TAG: GS 2: POLITY
THE CONTEXT: In February 2023, the Ministry of Corporate Affairs (MCA) of India constituted a Committee on Digital Competition Law (CDCL) to examine the need for a separate law addressing competition in digital markets.
EXPLANATION:
- After a year of deliberation, the CDCL concluded that the current ex-post framework under the Competition Act, 2002, needed to be supplemented with an ex-ante framework, leading to the formulation of the draft Digital Competition Bill.
- In its report, the Committee also published a draft Bill to give effect to its recommendations.
Key observations and recommendations of the Committee include:
- Need for ex-ante regulation of digital competition:
- The Committee noted that the current ex-post framework (intervening after an event occurs) under the Competition Act, 2002, does not facilitate timely redressal of anti-competitive conduct by digital enterprises.
- It observed that the present framework may not be effective to address the irreversible tipping of markets in favour of large digital enterprises (permanent dominance of a firm in relevant market).
- The Committee recommended enacting the Digital Competition Act to enable the Competition Commission of India (CCI) to selectively regulate large digital enterprises in an ex-ante manner (intervening before an event occurs).
- 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):
- The Committee noted that certain features of digital markets allow digital enterprises to swiftly gain influence.
- These features include:
(i) collection of user data which can allow large incumbent enterprises to enter related markets,
(ii) network effects where the utility of a service increases when the number of users consuming the service increases, and
(iii) 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, which are susceptible to market concentration.
- These include search engines, social networking services, operating systems, and web browsers.
- Associate Digital Enterprises (ADEs):
- The Committee noted that in some cases, compliance may be required from multiple digital enterprises in a group that are 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 draft Digital Competition Bill, 2024, as recommended by the Committee, prohibits SSDEs from carrying out certain practices.
- These include:
(i) favouring their own products and services or those of related parties,
(ii) use non-public data of business users operating on their core digital service to compete with those users,
(iii) restrict users from using third-party applications on their core digital services, and
(iv) 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 draft 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 Committee noted that the central government has decriminalised various corporate offences to promote ease of doing business.
- It recommended that contraventions under the draft Bill should be addressed by imposing civil penalties.
- To calculate the ceiling on penalties, the Committee recommended the use of global turnover of enterprises.
- The Committee also recommended capping the penalty at 10% of the global turnover of SSDEs.
The European Union’s Model
- The European Union (EU) is currently the only jurisdiction with a comprehensive ex-ante competition framework under the Digital Markets Act.
- The CDCL supports this approach, acknowledging that the unique dynamics of digital markets require preventative measures rather than solely reactive ones.
- The draft Bill follows the EU’s template, targeting only those digital enterprises that are dominant in their market segments.
Understanding Ex-Post and Ex-Ante Frameworks
- Ex-Post Framework
- The Competition Act, 2002, establishes the Competition Commission of India (CCI) as the national competition regulator.
- The Act is based on an ex-post framework, meaning the CCI can enforce regulations only after anti-competitive conduct has occurred.
- This reactive approach allows businesses to engage in anti-competitive practices without immediate oversight, relying on subsequent investigations and penalties.
- Ex-Ante Framework
- In contrast, an ex-ante framework involves proactive regulation to prevent anti-competitive conduct before it occurs.
- The CDCL advocates for this approach in digital markets, proposing that the CCI’s enforcement powers be expanded to pre-empt and prevent anti-competitive behaviours.
- The draft Digital Competition Bill outlines this proactive regulatory framework.