Ex ante regulations and obligations
ABSTRACT:
The Draft Digital Competition Bill. The CDCL has aimed to design DCB In a manner where it complements the existing framework, the Competition Act with a set of ex-ante measures. The DCB aims to proactively monitor and regulate the conduct of large digital enterprises, to achieve the desired outcome of ensuring fair competition and consumer protection.
The protracted delays in the investigation, particularly when it comes to digital economy players, has globally led some competition regulators to consider whether the traditional tools of antitrust of an ex post facto analysis and penalising companies for a violation in fast-moving digital markets well after an alleged violation is nearly enough. Europe has been the frontrunner and introduced the Digital Markets Act (DMA) in September 2023, which currently has designated six players— Alphabet, Amazon, Apple, Meta, Microsoft & Bytedance —as “gatekeepers”, and likely two potential gatekeepers, viz. Booking and X in the offing.
The DMA, in a nutshell, is pre-emptive and a classic case of precautionary antitrust premised on the principle of “fairness and contestability”—neither being defined by objective standards. The notion of “one size fits all” with the DMA uniformly prescribing principles is fundamentally flawed and completely untested. It also ignores market realities. Some markets on their own will result in smaller number of players such as telecom or airlines on account of economies of scale.1 Proponents of the DMA also presume that digital market structures are such that firms are incentivised to behave with a “winner takes it all” approach and markets necessarily tip in favour of these incumbent firms. To prevent harm, an ex-ante regulation is the need of the hour—this is their constant refrain. For India, at this stage of its economic trajectory, to want to adopt an untested DMA styled legislation in terms of the new proposed Digital Competition law to govern digital economy players on an ex ante basis may not necessarily yield the desired results. Given the current backlog of regular competition cases in courts, introducing a DMA-like legislation will not serve to fix the issue of “delays in investigation” without correspondingly addressing the lack of dedicated competition benches in court, if not a dedicated competition appellate tribunal and competition benches across the country.
INTRODUCTION:
The Competition Act, 2002 is India’s only anti-trust law at the moment. The digital competition law will be an additional legislation, meant exclusively to govern digital markets The draft digital competition bill introduces a new term for big tech firms — Systematically Significant Digital Enterprises. SSDEs are enterprises that offer “core digital services” such as online search engines, social networking services, video-sharing platforms, and so on.
An enterprise can be called an SSDE if has significant financial strength and a significant number of end-users. A key feature of the proposed digital competition law is the
introduction of ex ante regulations. Ex-ante is a method of evaluation, wherein the regulator predicts a violation of anti-trust law before it happens based on a company’s business conduct. Expost is when the regulator penalises a company after it is found to be in violation of antitrust law.2
On 12 March 2024, the Ministry of Corporate Affairs, Government of India (MCA) unveiled the Committee on Digital Competition Law (CDCL) Report (Report) and the draft of the Digital Competition Bill (DCB) that the CDCL has proposed. The CDCL was formed on 6 February 2023, driven by the report prepared by the Standing Committee on Finance (Standing Committee Report 3which highlighted (1) ten specific anti- competitive practices that digital enterprises engage in; (i) challenges associated with regulating digital markets in a manner consistent with traditional markets: (ii) suggestions on revamping the Competition Commission of India (Commission), and (iii) introduction of a Digital Competition Act (DCA) to ensure a fair, transparent and contestable digital ecosystem.
Accordingly, the MCA constituted the CDCL and tasked it with reviewing the existing antitrust regime in India (the Competition Act 2002) (Competition Act), and evaluating the need for an ex-ante competition framework for digital markets in India. Through the course of the year, the CDCL4: (1) held in- depth discussions with various stakeholders spanning big tech companies such as Amazon, Google and Paytm (2) analysed the feasibility of a specific regulation for digital markets for India, relying on practices adopted globally, and (iii) deliberated on the extant framework in India, albeit sector- specific, for regulating digital entities, among others.
The CDCL observed that digital markets are typically characterized by rapid evolution network effects and a tendency to transform Into “winner-takes-all” markets. This could have a chilling effect on competition in digital markets, given that these are structured in a way where dominant market players tip the markets in their favour even before fail-safe protocols under the extant competition law framework kick in. Additionally, the CDCL also observed that there are various limitations under the extant framework such as: (1) time-consuming nature of ex-post Investigations and, (2) narrow remedies, focussing on addressing case-specific issues without focussing on correcting behaviour on a wider scale, among others.
In light of the aforementioned, the CDCL made the following key recommendations (in line with the Standing Committee Report) which include inter alia: (1) Introduction of a de-novo DCA, enabling the Commission to selectively regulate large digital enterprises, (2) institution of qualitative and quantitative criteria for designating an enterprise as a Systemically Significant Digital Enterprise (SSDE); and (3) adoption of a flexible principle-based framework for identification of anti-competitive practices.
FEATURES OF THE ACT:
A key feature of the proposed digital competition law is the introduction of ex ante regulations. Ex-ante measures under the proposed Digital Competition Bill will empower the CCI to discipline big tech players that are designated as SSDEs, by placing the onus on them to self-assess their compliance. To implement ex-ante regulations, the committee has provided certain obligations that SSDEs must necessarily comply with. These include establishing transparent and effective complaint handling and compliance mechanisms, operating in a fair and transparent manner, not using non-public user-data, and not restricting third party applications, among others. An elaborate set of obligations are expected to be released in the subordinate legislation, once the digital competition law is enacted.
- Scope and Applicability: The DCB has a pre-identified list of Core Digital Services, which the Central Government in consultation with the Commission could revise from time to time. A digital enterprise: (i) providing a specific Core Digital Service, and (il) fulfilling the quantitative or qualitative criteria set out under Section 3 of the DCB5, is identified as a SSDE. Interestingly, the DCB also introduces the concept of an Associate Digital Enterprise (ADE), under which group entities of a SSDE/entity proposed to be designated as a SSDE would also under the ambit of the DCB, if such group entities are also engaged in the provision of a Core Digital Service6.
- Obligation to self-assess and designate: The DCB requires enterprises to self- assess their designation as a SSDE based on the quantitative thresholds set out above. The Commission Is also empowered to call for information from any enterprise and assess if it meets the quantitative thresholds or qualitative thresholds Given that qualitative thresholds are subjective in nature, an entity could be designated an SSDE on that basis only by Commission.7
- Obligations of a SSDE/ADE under the DCB: The DCB prescribes an agile and principle-based framework of ex-ante obligations. The DCB contains certain widely-worded obligations which would act as a principle-based framework on which the Commission can frame bespoke regulations with detailed conduct requirements. The Commission can further specify differential obligations for different entities given the nature of market, number of users or any other relevant factor. The obligations listed in the DCB are: (i) fair and transparent dealing with end users and business users, (ii) no self-preferencing vis-à-vis third- party business users; (iii) no restrictions on third-party party applications, (iv) anti- steering, (v) no tying and bundling; and (vi) restrictions on non-public data usage of business user/end user data. While DCB provides that conduct-based requirements are applicable on both SSDES/ADEs, keeping in mind the fact that an ADE may not impact the markets In the way that a SSDE can, the Commission has the power to specify differential obligations for an ADE8
- Penalties under the DCB: In line with the extant penalty regime under the Competition Act, the DCB prescribes penalties for various non-compliances such as (1) failure to comply with the orders of the Commission, (ii) failure to self-assess and identify as a SSDE, and (ii) failure to comply with the obligations under the DCB and the relevant regulations. The maximum penalty payable under the DCB is 10% of the global turnover of the SSDE. Where the SSDE is a part of a group of enterprises, the global turnover will be determined based on the turnover of the entire group. Additionally, the DCB also prescribes penalties for individuals helming the affairs of the SSDE such as directors managers, secretary among others.9
- Investigation by the Director General Commitment and Settlement: Mechanism Aligning with the enforcement framework under the Competition Act, the DCB also emphasises on the importance of the Director General (DG) in Investigating potential non-compliances. The DG Is compulsorily required to investigate each instance of noncompliance under the DCB on a reference from the Commission Further, in line with the amendments to the Competition Act, the DCB also envisages a commitment regime10 and a settlement regime. Aimed at ensuring a quick redressal of non-compliance with obligation proceedings, the DCB provides that the specific SSDE/ADE (subject matter of an inquiry into a failure to comply with the obligations under the DCB and the regulations) can either: (1) submit an application for settlement prior to issuance of a final order on the contravention by the Commission or (ii) While DCB provides that conduct-based requirements are applicable on both SSDES/ADEs, keeping in mind the fact that an ADE may not impact the markets In the way that a SSDE can, the Commission has the power to specify differential obligations for an ADE.11
POSITIVE OUTCOME OF THE ACT:
The proposed digital competition law, if brought into force in its current form, will give more teeth to India’s anti-trust regulator, the Competition Commission of India (CCI). Tech companies such as Apple, Amazon, Flipkart, Zomato, Google, etc., are likely to be affected if the law comes into play. The bill aims to bring in regulations for bigger companies based on their turnover, gross merchandise value (GMV), global market capitalisation, number of users, and other factors. The regulatory framework to effectively regulate digital markets in a timely manner and ensure they remain competitive, the report of the Committee on Digital Competition Law (CDCL) has recommended the enactment of an ex-ante law to supplement the existing ex-post regime.
CRITICISM:
The recommendations introduce certain onerous obligations on digital companies without following the usual process of an investigation to find whether there is a violation of law or not. These recommendations, if implemented, will increase the cost of doing business in India. The Digital Competition Bill lays down the broad contours of the regulations that the CCI can prescribe. While the Committee on Digital Competition Law (CDCL) recommends12 that different sets of obligations be introduced for different business models, like cab aggregators, food aggregators, etc., there is no clarity on how narrowly these obligations would be crafted. Additional compliance obligations would mean additional financial burden on these companies, who may have to spend more time, resources, and capital to comply with the new set of laws /regulations. It is hoped that a balance is struck between the need for regulation and the unique realities of the Indian economy, to avoid unintended consequences so that Indian consumers do not end up with a medicine that is worse than the disease. This might hamper growth and innovation in the industry.
CONCLUSION:
The DCB does not bar concurrent proceedings for the same conduct under the Competition Act as well as the DCB. However, if parallel proceedings result in multiple penalties for the same conduct, it is expected that the penalty guidelines under the DCB would appropriately temper the penalties following the proportionality principles of the DCB relies heavily on the robust procedural framework provided under the Competition Act and as such incorporates the pre-settled framework for enforcing obligations under the DCB Additionally, much like the Competition Act, the DCB Is envisaged to have extra-territorial application i.e., irrespective of whether: (1)- the enterprise is present outside India, or (ii) the matter/action arising out of the enterprise’s conduct is outside India, the Commission has the power to cause an Inquiry against such enterprise for non- compliance of the DCB or the regulations framed thereunder.
Interestingly, the appellate tribunal for the purposes of the DCB is the National Company Law Appellate Tribunal (‘NCLAT”), which is already identified as the appellate tribunal for the purposes of the Competition Act Finally, the DCB also envisages a limitation period of 3 years (calculated from the date on which the cause of action arises) for any information or reference filed by a complainant, with an exception for sufficient cause. This is in line with the amended Competition Act which also provides an identical limitation period, with an identical exception for sufficient cause.
The Report and the DCB represent a momentous step forward in India’s pursuit of establishing a robust, competitive, and equitable digital ecosystem. The proposed adoption of a customized and tailor-made ex ante regulatory framework underscores the government’s unwavering commitment to addressing the unique challenges prevalent in India’s digital markets with the DCB set to undergo an extensive public consultation process, voices from across the spectrum, including smaller digital entities, Innovators, and larger digital entities potentially designated as SSDEs, will be heard. This consultative process is expected to yield a regulatory framework that not only safeguards fairness and competition but also encourages the proliferation of novel digital offerings, thereby propelling India’s digital landscape forward.
Notes:-
1 Chapter IV: A Fit-For-Purpose Competition Regime for the Indian Digital Economy, CDCL Report
2 Anti-Competitive Practices by Big Tech Companies, 53 Report, Standing Committee on Finance.
3 Chapter (II) Indian Regulatory Landscape for Large Digital Enterprises Efficacy and Gaps, CDCL Report.
4 Chapter (II) Indian Regulatory Landscape for Large Digital Enterprises Efficacy and Gaps, CDCL Report.
5 Section 3(4), DCB
7 Chapter III: Obligations on Systemically Significant Digital Enterprises and their Associate Digital Enterprises, DCB
8 Proviso to Section 7(3), DCB
9 Chapter VI: Penalties, DCB
10 Section 18, DCB
11 Section 19, DCB
12 Chapter IV: A Fit-For-Purpose Competition Regime for the Indian Digital Economy, CDCL Report
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