Digital Competition Laws: Beginning of a new era

India, a rapidly growing nation, has become a dwelling place for large digital market segments leading to exponential growth in digital markets in India, giving rise to various intricacies revolving around ‘large digital enterprises’ and a consequent increase in unfair trade practices, violations of consumer rights, and unilateral and discriminatory policies. With the expansion of commercial activities in digital space, the need was felt to put in place suitable guards as ex-ante measures, in place of the existing ex-post measures for the enforcement of competition law. A need was felt to implement new and strong regulations in the fast-growing digital economy, as big enterprises are likely to use their scale, size and influence inter-alia to restrict new players from entering the market or employ restrictive/ unfair trade practices. 

Against this backdrop, a Committee on Digital Competition Law (“CDCL”) was entrusted with the following tasks:

a) To review the Competition Act with regard to the contemporary digital economy.

b) To analyse the regulatory model of ex-ante through separate legislation.

c) To examine the international approach against digital markets.

d) To study various government policies, mechanisms and regimes related to digital markets.

e) To scrutinize the leading players and their practice.

f) To research any other matters pertaining to competition in digital markets.

Pertinently, in order to suggest measures to be built-in within the competition law, a Parliamentary Standing Committee (“the Standing Committee”) was formed to present a report on “Anti-Competitive Practices by Big Tech Companies.” The said Standing Committee presented a report, pointing out ten predominant Anti-Competitive Practices (ACPs) by large digital enterprises along with the need to strengthen competition laws in India.

As per the report, the rapid growth in the digitalization of markets affects the market drastically by showing strong ‘network effects’ of large digital enterprises leading to ‘winner-takes-most’ outcome. The Committee recommended the need to bring a comprehensive ex-ante model of competition law to deal with present-day digital markets. The primary highlight of the report involves a recommendation by the Committee to introduce a new legislation called the ‘Digital Competition Act’ to strike a balance between certainty and flexibility. The proposed legislation defines certain key terminologies denoting the nature of services/ products and the nature of enterprises finding applicability under the legislation, and lays down measures for the implementation of lawful recourse, which are highlighted as under.

Core Digital Services (CDS) - The Standing Committee recommends that draft bill of the proposed legislation should be applicable to pre-identified Core Digital Services (CDS). The non-exhaustive list of CDS has been specified in Schedule I of the proposed legislation and the list includes, (i) online search engines; (ii) online social networking services; (iii) video-sharing platform services; (iv) interpersonal communications services; (v) operating systems; (vi) web browsers; (vii) cloud services; (viii) advertising services; (ix) online intermediation services (includes web-hosting, service providers, payment sites, auction sites, app stores, e-commerce marketplace and aggregators, etc.).

Systemically Significant Digital Enterprises (SSDEs) - Under the proposed legislation, the enterprises providing CDS may be designated as Systemically Significant Digital Enterprises (SSDEs) if they attract the prescribed condition(s), and the proposed legislation aims to regulate only those enterprises which have a significant presence in the market. An enterprise would be identified as an SSDE if the following two thresholds are attracted:

1. Financial Threshold – If the enterprises achieved any of the four following conditions during the preceding three financial years :

   • Turnover in India greater than INR 4000 crore (USD 482 million), or

   • Global turnover greater than USD 30 billion, or

   • Gross merchandise value in India greater than INR 16000 crore, or

   • Global market capitalisation greater than USD 75 billion.

    

2. User Threshold – If the enterprises achieved any one of the following two conditions consistently for a period of three financial years.

   • The CDS provided by the enterprises has more than 1 crore (10 million) end-users in India, or

   • The core digital service provided by the enterprises has more than 10,000 business users in India.

Residuary Powers with the CCI - Further, the proposed legislation envisages that Competition Commission of India (CCI) can designate any enterprise as an SSDE even if it doesn’t qualify aforesaid tests/ thresholds, in the form of ‘qualitative’ criteria - that is, if the Commission believes that such enterprise has a significant presence in respect of a Core Digital Service, on the basis of an assessment of the information available with it and based factors like economic power of the enterprise, integration with other markets, dependence of end-users on the enterprise, barriers to entry, lock-in effects, network effects, social costs, etc. Before exercise of such power by CCI, to comply with the principles of natural justice, the enterprise will be allowed an opportunity to explain why it should not be designated as an SSDE.

Associate Digital Enterprise (ADE) - Apart from the concept of SSDE, the proposed legislation takes into account the group entity doctrine while proposing to bring under the umbrella the ADEs. If an enterprise being designated as an SSDE is part of a group, and one or more other enterprises within such group are directly or indirectly involved in the provision of the CDS in India, the CCI may designate these enterprises as ADEs. 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/ consequences that may be imposed on the SSDE.

Obligations of SSDEs and ADEs - The Committee noted that enterprises offering CDS in India are gaining influence and the same needs be regulated. Therefore, the Committee recommended SSDEs and ADEs to comply with ex-ante regulation which includes the following (i) No self-preferencing (ii) No restrictions on usage of third party application (iii) No anti–steering polices (iv) No tying and bundling (v) Fair and Transparent dealing. The said  obligations don’t apply the same way to all the Core Digital Services. The CCI will specify the obligations as applicable to each Core Digital Service through regulations.

Implementation of Ex-Ante Regulation in place of Ex-Post measures - The cornerstone of the Competition Act is to prohibit Anti-Competitive Practices and abuse of dominance between enterprises. In order to deal with the same, the Competition Act employed the of ex-post measures wherein the remedy was drawn after any anti-competitive practice takes place. However, this method of ex-post has become antiquated as it is not possible to apply the same when it comes to digital space/ markets.

In today’s digitalised world, the need was felt for a legal frameworks to adjudicate the issues timely and in a speedy manner. However, the adjudication process under the ex-post framework is designed neither to facilitate timely nor speedy redressal. Therefore, the Standing Committee recommended to introduce an ex-ante framework to deal with the issues relating to competition laws. Ex-ante is a regulatory model which works as precautionary measure. It means that it acts as a precaution before any anti-competitive activity takes place.

Penalty - The legislation proposes that if the SSDE or ADE is in breach of their obligations or in violation of CCI order issued under the Act, then the CCI is entitled to impose heavy monetary penalty, which may extend to ₹1 lakh for each day of non-compliance to a maximum of ₹10 crores. Further, CCI may also take action against other enterprises that are part of the same group, if it believes they have contributed to the contravention. For calculating the ceiling on penalties, the Committee recommended the use of global turnover of enterprises. The Committee also recommended capping the penalty at 10 per cent of global turnover in the preceding financial year of SSDEs.

Comparative analysis between Digital Personal Data Protection Act and Digital Competition Laws - The Digital Personal Data Protection Act (“DPDP Act”) and the Digital Competition Laws may sound similar. However, the objectives aimed by both the legal frameworks vary to a great extent. The former deals with the protection of personal data of the principal while the latter ensures competition and fairness in the digital market. Although, when it comes to the concept of ‘data’, both the statutes may experience an overlap or become closer, they do not face any conflict while dealing with their goals. Pertinently, the digital data present in the markets through online purchasing of goods and services would be regulated through DPDP Act. Therefore, touching upon the tangent, it was felt necessary to have a separate legislation regarding Digital Competition Laws to avoid any conflict of interests while adjudicating matters related to both the legal frameworks.

Global Perspective as per Report - While India is at a stage of rapid digitalization, so are the other International Jurisdictions. The Standing Committee has also analyzed the angle of anti-trust laws in other countries setting focus on ex-ante regulatory model and its need for enforcement in Indian digital markets. Since there has been a growth in large digital enterprises, bringing in ex-ante regulations has become the need of the hour for businesses as well as consumers. It can be seen that other countries have already started their journey towards the implementation of an ex-ante framework and a few of them have been successful in its enforcement as well.

For instance, the International Jurisdiction of European Union has added ‘ex-ante framework’ through the introduction of Digital Markets Act Regulation which came into force in the year 2022. The said regulation imposes ex-ante obligations on large digital undertakings with regard to anti-competitive activities. In addition, Germany and Australia have also introduced an ex-ante model by bringing in an amendment to their previous anti-trust laws. Moreover, bills and draft guidelines have been introduced in the United Sates of America and China respectively as they are in the process of bringing in ex-ante regulations into force. Further, Japan has also introduced a separate legislation, an ex-ante instrument, called Transparency and Fairness of Digital Platforms which came into force in 2021.

Although, we are inclined towards the implementation of International Best Practices in the Indian Digital Economy, an ex-ante framework is unique in its type. Therefore, it cannot be the same for all the jurisdictions as it may differ in line with every country’s unique and different social, political, and economic requirements.

India’s proposed draft Digital Competition Bill is a step towards implementing effective measures to deal with anti-competitive practices and abuses of dominant position prevalent in the digital business space. As digitalization is flourishing in India, it is both a ‘boon and a bane’ per se. On the one hand, it is a pressing priority and on the other hand, the by-product of digitalization has brought us with regulatory intricacies. On that account the proposed legislation offers to implement specific measures to administer the Indian digital markets.

About the author: Sonali Khanna is a Senior Associate at Hammurabi & Solomon Partners.