Indian Digital Markets Enroute An Ex-ante Overhaul?

With heavy discussion around the need for a new ex-ante framework to regulate competition in digital markets underway globally, New Delhi is mulling over this seriously.

To start with, it was reported that the Hon’ble Parliamentary Standing Committee of Finance (‘Standing Committee’) began scrutiny of anti-competitive practices by big tech companies on April 28, 2022. It then submitted its report on Anti-competitive Practices by Big Tech Companies (‘Big Tech Report’) in December 2022. The Big Tech Report, inter alia, recommended: (i) introducing a new Digital Competition Act^[1] (‘DCA’); (ii) setting up a specialised Digital Markets Unit^[2] (‘DMU’) within the Competition Commission of India (‘CCI’); and (iii) adopting an ex-ante framework / regulation for certain designated ‘big tech’ companies.^[3] The rationale behind these recommendations was the tendency of ‘fast moving’ markets to ‘tip quickly’, needing their conduct to be evaluated ex-ante before the damage becomes irreversible.^[4]

The Big Tech Report also sets out a skeletal framework for ex-ante regulation. Under this framework, certain leading market players with ‘significant influence over competition in the digital ecosystem’ must be designated as ‘Systemically Important Digital Intermediaries’ (‘SIDI’).^[5] Once designated, these SIDIs will need to comply with a predetermined set of obligations and prohibitions. This includes being subject to a mandatory code of conduct, increased intervention, making detailed disclosures etc.^[6]

On the heels of the Big Tech Report, on February 6, 2023, the Hon’ble Ministry of Corporate Affairs (‘MCA’) constituted the Committee on Digital Competition Law (‘CDCL’), to: (i) review the efficacy of the existing competition framework to deal with competition concerns in digital markets; (ii) examine the need for bringing an ex-ante framework through a separate legislation for digital markets; (iii) study the international best practices on regulation in the field of digital markets; (iv) study other regulatory regimes/ institutional mechanisms/ Government policies regarding competition in digital markets; (v) study the practices of leading players/ SIDIs, which limit or have the potential to cause harm in digital markets; and (vi) look into any other matters related to competition in digital markets, as may be considered relevant by the CDCL (Terms of Reference or ‘TOR’). The CDCL is required to submit its report to the Hon’ble MCA within a speedy short span of three months (of its constitution).

All these developments make it clear that the Government is prioritising heavy regulation of digital markets in India. In these circumstances, it would be important to recognise that India has spent decades on advancing deregulation and opening markets, by dispensing with the cumbersome ‘License Raj’. While it is important for any regulation to balance the need to regulate with the efficiency of open markets, it is critical in the case of digital markets that by their very nature are dynamic. India must cautiously and independently formulate a measured and tailor- made framework, which aims at healthy competition but does not thwart India’s ambition of a robust digital economy.

What’s Happening Globally?

The European Union (‘EU’) was one of the first to introduce ex-ante legislation i.e., the Digital Markets Act (‘DMA’) to regulate its ‘large’ digital platforms. Under the DMA, the European Commission (‘EC’) designates large online platforms operating specific ‘core platform services’ (‘CPS’),^[7] as ‘Gatekeepers’.^[8] Once designated, gatekeepers must adhere to a set of proscriptions.^[9] Notably, the EC only brought into force the DMA in 2022 after a two-year long detailed impact assessment on European markets.^[10]

Interestingly, despite being an EU member state, Germany has implemented its own version of ex-ante regulation i.e., the 10th amendment to the German Act against Restraints of Competition (‘GWB Digitalisation Act / German Legislation’). In contrast to the quantitative process for designation under the DMA, the German Legislation provides for a purely qualitative approach for designation of platforms as, ‘undertakings with Paramount Cross-Market Significance’ (‘PCMS’)^[11]. Post designation of the platform as a PCMS, the obligations to be imposed under the German Legislation are uniquely tailored for each platform and parties are allowed to make representations in this regard.^[12] Unlike the DMA where there is limited scope of appeal, in Germany parties can appeal (on merits) both the PCMS designation and the prohibition decisions. Notably, Germany jointly with France and Netherlands, has indicated its alignment with tailor-made remediation, as opposed to straight-jacket obligations, which could potentially be disproportionate and risk harming innovation.

Jurisdictions such as Australia and the United Kingdom (‘UK’) are also taking their time to decide whether to adopt ex-ante regulation. Indeed, Australia and the UK Governments are still deciding whether to introduce ex-ante legislation despite initiating this process in 2017 and 2018, respectively.

The CMA, UK’s competition regulator, after a detailed consultation process in 2021 proposed an ex-ante framework. This framework includes identifying and designating firms with ‘Strategic Market Status’ (‘SMS’), through a hybrid qualitative and quantitative evidence-based assessment (which includes consultation).^[13] Post designation, each SMS will be subject to a specific code of conduct, also arrived at after a consultative process.^[14] Notably, like Germany both the designation and code of conduct decisions will be appealable.^[15]

The ACCC, Australia’s competition and consumer regulator, after a five-year long inquiry into issues related to digital platform services, in its interim report in 2022 (‘Interim Report’) recommended a framework similar to that of the UK, which includes the designation of large digital platforms as ‘Designated Digital Platforms’ (‘DDP’), if they meet certain qualitative and quantitative criteria.^[16] This designation is also done through a consultative process.^[17] Post designation, the DDP’s will be subject to a code of conduct specific to the type of digital platform service provided by the DDP.^[18] This code should allow flexibility to tailor the obligations to the specific competition issues, relevant to specific services as they change over time.^[19] The ACCC’s proposed framework is so-far, silent with respect to appeals.

In contrast to these jurisdictions, South Korea in 2022 decided to follow a ‘pro-market approach’ and go down the self-regulation route, despite being at the vanguard of formal regulation in 2021.^[20] The chairman of the Korean Fair-Trade Commission (‘KFTC’) has assured not pushing any unnecessary or onerous regulations, unless the self-regulatory initiatives prove to be ineffective and deemed a failure.^[21] The KFTC in 2022 began to focus more on the enforcement power it already has rather than engaging in an uphill task of enacting a new regulation. Korea has since then not suffered from under-enforcement and in a short span from January – October 2022, registered more than 70 cases of infringement in the KFTC’s database.^[22]

The United States (‘US’) is still considering measures to address the modern challenges in the technology sector. These measures include both: (i) changes to the existing regime such as amending the Horizontal and Vertical Merger Guidelines;^[23] and (ii) new legislation.^[24]

The Taiwan Fair Trade Commission (‘TFTC’) is also considering amending its existing legal framework, to tackle competition issues arising from the emergence of novel business models in the digital economy.^[25]

Similarly, the Canadian Competition Bureau (‘CCB’) is also deliberating a comprehensive set of amendments to its existing legislation, to address concerns in digital markets. The CCB launched its Digital Enforcement and Intelligence Branch (‘Canari’), a team of competition specialists, intelligence experts, data scientists and data engineers, which provides intelligence expertise for all directorates at the CCB.^[26]

The experience of other jurisdictions shows that each country is choosing to adopt a law/ regulation that best suits its needs after evaluating the competitiveness of their respective digital economies. Notably, each of these jurisdictions have invested considerable time (at least a few years) in examining, assessing and formulating  appropriate  frameworks that best guide the country’s economic objectives.

Which Ex-ante Model Should India Follow?

India’s regulation of digital markets must ensure that any regulation does not interfere with the remarkable growth that digital India has shown. The growth of digital markets has boosted the Indian economy by facilitating the unprecedented growth of Indian business and consumer convenience. Notably, Indian digital markets are presently witnessing fierce competition with startups and existing businesses entering and significantly expanding in the digital domain.

Good regulation must be rooted in: (i) empirical analysis; and (ii) an impact-based assessment, both involving in-depth stakeholder / public consultation.^[27] Given the far-reaching consequences of ex-ante regulation, it must be implemented carefully. The CDCL’s efforts in this regard, including engaging / consultation with stakeholders are commendable and lauded.

It should also be kept in mind that there are a host of other legislative changes under way which will impact big tech, such as – the proposed Digital India Act, 2023,^[28] Personal Data Protection Bill,^[29] Competition (Amendment) Act, 2023, etc. We must be mindful of over-regulation – the downsides of which are irreversible. This is because over-regulation leads to complexities and increased costs which can potentially disincentivise tech companies from innovating in the first place. It is important to ensure consistency and avoid overlaps with these other legislations to increase legal certainty amongst regulators and tech companies alike, to reduce the likelihood of disputes and litigation.

These prospective changes to regulate competition in digital markets make for an interesting time in the antitrust arena. The next couple of years will be critical in seeing how ex-ante regulation shapes the growth of India’s digital economy.

[1] See Big Tech Report, paragraph 13, pages 38-39.

[2] See Big Tech Report, paragraph 14, page 39.

[3] See Big Tech Report, paragraphs 1-2, pages 31-32.

[4] See Big Tech Report, paragraphs 1, pages 31.

[5] See Big Tech Report, paragraph 2, pages 31-32.

[6] See Big Tech Report, paragraphs 2, pages 31-32; paragraph 14, page 39.

[7] These services are: online intermediation services such as app stores, online search engines, social networking services, certain messaging services, video sharing platform services, virtual assistants, web browsers, cloud computing services, operating systems, online marketplaces, and advertising services. See https://ec.europa.eu/commission/presscorner/detail/en/ip_22_6423 and Article 2 of the DMA available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32022R1925.

[8] The DMA dictates a strong (but rebuttable) presumption of gatekeeper status of a company if it meets each of the following criteria:

• It has a significant impact on the internal EU market. An annual turnover of at least €7.5 billion within the EU in each of the past three FYs or an average market valuation of at least €75 billion in the last FY, and provides the same core platform service (CPS) in at least three member states.
• It provides a CPS that serves as an important gateway for business users to reach end users. CPS includes 10 services: online intermediation services, online search engines, online social networking services, video-sharing platform services, number-independent interpersonal communications services, operating systems, web browsers, virtual assistants, cloud computing services and online advertising services (including any advertising networks, advertising exchanges and any other advertising intermediation services).
• It enjoys an (established or expected) entrenched and durable position. A minimum average of 45 million monthly end users established or located in the EU and at least 10,000 yearly business users established in the EU in each of the previous three FYs.

See Article 3 of the DMA available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32022R1925.

[9] Obligations / prohibitions prescribed under Articles 5-7, 11, 14 and 15 of the DMA available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32022R1925. For a broad overview also see https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/europe-fit-digital-age/digital-markets-act-ensuring-fair-and-open-digital-markets_en.

[10] See https://digital-strategy.ec.europa.eu/en/library/impact-assessment-digital-markets-act.

[11] PCMS designation is done by Germany’s Federal Cartel Office (‘FCO’). For a finding of PCMS, the FCO takes into account in particular the following (non-exhaustive) factors:

• an undertaking’s dominant position on one or several markets;
• the undertaking’s financial strength or access to other resources;
• vertical integration and activities in related markets;
• access to data relevant for competition; and
• relevance of the undertaking’s activities for third party access to supply and its related influence on the business activities of third parties.

Article 18(3a) of the GWB Digitalisation Act, see https://content.clearygottlieb.com/antitrust/digital-markets regulation-handbook/germany/index.html, Point 4.

[12] The FCO has to, on a case-by-case basis, consider pro-competitive effects as potential objective justifications to not impose an obligation on a PCMS. The FCO may inter alia, prohibit PCMS undertakings from: (i) self-preferencing when it acts as an intermediary for access to markets; (ii) employing abusive data strategies, including using a combination of data from origin and target markets; (iii) raising market entry barriers or otherwise foreclose competitors; (iv) hampering interoperability of products or services, or the portability of data and thereby impeding competition, etc. See https://www.allenovery.com/en-gb/global/news-and-insights/publications/die-10-gwb-novelle.

[13] Designation of an SMS will be based on factors such as: (i) firm’s revenue; (ii) characteristics of the activity (network effects, economies of scale/scope, entry barriers etc.); and (iii) whether a sector regulator is better placed to address the issue of concern. See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1003913/Digital_Competition_Consultation_v2.pdf, paragraphs 77-78, page 24-25.

[14] The code of conduct will be based on: (i) fair trading; (ii) open choices; and (iii) trust and transparency. See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1003913/Digital_Competition_Consultation_v2.pdf, paragraph 83, pages 27-28 and paragraph 86, page 28.

[15] See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1003913/Digital_Competition_Consultation_v2.pdf, paragraph 78, page 26 and paragraph 86, page 28.

[16] Quantitative criteria include the setting ‘minimum thresholds’ using metrics such as numbers of monthly active Australian users of a platform’s service(s), and the platform’s Australian and/or global revenue. Qualitative criteria include requiring consideration of relevant characteristics, such as whether the digital platform holds an important intermediary position, whether it has substantial market power in the provision of a digital platform service, and/or whether it operates multiple digital platform services. See Interim Report, paragraph 5.4.1, page 114.

[17] See Interim Report, paragraph 5.4.2, page 119.

[18] See Interim Report, paragraph 5.5.1, pages 120-121.

[19] The code of conduct should broadly address: (i) anti-competitive self-preferencing anti-competitive tying; (ii) exclusive pre-installation and default agreements that hinder competition; (iii) impediments to consumer switching; (iv) impediments to interoperability; (v) data-related barriers to entry and expansion; where privacy impacts can be managed; (vi) a lack of transparency; (vii) unfair dealings with business users; and (viii) exclusivity and price parity clauses in contracts with business users. See https://treasury.gov.au/sites/default/files/2022-12/c2022-341745-cp.pdf and page 123 of the Interim Report.

[20] See https://competitionlawblog.kluwercompetitionlaw.com/2022/12/13/main-developments-in-competition-law-and-policy-2022-korea/.

[21] See Fair Trade Commission, new chairman, focus on promoting competition and improving regulations, available at https://www.etnews.com/20220904000040.

[22] See https://competitionlawblog.kluwercompetitionlaw.com/2022/12/13/main-developments-in-competition-law-and-policy-2022-korea/.

[23] See https://globalcompetitionreview.com/guide/digital-markets-guide/second-edition/article/key-developments-in-the-united-states#footnote-014.

[24] See https://globalcompetitionreview.com/guide/digital-markets-guide/second-edition/article/key-developments-in-the-united-states#footnote-014; American Innovation and Choice Online Act to prevent self-preferencing, discriminatory conduct,  use of non-public data, etc. by certain large online platforms, available at: www.congress.gov/bill/117th-congress/senate-bill/2992/text;

Augmenting Compatibility and Competition by Enabling Service Switching Act, enforcing data portability and interoperability on social media platforms, available at: www.congress.gov/bill/117th-congress/house-bill/3849/text;

Competition and Transparency in Digital Advertising Act, prohibiting companies from owning more than one portion of the digital advertising revenue. available at: www.congress.gov/bill/117th-congress/senate-bill/4258/text;

Ending Platform Monopolies Act, preventing certain online platforms from offering certain products or services through its subsidiary/sister companies, , available at: www.congress.gov/bill/117th-congress/house-bill/3825/text; and

Open App Markets Act, preventing app stores from imposing its own in-app payment system, MFN clauses and taking punitive action against those who do not comply with such conditions, available at: www.congress.gov/bill/117th-congress/senate-bill/2710/text.

[25] Yvonne Hsieh, Erica Chiu and Alex Chu, ‘Insights on Taiwan Digital Economy White Paper’, 11 January 2023, available at: https://www.competitionpolicyinternational.com/insights-on-taiwan-digital-economy-white-paper/

[26] Elisa Kearney, Alysha Manji-Knight and Joshua Hollenberg, ‘Digital Markets Guide – Second Edition: Key Developments in Canada’, 25 November 2022, available at: https://globalcompetitionreview.com/guide/digital-markets-guide/second-edition/article/key-developments-in-canada

[27] See, The Ten Principles of Ex Ante Competition Regulation, available at https://www.competitionpolicyinternational.com/the-ten-principles-of-ex-ante-competition-regulation/; and OECD, Guiding Principles for Regulatory Quality and Performance (2011) available at https://www.oecd.org/daf/competition/37318586.pdf.

[28] Which includes within its ‘key components’ – fair trade practices, prevention of concentration of market power and gatekeeping, regulation of dominant ad-tech platforms, app stores etc. See https://www.meity.gov.in/writereaddata/files/DIA_Presentation%2009.03.2023%20Final.pdf.

[29] Which is being is being introduced to assuage the personal data and privacy related concerns surrounding big tech companies.