[Vikas Kathuria is the Director of the ASCOLA-India Chapter and Professor at the School of Law, BML Munjal University, India. He is also an editor of the IndiaCorpLaw Blog]
India is all set to join the growing number of countries that have crafted level-playing rules for Big Tech firms. The Committee on Digital Competition Law (CDCL), which was constituted by the Ministry of Corporate Affairs to review the existing ex-post regime under the Competition Act, 2002 and to evaluate the need for an ex-ante competition framework for digital markets in India, presented its recommendations earlier this year. The CDCL, after a thorough assessment of the technological and economic features of the digital markets and the limitations of the ex-post tools, as felt in the ongoing cases before the Competition Commission of India (CCI), has presented the Draft Digital Competition Bill (DCB), 2024. This post presents the assessment of the CDCL Report and the DCB.
Background
The need for an ex-ante framework had been voiced by the CCI, which was struggling to employ its ex-post tool to fix the competitive process in digital markets. The growing body of competition law cases before the CCI concerning digital markets is not surprising. When compared by their aggregate level of digitalisation, India ranks as the third largest digitalised country in the world, behind the US and China, and ahead of the UK, Germany and Japan.
The internet penetration increased in India from 13.5 % in 2014 to 52.4 % in 2024. Coupled with India’s status as the most populated country, this makes India a lucrative market for foreign digital firms. The home-grown start-up ecosystem also aims to leverage digital penetration in offering innovative products and services. Government initiativessupport startups in India by easing the regulatory burden and providing support with funding. A Statista Report shows that 12 % of the Indian population is involved in business start-ups. At 87, India has the third-largest number of Unicorns in the World after the United States (739) and China (278). It was, therefore, imperative for the government to move swiftly to level the playing field and ensure consumer welfare in digital markets.
Concerns of the CDCL
The CDCL Report highlights several instances of competition cases in digital markets which despite taking several years have not been finalised. Further, the Report discusses the peculiar technological and economic features of digital markets such as network effects and economies of scale which make them prone to concentration and ‘tipping’. Other concerns that the Report notes are the time-consuming process of defining the relevant market in digital markets and the ability of large digital enterprises—which are not ‘dominant’— to influence markets. Thus, the ‘tipping’ of markets due to underlying network effects is a real fear and has featured prominently in the Report. This part is fairly uncontroversial as several international reports and expert studies have recognised these features of digital markets.
Based upon its findings, the CDCL recommends enacting a de novo Digital Competition Act to selectively regulate Systemically Significant Digital Enterprises (SSDEs) by imposing ex-ante obligations upon them. The CDCL did not have to reinvent the wheel. Just as the competition law framework, which is largely based on the EU competition law, it had a late-mover advantage in the ex-ante framework as well. This is evident not only for the substantive provisions but also for the procedural and institutional framework that the Committee has proposed. Unsurprisingly, one sees the reflection of the EU Digital Markets Act (DMA). What makes this Report remarkable is that it could propose an ex-ante framework despite there being strong opposition. In an emerging market where the Indian state endeavours to attract investment, it is a tough task to create rules for mostly foreign big tech firms. What could have bolstered the Committee is the growing number of local startups in India that have been complaining about the absence of a level playing field.
Framework of the Digital Competition Bill, 2024
The Draft Digital Competition Bill, 2024 proclaims ‘contestability, fairness and transparency’ as the guiding principles. The CDCL Report did not elaborate on ‘fairness and transparency’. It is evident that the Bill has borrowed these principles from the DMA, where fairness features in terms of the relationship of ‘gatekeepers’ with their business users. For instance, prohibiting a ‘gatekeeper’ from using the non-public data of the business users emanates from the ‘fairness’ principle.
The proposed legislation would apply to a pre-identified list of ‘Core Digital Services’ that are susceptible to concentration. For now, this list has nine entries: online search engines; online social networking services; video-sharing platform services; interpersonal communications services; operating systems; web browsers; cloud services; advertising services; and online intermediation services. The Draft Bill terms them ‘Systemically Significant Digital Enterprise (SSDE)’. To identify an SSDE, the Bill proposes a two-pronged threshold test— quantitative and qualitative. The quantitative threshold criterion is further divided into two parts. The first part relates to gauging the ‘significant financial strength’ based on turnover, gross merchandise value and market capitalization. The second part relates to gauging the ‘significant spread’ based on user numbers.
The Bill casts a self-reporting obligation on enterprises vis-à-vis their SSDE designation. Even if an enterprise does not meet the quantitative threshold, the Commission (the Competition Commission of India) may still designate an enterprise as an SSDE in respect of a Core Digital Service based on a long inclusive list of qualitative criteria. An enterprise shall be designated as a Systemically Significant Digital Enterprise for a period of three years.
A Systemically Significant Digital Enterprise is mandated to operate in a fair, non-discriminatory, and transparent manner with end users and business users. The activities that have been prohibited for SSDE are self-preferencing, using or relying on non-public data of business users, restricting third-party applications, anti-steering and tying and bundling. The Commission will follow the same procedure that it does in ex-post cases. Thus, these principles will be examined on a case-to-case basis. In line with the newly introduced settlement and commitment provisions in the ex-post cases, similar provisions have been recommended in the DCB. The appeals from the orders of the CCI will lie before the National Company Law Appellate Tribunal (NCLAT). The Supreme Court of India will be the final avenue for appeals.
The Central Government has been empowered to grant exemptions based on (a) the interest of security of the State or public interest; (b) in accordance with any obligation assumed by India under any treaty, agreement or convention with any other country or countries; (c) if it performs a sovereign function on behalf of the Central Government or a State Government, only in respect of activities relatable to the discharge of the sovereign functions. This exemption is in addition to the exemption that CCI may grant in its regulation based on (a) economic viability of operations; (b) prevention of fraud; (c) cybersecurity; (d) prevention of unlawful infringement of pre-existing intellectual property rights; (e) requirement of any other law in force; and (f) such other factors as may be prescribed. The CCI has been empowered to impose a penalty in case of non-compliance of its orders.
Assessment
The justifications and peculiarities of the DMA are rooted in sound economics. Therefore, it is not a surprise that even the proposed DCB framework is structured similarly. Moreover, the competition law cases in the EU that demonstrated the limitations of the ex-post framework, resonated in India as well. Both in the EU and India, competition regulators struggled with their conventional tools in cases against Google, Amazon, Facebook, and the like.
Flowing from the underlying technological and economic features, the structures of both DMA and DCB tread parallel tracks. The designation of the ‘gatekeeper’ position has a two-prong test, qualitative and quantitative, applicable to those undertakings that provide ‘core platform services’. Further, a self-assessment of the ‘gatekeeper’ position features in both structures. Additionally, the identification of other enterprises which are involved in directly or indirectly providing a Core Digital Service for designating SSDEs (named ‘Associate Digital Enterprises’) is similar to the DMA (see the definition of ‘undertaking’ in Art 2(27) DMA). This is, once again, owing to the business models of digital undertakings which are similar regardless of the jurisdiction.
Unlike the DMA where the rules (dos and don’ts) are divided into two lists—a list of directly applicable requirements (Article 5) and a list of requirements that need to be specified – following a dialogue with the gatekeeper – as they potentially apply in different ways (Article 6), all prohibitions in the Indian framework are principles-based. It means that the gatekeeper firm will have to ensure compliance with the prohibitions in Chapter III of the DCB. Any contravention will then be assessed by the CCI before imposing any prohibition order. Participation with the stakeholders including the gatekeeper will be limited. A reasonable opportunity to be heard is given to the parties (Sec 16 (4)) before the CCI passes any order. Thus, all prohibitions in India are akin to Art 5 rules in the DMA in terms of procedure.
This is starkly different from a ‘participative regulation’ approach that requires continuous engagement with the concerned enterprise and other stakeholders. In the context of digital markets, a regulatory innovation such as participative regulation is a practical necessity. For instance, a requirement that the gatekeeper allow the installation and effective use of third-party software applications may endanger the integrity of the hardware or operating system provided by the gatekeeper. Ideally, the regulatee should be allowed, in a continuous engagement with the regulator, to demonstrate any such risk. Indeed, the DMA has kept the third-party application installation requirement under Art 6. In India, however, the ex-ante machinery will have to run the full course before arriving at any such result. Not only will it increase the regulatory compliance cost of gatekeepers, but it will also further burden the already resource-constrained CCI.
Another area of concern is the broad exemptions provided in the DCB. This is an area that requires scrutiny.
The CCI Needs More Resources
Indeed, an ex-ante framework for digital markets is an idea whose time has come. Enforcement practices of competition regulators over the last decade had demonstrated the limitations of the ex-post regime. While expert reports laid the foundation for the ex-ante framework, the efforts of academia and civil society ensured that this framework saw the light of the day. The success of a regime as complex as this would, however, depend upon the ingenuity and steadfastness of enforcers. The early days of DMA enforcement hold lessons for regulators the world over. Where right from the designation of the ‘gatekeeper’ position to the imposition of obligations, undertakings are allowed to defend (and rightly so), the regulators will have a Himalayan task proving their case.
The EC realizes that the enforcement of the DMA is going to be onerous and hence has planned to recruit staff. The CCI, which is already resource-constrained, needs to follow suit and hire qualified staff for the enforcement of DCA. Importantly, since the assessment has been proposed to fall with the CCI, bias in ex-ante enforcement may seep into ex-post enforcement if the same staff enforces both regimes. Thus, necessary firewalls must be ensured.
– Vikas Kathuria