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MCA invites public comments on Report of Committee on Digital Competition Law and Draft Bill on Digital Competition Law

The Ministry of Corporate Affairs (MCA) had constituted Committee on Digital Competition Law (CDCL) on the recommendations of 53rd report of the Parliamentary Standing Committee on Finance on the subject titled ‘Anti- Competitive Practices by Big Tech Companies’ under the chairmanship of Secretary, MCA, to examine the need for a separate law on competition in digital markets. The Committee has submitted its report along with the Draft Bill on Digital Competition Law.

The MCA is inviting public comments on the said report and the Draft Bill. The Report is placed under the section ‘Data & Reports [Reports>>>Library(Expert Committee Reports)]’ on the website of MCA and may be accessed at:

https://www.mca.gov.in/bin/dms/getdocument?mds=gzGtvSkE3zIVhAuBe2pbow%253D%253D&type=open

Copy of the same may also be accessed on the website of MCA under ‘e-Consultation module’ and comments/suggestions, if any, may be submitted on this module upto 15.04.2024.

EXECUTIVE SUMMARY

The Competition Act, 2002 (Competition Act) primarily envisages an ex-post framework of intervention wherein the Competition Commission of India (CCI) intervenes after the occurrence of an anti-competitive conduct. Such a framework was designed at a time when the extent and pace of digitalisation as is witnessed today could not be foreseen.

India has seen rapid digitalisation in the recent past owing to internet accessibility. With more than 759 million reported active internet users, India has swiftly become home to large digital market segments catering to users across sectors such as healthcare, financial services, and retail. The growth of digital markets has also given rise to large digital enterprises, which often operate as platforms that provide services on multiple sides of a market.

Large digital enterprises and their unique business models have prompted a variety of anti-competitive concerns that have been brought forth before the CCI. These include unilateral and opaque policies on search rankings, and anti-competitive usage of aggregated data.

Against this backdrop, the Parliamentary Standing Committee on Finance presented the 53rd Report on “Anti-Competitive Practices by Big Tech Companies” before the Lok Sabha on 22nd December 2022 (Standing Committee Report).

The Standing Committee Report identified ten predominant anti-competitive practices (ACPs) by large digital enterprises and examined the need for strengthening India’s competition framework to address such practices. The Standing Committee Report acknowledged that the dynamics of digital markets are underpinned by robust network effects and increasing returns to scale. This often leads to a ‘winner-takes-most’ outcome where a leading player adopts strategies that curtail market contestability, which reinforces its strength. As such, digital markets bear the risk of becoming irreversibly polarized in favour of the incumbent.

The Standing Committee Report also observed that an ex-post approach may not be sufficient to remedy such conducts in fast-paced digital markets. It recommended that the behaviour of large digital enterprises should be monitored ex-ante, with an emphasis on preventing such anti-competitive conducts from occurring. It further recommended the introduction of a ‘Digital Competition Act’ to create a fair, transparent, and contestable digital ecosystem.

Following the Standing Committee Report’s recommendation, the Ministry of Corporate Affairs constituted the Committee on Digital Competition Law (Committee) to inter alia review whether existing provisions in the Competition Act are sufficient to address the challenges in the digital economy and to examine whether an ex-ante digital competition law is required.

During its deliberations, the Committee took note of the enforcement practice of the CCI; the recommendations put forth in the Standing Committee Report; and the submissions it received from stakeholders on the need for an ex-ante competition framework for digital markets. The Committee further examined various sector-specific regulatory instruments that govern digital enterprises in India, and emerging international practices on ex-ante competition frameworks.

The Committee found that the ex-post model of regulation under the Competition Act, by design, involves fact-finding and inquiry processes which are time-consuming. Protracted enforcement proceedings hinder early detection and redressal. Given the tendency of digital markets to tip swiftly in favour of an incumbent, the Committee recommended a regulatory strategy focused on preventing anti-competitive conducts.

The key recommendations of the Committee are outlined below:

(i) Introduction of a Digital Competition Act with ex-ante measures: The
Committee recommends the introduction of an ex-ante legislation specifically applicable to large digital enterprises, to supplement the Competition Act. Such an ex-ante law should ensure that behaviors of large digital enterprises are proactively monitored, and that the CCI intervenes before instances of anti­competitive conduct transpire. A draft of the legislation (Draft DCB) as prepared and deliberated upon extensively by the Committee is enclosed as Annexure IV.

(ii)Scope and applicability: The Committee proposes that the Draft DCB should apply to a pre-identified list of Core Digital Services that are susceptible to concentration. The Committee recommends that this list is drawn up basis the CCI’s enforcement experience, market studies, and emerging global practices. Keeping in mind the pace at which digital markets are progressing, such a list is proposed as a Schedule to the Draft DCB in order to allow timely updation by the Central Government.

(iii) Regulation of digital enterprises with ‘significant presence’: The Committee recommends that the Draft DCB should only regulate enterprises which have a ‘significant presence’ in the provision of a Core Digital Service in India and the ability to influence the Indian digital market. The Committee recommends designating such enterprises as “Systemically Significant Digital Enterprises” (SSDEs).

(iv) Thresholds and criteria for designation as SSDEs: An enterprise is deemed an SSDE if it passes a twin test demonstrating ‘significant presence’: (a) the ‘significant financial strength’ test which comprises quantitative proxies of economic power, i.e. India-specific turnover, global turnover, global market capitalisation, and gross merchandise value; and (b) the ‘significant spread’ test which evaluates the extent to which an enterprise has been present in the provision of a Core Digital Service in India on the basis of the number of end-users and business users. The Draft DCB obligates enterprises to self-assess their fulfilment of these thresholds and report the same to the CCI. Additionally, the Draft DCB envisages residuary powers for designation in the form of ‘qualitative’ criteria for designating certain enterprises as SSDEs that do not meet the quantitative thresholds but nonetheless have the ability to significantly influence the market in which they operate.

(v) Associate Digital Enterprises: The Committee recommends that in cases where
enterprises providing Core Digital Services are part of a group, designation may not be limited to just one enterprise in the group. Depending on the involvement of different enterprises within the group in providing a Core Digital Service, the Committee envisages two scenarios: first, where the holding enterprise is designated as an SSDE and other enterprises within the group, directly or indirectly involved in provision of the same Core Digital Services, are designated as Associate Digital Enterprises to the SSDE (ADEs); and second, a non-holding enterprise most directly involved in providing the Core Digital Service is designated as an SSDE and its holding enterprise and other group entities directly or indirectly involved in providing the same Core Digital Services are designated as its ADEs. In this regard, the Committee recommends that the CCI be given flexibility to identify the appropriate enterprises for SSDE and ADE designations.

(vi) Obligations: The Committee recommends an agile and principle-based framework of ex-ante obligations under the Draft DCB. The specificities of the obligations as applicable to each Core Digital Service would be specified through regulations drafted by the CCI through a consultative process. The Committee, cognisant that not all SSDEs and ADEs providing the same Core Digital Service have the same degree of influence on the market within which they operate, recommends that the regulations may provide for differential obligations upon different SSDEs and ADEs depending on factors such as their business models and size of their user base.

(vii) Exemptions: The Committee recommends that the grounds for exemption from complying with the ex-ante obligations should be provided for in the statute itself. The features of such exemptions should be specified through regulations framed by the CCI, taking into account the particular Core Digital Service and related business models of SSDEs and their ADEs. The Committee also recommends including a provision similar to Section 54 of the Competition Act exempting certain classes of enterprises from the applicability of the statute.

(viii) Enforcement: The Committee recommends borrowing the procedural framework from the Competition Act for the purposes of the Draft DCB, given that the enforcement of both these laws is to be entrusted with the CCI. The Committee also strongly advises that the CCI must strengthen the capacity of its Digital Markets and Data Unit with experts from the field of technology to keep pace with the rapid evolution of digital markets. Further, the Committee recommends instituting a separate bench within the National Company Law Appellate Tribunal to ensure timely disposal of appeals filed against the CCI’s orders, particularly those relating to digital markets.

(ix) Remedies: The Committee proposes that a monetary penalty for non-compliance with ex-ante obligations is restricted to a maximum of 10% of the global turnover of the SSDE in line with the penalty regime under the Competition Act. Additionally, in cases where the SSDE is part of a group of enterprises, the Committee recommends that the ‘global turnover’ cap is calculated in relation to the turnover of the entire group. The Committee further recommends that the precise quantum of penalty be determined by the CCI with due regard to the penalty guidelines under the Draft DCB. In addition to the above, separate penalties have been provided for contraventions resulting from incorrect reporting and vicarious liability of key managerial persons.

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