Introduction
As businesses become more connected and digital, they rely more and more on third-party providers to help with data processing tasks in areas like cloud computing, human resources, marketing, and customer service. This outsourcing makes operations more flexible and efficient, but it also adds a lot of dangers to data privacy and regulatory compliance. The Digital Personal Data Protection Act, 2023 (Digital Perosnal Data Protection Act 2023 & Draft DPDP Rules 2025), made vendor risk management (VRM) even more important. This is the first time that Indian law has spelt out the duties of data fiduciaries and processors.
The Digital Perosnal Data Protection Act 2023 & Draft DPDP Rules 2025 , along with sector-specific rules and the Information Technology Act, 2000 , and its rules, govern the legal relationship between data fiduciaries (people who decide how and why to process personal data) and data processors (third parties who process data for fiduciaries) in India. These frameworks put a lot of pressure on businesses that hire suppliers to handle data processing duties.
This article gives a thorough and analytical look at vendor risk management from the point of view of Indian law. It focuses on regulatory requirements, due diligence practices, contractual safeguards, and how to make compliance happen through monitoring and enforcement.
The Legal Imperative for Vendor Risk Management in India
The Digital Perosnal Data Protection Act 2023 & Draft DPDP Rules 2025 , is the foundation of India's new privacy laws. It sets up statutory duties for both data fiduciaries and data processors. A data fiduciary can hire a data processor to handle personal data on its behalf through a lawful contract, as long as it follows the rules in Section 7 of the Act. But this transfer through a contract does not free the fiduciary from responsibility. Section 8(5) makes it plain that fiduciaries are responsible for making sure that their processors follow the law. In addition, Section 9 makes it a legal duty for both fiduciaries and processors to put in place adequate security measures to keep personal data from being stolen.
These rules have a lot of effects. The data fiduciary will be responsible for any processing done by a vendor, and if the vendor doesn't follow the rules, the fiduciary could face regulatory action, fines, or civil lawsuits. Schedule I of the Act says that such violations might result in fines of up to ₹250 crore. This shows how bad vendor control can hurt your reputation and finances.
Indian businesses are still required to follow the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 , which were made under Section 43A of the Information Technology Act, 2000, until the Act is completely in effect. According to these guidelines, companies must use appropriate security measures and make sure that vendors who handle sensitive personal data do the same. They also include getting permission before sharing data and setting strict rules for how data can be collected, used, and shared.
Along with these general rules, certain industries have their own set of rules. The Reserve Bank of India (RBI) says that banks and NBFCs must complete vendor due diligence, keep vendor information private, and have the authority to audit vendor activities. The Insurance Regulatory and Development Authority of India (IRDAI) and the Securities and Exchange Board of India (SEBI) also have rigorous rules around outsourcing for insurers and market intermediaries, respectively. These rules for specific sectors make it harder to follow the rules in areas like cloud computing, payment processing, and core financial services.
Conducting Due Diligence Before Vendor Onboarding:
Before engaging any third-party data processor, a data fiduciary must ensure that the vendor is legally, technically, and operationally equipped to handle personal data in compliance with Indian law. This due diligence process is fundamental to fulfilling the fiduciary’s statutory responsibilities under the Digital Perosnal Data Protection Act 2023 & Draft DPDP Rules 2025.
Key due diligence steps include:
- Legal Compliance Assessment: Examine whether the vendor is familiar with and adheres to the Digital Perosnal Data Protection Act 2023 & Draft DPDP Rules 2025 , IT Act, and any applicable sectoral regulations.
- Data Security Infrastructure: Evaluate encryption standards, access controls, audit logs, intrusion detection systems, and incident response plans.
- Past Compliance Record: Investigate any history of regulatory fines, data breaches, litigation, or reputational damage.
- Use of Sub-Processors: Identify any sub-processing arrangements and assess whether those entities meet equivalent data protection standards.
- Certifications and Third-Party Audits: Review information security certifications (such as ISO/IEC 27001) and third-party audit results as supplementary indicators.
Contractual Structuring and Legal Safeguards
A legally binding contract between the data fiduciary and the data processor is not just a business tool; it is also an important way to make sure that the law is followed. According to Section 7(1)(b) of the Digital Perosnal Data Protection Act 2023 & Draft DPDP Rules 2025, this kind of contract must explicitly state the scope, purpose, and manner of processing data. It must also make it clear that the processor has to take the right security measures, not share personal data without permission, and disclose any breaches of personal data within a fair amount of time.
Standard data processing agreements (DPAs) must have language about limiting the purpose of the data, keeping it private, deleting it, auditing it, notifying people of breaches, controlling sub-processing, and ending the agreement. Fiduciaries must still be able to do audits and inspections to make sure that processors are following the law and their contracts. The agreement should also have indemnification clauses that make the processor responsible for any damages caused by gross negligence or wilful wrongdoing.
Cross-border data exchanges add even more intricacy. The Digital Perosnal Data Protection Act 2023 & Draft DPDP Rules 2025 lets transfers flow to all countries right now, but the government could change that in the future. Fiduciaries must check to see if the data protection in the recipient jurisdiction is good enough. They also need to include terms that make sure the vendor follows Indian laws even when the data is processed outside of India. If a sectoral regulator requires data to be stored in a certain place, like in banking or insurance, the contract must show these constraints.
Post-Contractual Oversight and Monitoring Mechanisms
Once a data processor is engaged, continuous oversight is necessary to ensure sustained legal and operational compliance. Monitoring must be both preventive and reactive in nature.
Essential post-contractual controls include:
- Performance Reviews and Compliance Audits: Periodically review adherence to contractual terms, including security obligations, service levels, and data protection clauses.
- Risk Categorization and Tiering: Maintain a central vendor register, classifying vendors by data sensitivity and risk exposure.
- Integration with Enterprise Risk Management (ERM): Align vendor oversight with overall ERM systems to ensure cross-functional visibility.
- Engagement of the Data Protection Officer (DPO): Involve the DPO in policy implementation, monitoring, and vendor-specific compliance assessments.
- Breach Detection and Incident Coordination: Regularly test and update incident response mechanisms in coordination with vendors to ensure regulatory reporting readiness.
Data Breach Preparedness and Incident Response Protocols:
The potential for a data breach exists even in the most mature organisations. However, when such an incident originates from a third-party processor, the impact can be amplified by delays in notification, poor response planning, and fragmented accountability. Digital Perosnal Data Protection Act 2023 & Draft DPDP Rules 2025 requires both data fiduciaries and processors to notify the Data Protection Board of India and affected individuals in the event of a breach.
Contracts must clearly define incident response responsibilities, timelines for breach reporting (ideally within 24–72 hours), and procedures for investigation, containment, and mitigation. Vendors should be required to maintain documented incident response plans (IRPs), designate breach response coordinators, and facilitate joint investigations. These protocols should be tested periodically through breach simulation exercises or tabletop drills.
The failure to comply with breach notification obligations can attract regulatory scrutiny, erode public trust, and lead to monetary penalties. As such, data fiduciaries must verify the existence and adequacy of the vendor’s breach response framework prior to onboarding and throughout the contract lifecycle.
Enforcement, Penalties, and the Role of the Data Protection Board:
The Data Protection Board of India (DPBI) is the central enforcement authority set up under the Digital Perosnal Data Protection Act 2023 & Draft DPDP Rules 2025. It has the capacity to look into complaints, hold enquiries, and levy fines. The Board has power over both data fiduciaries and processors. For some violations, such not putting in place adequate protections or not reporting breaches, the penalty in Schedule I can be as high as ₹250 crore.
Trends in enforcement in places like the EU and Singapore show that regulators are more and more holding companies responsible for what their contractors do. The DPBI should also look closely at Indian fiduciaries, especially in well-known fields like digital finance, telecommunications, and e-commerce.
Organisations need to keep audit logs, vendor assessments, breach reports, contractual documents, and other records as proof of due diligence and proactive governance in order to show that they are following the rules.
Conclusion
Under Indian legislation, vendor Digital Perosnal Data Protection Act 2023 & Draft DPDP Rules 2025risk management is no longer just a side job for compliance; it is now a key part of data governance. The Digital Perosnal Data Protection Act 2023 & Draft DPDP Rules 2025 makes it clear that data fiduciaries are legally required to keep an eye on and control how their processors act. It also sets high fines for failing to do so. Organisations need to deal with vendor risk with a mix of legal accuracy, operational discipline, and technical rigour in a regulatory environment that is changing and becoming more focused on enforcement.
Businesses may greatly reduce the legal and reputational risks of third-party data processing by putting in place organised due diligence methods, writing strong data processing agreements, keeping an eye on things all the time, and being ready for data breaches. As India's data protection laws get stronger, the companies that do well will be the ones that make vendor governance a part of their risk culture and see data privacy as an obligation, not just a box to tick.
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