impacts– Compliance expenditures imply more than just installation of technically feasible evolutions; training of staff and monitoring constitute some other duties. For startups, those costs usually diverted funds away from innovation.
• Business Risks and Reputation– Non-compliance will bring in fines that smaller companies will certainly feel harder. A breach or an opaque practice, however, will erode trust-induced in the consumers’ perspective-a much-awaited happening since freedom-oriented spheres came into existence.
• Compliance as an Opportunity– Compliance also provides opportunities, despite all the hurdles. Privacy-first products are key customer demand and align with international standards, easing their path to international expansion. The documentation requirements and the audit requirements of the Act enforce good governance principles-that confidence investors and allow raising to be done responsibly.

STRATEGIES FOR COMPLIANCE

In order to navigate the Act, Indian SMEs and startups have attempted to perfect workable approaches that balance legal requirements and business realities. With an efficient plan, compliance may no more be an inhibitor; instead, it can evolve into a competitive advantage:

• Privacy by design and default – Data protection is worked into the product or service from day 1, looking to minimize data collection, provide concrete choices for consents, and embed security from the development process.
• Technology and Automation – With cloud tools, one may be able to manage consent, data mapping, and breach notifications through automation.
• Clear Policies and Documentation – Policies and documentation needs to be very clear and makes an organization accountable for different practices about data use, retention, access, and breach notices.
• Employee Training – Since a lot of breaches happen because of human error, boosting compliance culture with respect to privacy and good practice through ongoing training is to be preferred.
• Collaborate with External Experts and Partners – SMEs and startups can consider partnering with lawyers or consultants for audits, impacts, or breach planning, who will provide specialized expertise for a particular case without hiring a full-time person.
• Carry out Vendor Management and Third-Party Management Rigorously – As SMEs would depend on many service providers, it must have an adequate due diligence process for vendor onboarding.
• Foster Transparency and Communication with Customers – Transparency comes with good communication on data practices through privacy notices, consent, and rights to access.

EXTENDED CONSIDERATIONS AND EMERGING TRENDS

As SMEs and startups adjust to the Act, they must also evolve vigilance around arising privacy issues and regulatory expectations. These trends ensure the present compliance on one side and impact risks and opening opportunities for the future:

• Enhanced Protection of Children’s Data– Children’s data is treated as highly sensitive. Businesses offering products or services to minors must obtain verifiable parental consent and implement safeguards to prevent misuse.
• Artificial Intelligence and Automated Decision-Making– With the increasing use of AI, businesses must address concerns around bias, transparency, and accountability in automated decisions that rely on personal data.
• Proactive Risk Management– Tools such as Privacy Impact Assessments (PIAs), data minimization, and purpose limitation help organizations identify risks early, reduce unnecessary data collection, and build user trust.
• Cybersecurity as a Core Priority– Privacy and security are inseparable. Weak security controls can quickly escalate into regulatory penalties and reputational crises. SMEs must invest in cost-effective cybersecurity measures such as encryption, monitoring, and incident response plans.
• Regulatory Collaboration– Smaller businesses benefit from engaging with regulators through workshops and consultations. Active dialogue reduces uncertainty and helps anticipate changing compliance expectations.

AMLEGALS REMARKS

Data privacy under the Act is no longer just a legal obligation, it has become a strategic priority. For Indian SMEs and startups, embedding privacy principles into daily operations, ensuring transparent consent management, and safeguarding personal data through robust security measures are essential steps. Strong privacy practices not only build trust and strengthen brand reputation but also open doors to new markets. By addressing privacy challenges proactively, SMEs and startups demonstrate responsibility and foresight, making themselves more attractive to investors, partners, and customers in the digital economy.

– Team AMLEGALS assisted by Ms. Tanisha Khandelwal (Intern)

For any queries or feedback, feel free to reach out to mridusha.guha@amlegals.com or rohit.lalwani@amlegals.com