23 April 2024

Regulation Of Enterprises In Core Digital Service Areas: Analysing The Draft Digital Competition Bill



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In February 2023, the government of India established a committee tasked with examining the need for a separate law to regulate competition in digital markets.
India Antitrust/Competition Law
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In February 2023, the government of India established a committee tasked with examining the need for a separate law to regulate competition in digital markets. The Committee on Digital Competition Law was formed to conduct an in-depth investigation and submit a detailed report on the matter.

The Committee was established under the guidance of the Parliamentary Standing Committee on Finance, which identified anti-competitive practices by large technology companies in December 2022. The Committee recommended ex-ante regulations for digital markets to prevent such practices from occurring, in contrast to the existing ex-post framework under the Competition Act, 2002.

On February 27, 2024, the Committee submitted its report to the finance minister, with feedback given by various stakeholders, the existing and evolving legislative landscape in other jurisdictions, as well as the Draft Digital Competition Bill ("draft Bill"). On March 12, 2024, the Ministry of Corporate Affairs released the draft Digital Competition Bill, 2024, inviting public consultation. The draft Bill aims to regulate and promote competition in the digital sector, which has grown rapidly in recent years and has a significant impact on the Indian economy.

The draft Bill also aims to create a mechanism to identify Systemically Significant Digital Enterprises (SSDE) along with their Associate Digital Enterprises (ADE) and create a framework of regulations that the SSDE and ADE must comply with so as to create a competitive digital landscape nullifying the advantages gained by SSDE and ADE on account of their frequency and volume of transactions which makes them dominant market players in their respective core digital service areas. This article provides a comprehensive overview of the effects of the Bill on enterprises that are engaged in providing Core Digital Services.

Core Digital Services

A "Core Digital Service", as per Schedule I of the draft Bill, 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.

Systemically Significant Digital Enterprises (SSDE)

Section 3(2) of the draft Bill states that an enterprise will be labelled as an SSDE with respect to a core digital service if it meets the dual test of financial strength and market spread.

First, an enterprise must meet any of the following financial thresholds in each of the immediately preceding three financial years:

  1. turnover in India of not less than INR 4000 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 calculated in such manner as may be prescribed.

Further, the enterprise must also meet the following user threshold in each of the immediately preceding three financial years in India:

  1. the core digital service provided by the enterprise has at least 1 crore end users or
  2. the core digital service provided by the enterprise has at least 10 thousand business users.

The Central Government shall, after every 3 years, review and redefine the financial threshold and user threshold values in consultation with the Competition Commission.

The SSDE must furnish requisite data to demonstrate its financial and user thresholds for each of the previous three years. Failure to furnish the above data will automatically cause the enterprise to be deemed an SSDE if it meets any of the thresholds mentioned above in respect of either of the categories of financial or user threshold.

Additionally, the Competition Commission may designate an enterprise as an SSDE for a Core Digital Service, even if it does not meet the criteria set out above, if the Commission considers the enterprise to have a significant presence based on an assessment of factors such as volume of commerce, size, resources, number of end users and business users, economic power, the dependence of end users on the service rendered, monopolistic position and barriers to entry or expansion such as regulatory barriers, financial risk, high cost of entry, marketing costs, technical entry barriers, barriers related to data leveraging, economies of scale and scope, high cost of substitutable goods or services for end users or business users; lock-in period including high switching cost and behavioural bias, network effects, data-driven advantages of scale and scope, etc.

Further, Section 4 of the Bill requires an enterprise to report to the Competition Commission that it qualifies as an SSDE within 90 days of achieving the thresholds mentioned in Section 3 with respect to one or more categories of Core Digital Services. All SSDE shall also inform the Commission of any enterprises within their group that qualify as ADE for any categories of Core Digital Services.

At any time during the last 6 months before the expiry of its designation period or re-designation, the SSDE may apply to the Commission that it no longer meets the thresholds to be designated as an SSDE for any of the Core Digital Services or that it no longer needs to be designated as an SSDE. Within 90 days of receiving the SSDE's application, the Commission may revoke the enterprise's designation as an SSDE or dismiss it if it fails to meet the requirements.

Once an enterprise is notified as SSDE or ADE by the Competition Commission, the following obligations have to be fulfilled by an SSDE and ADE. The obligations under Section 7 of the Bill shall become enforceable only after the details of the regulations to be adhered to are notified. These Regulations shall be made keeping in mind the following aspects:

  1. economic viability of operations;
  2. prevention of fraud;
  3. cybersecurity considerations;
  4. prevention of unlawful infringement of pre-existing IPRs;
  5. requirement of any other law in force, etc.

Further, under Section 8, SSDE and ADE are obligated not to indulge in activities that may circumvent their obligations under this Bill. This means that the enterprise must not engage in any contractual, commercial, technical, or other activity to circumvent the thresholds and the obligations associated with them.

Section 9 outlines the compliance and reporting obligations of the SSDE and ADE that must be adhered to, failing which there can be pecuniary penal consequences. Section 10 outlines the requirements for fairness, non-discrimination, and transparency in online business dealings of SSDE and ADE as far as end users and business users are concerned.

Under Section 11, SSDE is obligated not to directly or indirectly indulge in Self-Preferencing, i.e., favouring or preferring the services or products of the SSDE itself or its related parties. This includes third parties that have contractual arrangements for the manufacture and sale of products and services of the SSDE or its group companies and related parties.

Thereafter, Section 12 of the Bill prohibits SSDE from utilising the customer or user data gathered from the use of the Core Services to compete with other service providers in the same Core Service Area. In this regard, the requirement of consent for the use of the Personal Data of the End User is mandated as per the requirements of the Digital Personal Data Protection Act, 2023 and no cross-usage of data or sharing of data with a third party is permitted unless valid and express consent from the Data Principal who is the end-user has been duly obtained and recorded by the SSDE. Further, the SSDE must not obstruct the portability of data from one service provider to another by the end user in the event of a decision to switch to a different service provider. These provisions are meant to create a level playing field for new entrants in the Core Service Area.

Section 13 of the Bill further obligates the SSDE not to hinder or impede end users and business users from downloading, installing, operating, or using Third-Party Applications or other software on its Core Digital Service Areas and to allow them to choose, set, and change default settings.

Section 14 of the Bill deals with Anti-Steering, i.e., it prohibits SSDE from restricting business users from communicating offers and promotions directly or indirectly to end users to increase their business prospects unless the activities are specifically prohibited by any Government regulation that may be issued from time to time under the Bill.

Lastly, Section 15 deals with Tying and Bundling and prohibits incentivising for the end user or business users a bouquet of services and products of the SSDE and its group companies, related parties or third-party suppliers to the detriment of other non-related service providers providing similar products and services. The remaining sections of the Bill discuss the procedural aspects of examining complaints, how penalties will be imposed, and how appeals against these decisions can be filed.

The Commission may impose penalties of up to 10 per cent of the global turnover in the preceding financial year of the SSDE or ADE if they fail to comply with their obligations. However, for certain acts, the Commission may impose a penalty of up to 1 per cent of the global turnover of the enterprise. These acts may include providing incorrect, incomplete or misleading information or omitting information required under the different provisions.

The Draft Digital Competition Bill has been meticulously crafted to establish a fair and level playing field for new entrants in the digital space. Its primary objective is to incentivise fintech companies and start-ups to tap into the virtual landscape with their offerings, and to remove any impediments that may hinder their progress. Through this Bill, the government aims to create an environment that promotes innovation and growth by ensuring that all participants have an equal opportunity to succeed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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