January 2025
1. Introduction
Concerns about the inadequacies of the existing Indian regulatory regime for competition law for digital markets were growing for a while. In February 2023, the Ministry of Corporate Affairs (“MCA”) constituted a Committee on Digital Competition Law (“CDCL”) to evaluate the need for a separate framework regulating competition in Indian digital markets. This also coincided with the 2022 introduction of Digital Markets Act (“DMA”) in Europe which came into effect in May 2023. This is an ex-ante regulation to deter anti-competitive practices in European digital markets, which also acknowledged that the existing competition regime was sound and allowed enough flexibility for growth of digital economies.[1] On March 12, 2023, the aforesaid committee published its report along with the draft Digital Competition Bill, 2024 (“Draft Bill”) which outlined the criticality of regulating competition in digital markets, specifically, in presence of an ex-post regulatory regime i.e. the Competition Act, 2002.[2] Most stakeholders and global observers viewed the Draft Bill as premature and strikingly analogous to the DMA.
This newsletter delineates the key provisions of the Draft Bill from the stakeholders’ standpoint and discusses if it could cause more harm than good to the Indian digital markets.
2. The Shift of the Regime: In the Steps of DMA
The 60th report of MCA’s Standing Committee on Finance studied anti-competitive conduct of “Big Tech Companies” on the Indian markets.[3] The report was based on a preventive approach, instead of referring to actual case analyses. Amongst numerous recommendations to the government, the committee explained the one seeking an ex-ante regulatory regime for digital markets in detail. It noted that digital markets, unlike traditional markets, are driven by usage, learning, and network effects,[4] rapidly reducing their operational costs and easier for a few market players to achieve dominance and scale their enterprises. Consequently, such market players tend to polarize, or tip the market in their favor, often irreparably, ultimately leading to market foreclosure. Therefore, by the time policies to regulate such behavior are formulated, the market is tipped irreparably in favor of one or two significantly big market players. In this context, the committee coined the phrase “the winner-take-all markets” to describe digital markets, where winners emerge rapidly within a few years of market development. Acknowledging the need of preventing digital markets from tipping, the committee suggested that competition in digital markets needs to be evaluated ex-ante, unlike the ex-post regulation mechanism of traditional markets, under the existing statute and supervision of Competition Commission of India (“CCI”). The regulator deals with anti-competitive conduct on a case-to-case basis, based on several modalities, statistics and prevailing market conditions.
Noteworthily, the Draft Bill proposes a regime based on deterrence to curb competition in digital markets by (a) identification, (b) designation, and (c) restriction of anti-competitive conduct, prior to occurrence of any actual anti-competitive behavior in digital ecosystems. The Draft Bill, however, categorizes digital markets as a novel and unique segment with a propensity to be polarized in a short span of time, considering market and consumption trends. The underlying problem with the imposition of ex-ante regulations in a budding digital economy is it stifles competition, and innovation is nipped in the bud.
Interestingly, the Draft Bill is like the European DMA which focuses on identification of “gatekeepers” of digital markets. The DMA aims at establishing objective and fair digital markets by identifying “gatekeepers” and establishing a set of do’s and don’ts. Under the DMA, these are large undertakings which provide “core platform services” and possess “considerable economic power.”[5] The DMA too, is an ex-ante framework, calling for early intervention by imposing prohibitory standards on “gatekeepers” to curb anti-competitive conduct and offer varied choice to users. The DMA, however, cautions under regulation 27, by recognizing the need for digital markets to remain competitive, and only “necessary and appropriate” curbs and intervention be applied.[6]
3. Draft Bill Highlights & Challenges
3.1 Systemically Significant Digital Enterprises (“SSDE”): In its report, the committee emphasized the need for recognizing enterprises which exert sufficient influence on digital markets, by defining thresholds based on their revenue, market capitalization and number of users, amongst other factors. Section 3 of Draft Bill defines SSDE in respect of certain Core Digital Service(s) (“CDS”) listed under Schedule I.[7] Here, they are defined based on two factors (a) financial thresholds, in terms of turnover, global turnover, gross merchandise value and global market capitalization in the preceding three financial years, and (b) user thresholds, in terms of the number of end users and business users in the preceding three financial years. Once a digital enterprise touches upon or exceeds the aforesaid thresholds, they are deemed to be SSDEs and required to comply with self-reporting statutory obligations.
However, the CCI may, on its own motion, designate an enterprise as a SSDE even if the thresholds under section 3 are not met, provided it is of the opinion that the digital enterprise holds sufficient presence in such CDS. Such suo-moto designation is based on criteria including volume, size and resources, number of business or end users, economic power, dependence of end users on the enterprise, monopoly, cost of substitutable goods or services for consumers, user lock in and switching costs, etc. Apart from the above, the CCI may, at its own discretion, call upon an enterprise to furnish information required to ascertain if an enterprise qualifies as a SSDE. In section 4, the Draft Bill proposes such designation for three years.
3.2 Anti-competitive practices: The Draft Bill entrusts the SSDEs to operate in a fair and non-discriminatory manner with its users. The other anti-competitive activities curbed are (a) self-preferencing & anti-steering practices: under section 9, SSDEs are prohibited from favoring their “own products, services or lines of business” or those of their related parties and entities with whom SSDEs have arrangements for manufacture and sale of products or services. The committee’s report too recommended prevention of “anti-steering” behavior where SSDEs should be prevented from steering its users towards its own products and services by offering them at cheaper prices, instead of other products or services that may be better. This effectively means that the SSDE should not make access to other platforms (unrelated to it) unnecessarily burdensome for the user; (b) restriction on third-party applications: SSDEs shall be prohibited from restricting users from accessing other applications pertaining to the CDS it offers. This also means they shall allow their users to choose freely and change default settings in relation to a CDS; (c) tying and bundling: under section 15, SSDEs are prevented from incentivizing users of their CDS to use one or more of the other products and/or services offered by them or of its related parties; (d) data usage: considering their access to volume of user data, SSDEs are prohibited from accessing personal data for providing advertising services or combining user personal data gathered from different services, including the CDS it offers. Further, SSDEs are obligated to allow users to port their data seamlessly to any other enterprise, effectively easing the process of switching among digital enterprises.
3.3 Challenges: In India, CCI has already acted upon several complaints against big tech in the past. There are other statutory regulations which oversee their operations in digital markets including the existing ex-post regulatory regime. An addition of an ex-ante regulation may cause funding crunch for newer enterprises. Besides, CDCL’s report acknowledges the permeation of digital enterprises in Indian cities was non-uniform. For instance, online food delivery market is mainly concentrated in tier-1 cities and for other e-commerce activities, difference in user penetration exists between the rural and urban India. CDCL also noted obtaining data for each CDS to define these thresholds would confront operational difficulties and recommended thresholds be uniform across CDS.
Further, the Draft Bill seeks to prevent and regulate the usage and intermixing of data at the behest of digital enterprises. However, such a restriction could coerce most large tech enterprises to change their business models which, in turn, hinders the pace at which the digital markets in India are growing since digital enterprises utilize user data to tailor results according to the user needs. Without evidence of digital entities utilizing user data to cause adverse effect on competition, such restriction may deter entrants in this space. At this stage it does appear the Draft Bill is premature and based on a generalized understanding of digital markets, which are still metamorphosing into a mature and stable ecosystem.
4. The Stakeholders Opinion(s)
The Draft Bill, which was open for stakeholder consultation until May 2024, drew widespread attention and flak. Different agencies and leaders of large conglomerates provided comments and voiced concern about risking the loss of investment in digital markets, if an ex-ante approach is adopted. These include the Information Technology & Innovation Foundation and the American Bar Association’s Antitrust & International Law Sections.[8] The former categorically stated the Draft Bill was unnecessary at a time when Indian digital markets are at the pinnacle of growth and, instead, Indian legislators ought to adopt an observatory stance and watch the European digital markets in the backdrop of the DMA. The latter noted several new legislative measures applied to Indian digital markets, apart from the Competition Act. Given such legislations are already available and some ready to be enforced, Indian legislators ought to be careful before enforcing any new ex-ante legislation. While the Draft Bill proposes to offer healthier digital markets to consumers by identifying influential entities in the first place itself, it leaves very little to no room for digital enterprises to innovate and offer better products and/or services to consumers, due to CCI’s regulatory gaze.
5. Conclusion
Innovation and scuffle amongst competitors to offer newer and better products, and/or services is key to achieve growth in digital markets like other traditional markets which is, in fact, one of the tenets of competition jurisprudence in India. In any case, enforcing ex-ante regulation in competitive markets is unusual and contrary to the spirit of competitive markets, as it assumes a presumptive approach by pre-regulating markets. It appears the Draft Bill has overlooked measures required for strengthening the existing regulatory regime and is focused on categorizing a specific market to bring in a new regulation. Consequently, its thresholds shall have to be constantly monitored and amended in view of evolving trends which for now are inclined towards growth of digital markets. This is precisely the limitation of ex-ante regulations – prevailing circumstances may change rapidly, while legislations and regulations may take time to be enforced, leading to confusion.
In other jurisdictions the development of digital economies may possibly be at an advanced stage, but Indian digital economy is still nascent. Although the future looks promising, markets here are still adapting to the existing regulations and preparing to conform to upcoming ones, like the new Digital Personal Data Protection Act. While awaiting the enforcement of regulations to streamline processing and usage of data amongst big tech enterprises in India, a regulation seeking to strike even before the occurrence of anti-competitive behavior, is far-fetched and seems to be based on an incomplete understanding of digital markets.
Author
Shatakshi Vats
[1] See here – https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/europe-fit-digital-age/digital-markets-act-ensuring-fair-and-open-digital-markets_en (last accessed on January 9, 2025)
[2] See here –
https://www.mca.gov.in/bin/dms/getdocument?mds=gzGtvSkE3zIVhAuBe2pbow%253D%253D&type=open (last accessed on January 09, 2025)
[3] See here – https://sansad.in/getFile/lsscommittee/Finance/17_Finance_60.pdf?source=loksabhadocs (last accessed on January 09, 2025)
[4] An economic principle which illustrates that increase in the number of users of a product or service, leads to an improvement in its value.
[5] Recital 3 of the DMA.
[6] See here- https://digital-markets-act.ec.europa.eu/about-dma_en (last accessed on January 09, 2025).
[7] These include online search engines and various services including online social networking, video-sharing platforms, interpersonal communications, operating systems, web browsers, cloud, advertising and online intermediation.
[8] Please see here – https://www.americanbar.org/content/dam/aba/publications/antitrust/comments-reports-briefs/2024/joint-comments-india-bill-digital-competition.pdf (last accessed on January 9, 2025)