The Ministry of Corporate Affairs set up the Committee on Digital Competition Law (“Committee“) on February 6, 2023 in order to evaluate the need for an ex-ante regulatory mechanism for digital markets in India, reviewing the current provisions of the Competition Act, 2002 (“Competition Act“), assessing whether they are sufficient to deal with challenges that have emerged from the digital economy, and evaluating whether a separate legislation to regulate digital markets is needed. The Committee released its report on March 12, 2024, and comments have been invited until April 15, 2024.
The Committee was formed following the 53rd Parliamentary Standing Committee Report (“Standing Committee Report”) which, “identified ten predominant anti-competitive practices by large digital enterprises and examined the need for strengthening competition framework to address such practices.” Acknowledging that the dynamics of digital markets are underpinned by robust network effects and increasing returns to scale, the Standing Committee Report found that 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 polarised 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.
The Committee noted that, while the Competition Act primarily currently envisages an ex-post framework for intervention in anti-competitive conduct, the Competition Act was enacted at a time when the, “extent and pace of digitalisation as is witnessed today could not be foreseen.” The Committee further attributed the permeation of internet usage in India to a simultaneous increase in the number of digital market segments in India, including in sectors like retail and healthcare, giving rise to digital enterprises offering services as platforms to multiple segments and sides of a market. However, the Committee clarified that there is a need to strike a balance between increased regulation and allowing for innovation, recommending that the draft Digital Competition Bill regulate only those enterprises that have, “a significant presence and as such, the ability to influence the Indian digital market.”
In the report, the Committee examined the various Indian legislations governing large digital enterprises, including the Foreign Direct Investment Policy, the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, the Consumer Protection Act, 2019 and the Draft E-commerce Policy, 2019. The Committee further examined the regulation of digital markets in jurisdictions, including the ex-ante framework adopted by the European Union, the United Kingdom and the United States of America, and prevailing laws in Australia, Japan, South Korea and China.
The key recommendations of the Committee are set out below:
- Introduction of a Digital Competition Act with ex-ante measures: The Committee found that the current ex-post framework under the Competition Act, did not permit the timely redressal of anti-competitive conduct by digital enterprises. It, therefore, recommended the introduction of an ex-ante legislation for the specific purpose of regulating large digital enterprises and as a supplement to the Competition Act, requiring the Competition Commission of India to intervene prior to the occurrence of anti-competitive practices.
- Systemically Significant Digital Enterprises (“SSDEs”): The Committee further recommended that the draft Digital Competition Bill only regulate digital enterprises with a ‘significant presence’ in providing certain core digital services in India as SSDE’s. To determine whether an enterprise is an SSDE, the Committee recommended using a twin test to determine ‘significant presence,’ namely: (i) significant financial strength looking at factors including the turnover, market capitalisation and gross merchandise value; and (ii) the ‘significant spread’ test, to evaluate the extent of provision of the ‘core digital service’ in India basis the number of users. The Draft Digital Competition Bill requires self-evaluation by enterprises to determine whether the thresholds are met, and to report the evaluation to the CCI. While certain enterprises may not meet the thresholds for designation as an SSDE, the Committee has recommended certain qualitative criteria for designation of such enterprises as an SSDE, including resources of the enterprise and volume of data aggregated.
- Associate Digital Enterprises (“ADEs”): In some cases where group enterprises are directly or indirectly providing ‘core digital services’ with SSDEs, compliance would be required from more than one such enterprise. In such situations, the CCI has been empowered to designate these enterprises as ADEs under the draft Digital Competition Bill.
- Obligations of SSDEs: While the draft Digital Competition Bill prevents SSDEs from: (i) intermixing or cross use of the users personal data, as collected from different services including its ‘core digital service,’ or permit usage of such data by any third party without the consent of the users; (ii) restricting business users from communicating with or promoting offers to their end users, unless the restrictions are integral to the provision of the SSDE’s core digital service; and (iii) requiring users to use one or more of its other products or services, or those of related parties or third parties with whom it has arrangements.
- Remedies: The Committee proposed a maximum monetary penalty of 10% of the global turnover of the SSDE for non-compliance with the draft Digital Competition Bill, in line with the penalty regime under the Competition Act. In cases where the SSDE is part of a group of enterprises, the ‘global turnover’ cap is calculated basis the turnover of the entire group. The penalty amounts will be determined by the CCI in line with the penalty guidelines under the draft Digital Competition Bill.
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