Analysing India's Digital Competition Bill And Its Legal Landscape

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The Competition Act, 2002 ("Competition Act") provides a robust legal framework for regulating competition in traditional markets, but there is a notable absence of specific legislation tailored...
India Antitrust/Competition Law
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Analysing India's Digital Competition Bill and its Legal Landscape

The Competition Act, 2002 ("Competition Act") provides a robust legal framework for regulating competition in traditional markets, but there is a notable absence of specific legislation tailored to address the intricacies of competition in digital markets. With the widespread adoption of smartphones, expanding internet connectivity and the government's push towards digitization, digital platforms have witnessed exponential growth across various sectors, leading to new challenges in the digital markets. The concentration of market power in a few dominant players limits competition. Issues such as data privacy, platform dominance of large digital enterprises, quick changes in technology etc. require specialized regulatory interventions to promote competition, innovation, and consumer welfare in the digital economy.

In February 2023, the Committee on Digital Competition Law ("CDCL") was constituted by the Ministry of Corporate Affairs to inter-alia, assess the adequacy of the Competition Act in dealing with the challenges of the digital economy, examine the need for an ex-ante regulatory regime for the digital markets in India and study the international best practices on regulating digital markets. On March 12, 2024, the CDCL published its report ("CDCL Report") which also includes a Draft Digital Competition Bill, 2024 ("Draft Bill") released for public consultation. In this article, we discuss and summarise the key provisions of the Draft Bill along with key recommendations of CDCL Report.

Key Aspects under Draft Bill and CDCL Report:

  1. Introduction of a Digital Competition Act with ex-ante measures: CDCL recommends introducing a de novo Digital Competition Act ("Act") specifically covering large digital enterprises and allowing the Competition Commission of India ("CCI") to monitor and regulate the behaviour of such enterprises in an ex-ante manner i.e., before instances of anti-competitive behaviour occur. The CDCL Report suggests enacting the proposed digital competition law to supplement the existing Competition Act which relies on an ex-post model to regulate anti-competitive behaviour after its occurrence. CDCL considered various anti-competitive practices undertaken by large digital enterprises to abuse and consolidate their position in the digital markets including exclusionary behaviour which prevents business users from moving out of the platform; a platform according favourable treatment to its in-house products; bundling essential services with complementary offerings i.e., forcing consumers to buy related services; using personal data for tracking and profiling customers to offer targeted online services; predatory pricing strategies; controlling search engine algorithms.
  1. Scope and Applicability of Draft Bill: To strike a balance between certainty and flexibility, CDCL recommends that the Draft Bill should apply to an inclusive and pre-identified list of Core Digital Service ("CDS") that is susceptible to concentration and anti-competitive behaviour. Such list should be drawn up based on the CCI's enforcement experience, market studies and emerging global practices.

A list of CDS has been provided in the schedule of the Draft Bill which includes 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. Recognising the dynamic nature of the digital markets, new CDS may be added to the list by the government from time to time.

Further, CDCL recommends that Draft Bill should only regulate enterprises which have a 'significant presence', which shall be designated as Systemically Significant Digital Enterprises ("SSDEs").

  1. Thresholds and Criteria for Designation of SSDEs: The Draft Bill envisages a dual test to determine the entity's significance in the digital markets as stated below:
  1. Significant financial strength test: Any one of the four thresholds below should be fulfilled for the last three financial years to assess the economic strength of the enterprise:
    1. Domestic turnover of not less than INR 4,000 crore; or
    2. Global turnover of not less than USD 30 billion; or
    3. Gross merchandise value in India of not less than INR 16000 crore; or
    4. Global market capitalisation of not less than USD 75 billion, or its equivalent fair value of not less than USD 75 billion.
  1. Significant spread test: This comprises metrics relating to the number of business users or end users of the CDSs in India and any one of the two thresholds below should be fulfilled consistently for a period of three financial years by an entity:
    1. CDS provided by the enterprise should have at least one crore end-users; or
    2. CDS provided by the enterprise should have at least ten thousand business users.

An entity must fulfil either one of the four thresholds under the significant financial strength test along with fulfilling any one of the four thresholds under the significant spread test for the last three financial years to be designated a SSDE.

Additionally, the Draft Bill also envisages residuary powers with the CCI for designation in the form of 'qualitative' criteria such as resources of the enterprise, volumes of commerce of the enterprise, number of business users or end users of the enterprise etc. for designating certain enterprises as SSDEs that do not meet the quantitative thresholds but nonetheless can significantly influence the market in which they operate.

  1. Associate Digital Enterprises: CDCL recommends that the enterprise which forms part of a larger group be required to identify all other enterprises within its group that are directly or indirectly involved in providing the CDS. The enterprise exercising control over the other enterprise providing the CDSs should be designated as the SSDE and other enterprises that are directly or indirectly engaged in the provision of a CDS be designated as Associate Digital Enterprises ("ADEs"). Notably, the Draft Bill stipulates that ADEs shall comply with all the obligations which are to be complied with by SSDEs and non-compliance with such obligations shall be subject to the same penalties that may be imposed on the SSDE.
  1. Self-reporting by SSDEs: The Draft Bill envisages that the digital enterprises should self-assess their fulfilment of the quantitative thresholds and report the same to the CCI in such form and manner as may be specified by regulations. The CCI may then proceed to designate the enterprise as a SSDE. The CCI may also ask any enterprise to furnish details concerning the above thresholds if the enterprise has not voluntarily done so and designate it as a SSDE if it meets the above thresholds. An enterprise will be designated as a SSDE or an ADE for a period of 3 (three) years, which will be automatically renewed unless the SSDE applies for revocation of designation due to no longer meeting the thresholds or if there is a significant change in market dynamics.
  1. Obligations of SSDEs and exemptions: The Draft Bill has imposed several obligations on SSDEs which inter-alia include prohibitions from indulging in anti-competitive practices such as imposing anti-steering policies, engaging in self-preferencing, restricting third-party apps, misusing the data of business users, and bundling products and services. All SSDEs are obligated to institute a transparent grievance redressal mechanism upon designation. All broad principle-based obligations apply to the ADEs as well. However, where ADEs are only indirectly or partially involved, CCI is empowered to specify differential obligations depending on factors such as their business models and size of their user base.

Further, the Draft Bill also empowers the Central Government to exempt certain enterprises or classes of enterprises from the purview of the Draft Bill.

  1. Enforcement and Remedies: The Draft Bill stipulates that where the CCI either on its own or based on a complaint from any person, or on reference from the government, is of the opinion that there exists a prima facie case that a SSDE or ADE is in breach of its obligations under the proposed Act, the CCI shall direct the Director General to conduct investigations. If the inquiry concludes that a SSDE or an ADE is in contravention of the Act, the CCI may issue an order directing any enterprise to discontinue or modify such conduct and/or impose a penalty. CCI may also act against other enterprises which form part of the same group as the violating SSDE if it believes they have contributed to the contravention.

The Draft Bill stipulates a cap on penalty imposed by CCI for non-compliance with the Act at 10% of the SSDE's 'global turnover' in the preceding financial year. Further, in cases where the SSDE is part of a group of enterprises, such global turnover should be calculated as a total of all the enterprises in the group. In some cases, such as failure to self-report SSDE status, not submitting compliance reports to the CCI, or submitting incorrect, incomplete, or misleading information during an inquiry, the fine may be up to 1% of the SSDE's global turnover.

  1. Appeals: The Draft Bill also allows an enterprise to appeal to the National Company Law Appellate Tribunal ("NCLAT") against the CCI's directions and orders within 60 (sixty) days of receipt of the direction or order and after depositing 25% of the penalty amount in case where an amount is required to be paid in terms of the direction or order of the CCI. The enterprise, the CCI or any other aggrieved person can file an appeal against the NCLAT order before the Supreme Court within 60 (sixty) days of the NCLAT's order. It may be noted that CDCL has recommended a separate bench to be instituted within the NCLAT for speedy disposals of appeals relating to the digital markets.

Conclusion

The tendency of the digital markets is to irreversibly tip in favour of the incumbent which results in one or two winners or leading players in a short span of time. The proposal for a new digital competition law is therefore a significant development in regulating India's rapidly evolving digital market. This law when enacted would also complement the existing data protection regime creating a comprehensive framework for the digital age. CDCL has examined existing framework of competition law in India and benchmarked them against regulations in the EU, the US and other major economies. This approach aims to establish a world-class legal framework tailored to India's specific needs.

The introduction of an ex-ante regime focusing on preventing anti-competitive practices upfront is a notable feature. While ex-ante regulations are gaining traction globally, concerns exist around the potential stifling of innovation and abuse of power by controlling governments. However, considering the data consolidation by large digital enterprises and the privacy threats being faced by net citizens, it appears that the current ex-post system, which intervenes after harm occurs, may not be the proactive approach to address the dynamic nature of digital markets, and may fail to timely identify and rectify the losses incurred to fair market competition due to anti-competitive practices of dominant players. Time will tell how effectively the ex-ante approach balances innovation and fair competition. While the Draft Bill adopts the existing adjudication procedure from the Competition Act, some arguments are being made for modifications specific to the digital landscape. This aspect might benefit from further consideration.

LexCounsel provides this e-update on a complimentary basis solely for informational purposes. It is not intended to constitute, and should not be taken as, legal advice, or a communication intended to solicit or establish any attorney-client relationship between LexCounsel and the reader(s). LexCounsel shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained in this e-newsletter. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.

Analysing India's Digital Competition Bill And Its Legal Landscape

India Antitrust/Competition Law

Contributor

“LexCounsel is a corporate and commercial law firm with head office at New Delhi and associate offices in major cities across India. Supported by the strong capabilities and experience of its members, it provides comprehensive legal services to a broad spectrum of corporations in the areas of Corporate & M&A, Private Equity & Funding, Education, Biotechnology, Satellite/Space Law, Food & Health, TMT, Aviation and Defence, Projects & Energy, Restructuring and Insolvency, Dispute Resolution, Real Estate, Taxation, Intellectual Property, Retail, Licensing & Franchising.”
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