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  • Context (IE): India’s proposed digital competition law aims to stop tech giants from self-preferencing or using data from one company to benefit another.
  • The proposed law is inspired by the European regulatory model.
  • It is designed to prevent anti-competitive practices, ensure transparency, and curb unfair favouritism in the digital sector.
  • The Bill was drafted by a 16-member committee on digital competition law after a year of deliberation.

Key Observations and Recommendations of the Committee

Need for ex-ante regulation of Digital Competition

  • The ex-post framework (intervening after an event occurs) under the Competition Act of 2002 fails to promptly address anti-competitive conduct, highlighting the need for new legislation.
  • The present framework may not be effective in addressing the irreversible tipping of markets in favour of large digital enterprises.

Irreversible tipping of markets

  • A situation where a market undergoes a fundamental and permanent change, often leading to the dominance of a single firm or technology.
  • This can occur due to network effects, economies of scale, or other competitive advantages that make it difficult for new entrants to compete, resulting in a stable market structure that is resistant to change.
  • The Committee recommends the Digital Competition Act, which would empower the Competition Commission of India (CCI) to regulate large digital enterprises ex-ante (intervening before an event occurs), ensuring fair competition.
  • The proposed legislation should regulate only those enterprises that have a significant presence and the ability to influence the Indian digital market.

Systemically Significant Digital Enterprises (SSDEs)

  • Certain features of digital markets enable enterprises to gain influence quickly, this includes:
    1. Collection of user data, which can allow large incumbent enterprises to enter related markets;
    2. Network effects, where the utility of a service increases when the number of users consuming the service increases, and
    3. Economies of scale, wherein incumbents can offer digital services at lower costs as compared to new entrants.
  • The Committee recommended designating entities offering certain core digital services as SSDEs for ex-ante regulation, as these services are susceptible to market concentration.
    • These include search engines, social networking services, operating systems, and web browsers.

Thresholds for Classification of SSDEs

  • The Committee recommended using both quantitative thresholds and qualitative criteria to designate enterprises as SSDEs.

The Quantitative threshold

  • It can be based on a dual test of:
    1. Significant financial strength, gauged from parameters such as turnover, gross merchandise value, and market capitalisation and
    2. Significant spread based on the number of business and end users of the core digital service in India.
  • Digital enterprises fulfilling the quantitative thresholds would have to report the same to CCI, which will then designate them as SSDEs.
    • The quantitative threshold may not cover all digital enterprises that may have a significant presence in Indian digital markets.
  • The Committee recommended that a set of qualitative criteria may be used to designate such enterprises as SSDEs.
    • These criteria include the resources of the enterprise and the volume of data aggregated by them.

Associate Digital Enterprises (ADEs)

  • In some cases, compliance may be required from multiple digital enterprises in a group that is engaged in providing a core digital service.
  • The Committee recommended that notifying enterprises should identify all other enterprises within its group involved in the provision of a core digital service.
  • These enterprises should be designated as ADEs under the proposed framework.

Obligations of SSDEs

  • The Committee recommends prohibiting SSDEs from carrying out certain practices. These include
    1. Favouring their own products and services or those of related parties,
    2. Using non-public data of business users operating on their core digital service to compete with those users,
    3. Restricting users from using third-party applications on their core digital services and
    4. Requiring or incentivising users of an identified core digital service to use other products or services offered by the SSDE.
  • Regulations may allow differential obligations for different SSDEs and ADEs based on factors like business models and user base.

Enforcement of provisions

  • The Bill empowers the Director General, appointed under the 2002 Act, to investigate any contraventions when directed by the CCI.
  • The Committee recommended that CCI should bolster its technical capacity including within the Director General’s office for early detection and disposal of cases.
  • It also recommended constituting a separate bench of the National Company Law Appellate Tribunal for the timely disposal of appeals.

Penalties

  • The 2002 Act provides for behavioural remedies and high monetary penalties to address anti-competitive practices.
  • The GOI has decriminalised various corporate offences to promote ease of doing business.
  • It recommended that contraventions under draft Bill should be addressed by imposing civil penalties.
    • It recommended capping the penalty at 10% of the global turnover of SSDEs.

Digital Competition Bill

  • It specifically prohibits these companies from unfairly favouring their own products or those of related parties.
  • It restricts the misuse of business users’ non-public data.
  • These regulations will apply alongside compliance with the existing Competition Act and the Digital Personal Data Protection Act.

Key Provisions

Predictive Regulation

  • Proposes a preventive (ex-ante) approach instead of the current post-incident (ex-post) regulation.
  • It aims to foresee and prevent potential anti-competitive practices before they occur.

Significant Entities

  • The Bill proposes this for certain “core digital services” like search engines, and social media sites.
  • The CCI will designate “Systematically Significant Digital Enterprises” (SSDE), on various quantitative and qualitative parameters.
  • Criteria include, in the last 3 financial years,
    1. Turnover over Rs 4,000 crore in India,
    2. Global turnover over $30 billion,
    3. Gross merchandise value in India over Rs 16,000 crore, or
    4. Global market capitalisation over $75 billion.
  • SSDEs must have at least 1 crore end users or 10,000 business users.

Prohibited Practices

  • SSDEs cannot engage in self-preferencing, anti-steering, or restricting third-party applications.
  • Violations can result in fines of up to 10% of global turnover.

Associate Digital Enterprises (ADEs)

  • Entities benefiting from data shared by a major tech group will be designated as ADEs.
  • ADEs will have the same obligations as SSDEs.

Need for the Digital Competition Law

  • Big tech companies have a history of anti-competitive behaviour.
    • For instance, Google was fined Rs 1.337 crore for its conduct in the Android ecosystem.
  • The dominance of a few companies creates high barriers for new entrants, limiting innovation within big tech firms.
  • The bill aims to foster competition, which can lead to more innovation outside the big tech companies.
  • The bill aims to level the playing field for smaller businesses struggling against big tech’s market dominance.

Benefits of the Digital Competition Bill

  • Increases Transparency: Requires tech companies to be more transparent in their operations and dealings.
  • Protects Innovators and Startups: Exempts smaller companies and startups from stringent rules, encouraging innovation.
  • Aligns with Global Standards: Follows a similar approach to the EU’s Digital Markets Act, showing an effort to align with international regulatory frameworks.
  • Boosts Digital Economy: By effectively regulating, it supports the growth of India’s digital market, which is expected to reach $800 billion by 2030.

Concerns with the bill

  • Stifling Innovation: There’s a worry that strict regulations could limit creativity and growth in the tech sector.
  • Too Much Power to Regulators: The Bill’s ex-ante approach may give regulators excessive discretionary power, raising concerns about potential misuse.
  • Duplication with Existing Laws: It might overlap with provisions in the current Competition Act, leading to regulatory complexity and potential confusion.
  • Potential for Conflicting Decisions: This overlap could result in parallel inquiries and divergent rulings for the same issue under different laws.
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