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Innovative Regulation for the Digital Era: Finding the Right Path for India

The authors are Ananda Padmanaban Suresh and Gayathri Menon, third year students at National University of Advanced Legal Studies.


The advent of the digital realm has resulted in a transformative era, wherein numerous companies and entities have established themselves in the digital market. However, the growth of platforms of certain companies in these markets has given rise to concerns regarding anti-competitive practices. Such practices have a detrimental impact on both smaller enterprises and consumers. Globally, competition authorities are struggling to regulate the digital economy as there is a stark difference between how the traditional markets and digital markets function. This led to a discourse within regulatory authorities abroad regarding the necessity of separate legislation to deal with anti-competitive practices within digital markets.


The Indian regulatory authorities also felt the need to initiate discussions on this subject matter. To aid the Competition Commission of India in this endeavor, the Parliamentary Standing Committee on Finance started its investigation into anti-competitive practices by Big Tech Companies in April 2022. Subsequently, the committee presented its findings in the form of a report in December 2022 which called for a separate Digital Competition Bill. The report also recommended the classification of select market leaders with ‘significant influence over competition in the digital ecosystem’ as ‘Systemically Important Digital Intermediaries’ (SIDIs). As a result, the Ministry of Corporate Affairs formed the Committee on Digital Competition Law (CDCL) in February 2023 to decide on the new legislation and the ex-ante regulatory regulations that would become applicable once a platform has been designated as a SIDI.

This article seeks to analyze similar classifications in foreign jurisdictions and the implications such categorization could have on digital platforms in India. Moreover, it also discusses the regulatory approach that should be considered while dealing with SIDIs.

 

Foreign regulatory approaches to digital markets


One of the primary challenges with the Digital Competition Bill is to define what will constitute a SIDI. Even though India has decided to approach the Bill taking inspiration from foreign jurisdiction by designating entities as SIDIs, the nomenclature adopted abroad is significantly different.

The EU Digital Markets Act (DMA), which came into force in May 2023 following the proposal of the European Commission in 2020, confers the status of ‘Gatekeepers’ to undertakings that satisfy certain conditions. Firstly, the undertaking must provide at least one of the ten enlisted core platform services enumerated in the legislation which includes online search engines, social networking services, video-sharing platform services, etc. Secondly, it must also meet certain quantitative requirements such as when the undertaking achieves a certain annual turnover in the European Economic Area in at least three EU Member States.  Adopting a one-size-fits-all approach, the Act requires an undertaking that has been identified as a ‘Gatekeeper’ to immediately comply with all the obligations mentioned under Sections 5 and 6 which include data handling restrictions, fair competition practices, and transparency requirements. This creates a deviation from the case-to-case approach that has been usually adopted in jurisdictions to decide on antitrust matters as undertakings here are not allowed an opportunity to objectively justify their behavior before the regulatory body.


Section 19(a) of the Act on Restraint of Competition (ARC) which was introduced through an amendment in Germany, empowers the Bundeskartellamt to declare multisided platforms as an ‘Undertaking of Paramount Significance for Competition Across Markets.’ The non-exhaustive list of elements that need to be considered before determining whether an undertaking has paramount significance across markets includes dominance in one or several markets, financial strength, and access to competitive data. This list was expanded in the Alphabet/Google decision to incorporate vertical integration, financial significance, and access to user data among other things. Furthermore, Bundeskartellamt, upon a finding of paramount significance can prohibit certain practices as mentioned in Section 19(a)(2). This section identifies several potentially anticompetitive behaviors that may be problematic when a company holds paramount cross-market significance, including favoring its own products on its platform, pre-installing its applications on devices, restricting other companies' advertising and sales channels, and erecting entry barriers based on accumulated user data.


Regardless of the similarity of conditions such as size, turnover, etc. that need to be met to bring undertakings within regulatory control, there are substantial differences in the approach towards implementation of these legislations. For example, while the EU DMA mandates gatekeepers to follow the specified list of obligations in the legislation, the ARC gives the Bundeskartellamt the power to exercise discretion to specify obligations, which may change from undertaking to undertaking. Unless this happens, there is no immediate consequence to an entity that has been found to have paramount significance across markets.


An approach similar to Germany has also been adopted in the UK with the UK Digital Markets, Competition, and Consumers Bill, allowing the Competition and Markets Authority (CMA) more discretion in terms of scope and procedure. Under Clause 2(2) of the Bill, an entity satisfies the ‘Strategic Market Status’ (SMS) conditions where it is found that it holds substantial and entrenched market power and a position of strategic significance. Even though the Bill does not define ‘substantial and entrenched market power,’ it spells out the conditions to be met to hold a ‘position of strategic significance’ in Clause 6 which, inter alia, includes the entity’s ability to extend its market power to other activities and to substantially influence the conduct of other entities.


Furthermore, Clause 2 of the Bill unequivocally establishes that only an entity carrying out a ‘digital activity’ would be conferred with SMS. The scope of what comes within the definition of ' digital activity’ is considerably widened through the inclusion of Clause 3(1)(c). According to this clause, any other activity carried out for the purposes of the provision of a service by means of the internet or of one or more pieces of digital content will be deemed a ‘digital activity’, thereby bringing a large number of services under its purview. This demonstrates that the legislations in the UK and Germany are dynamic and better equipped for the future, whereas, in the case of EU legislation, it lacks the same level of adaptability due to reduced regulatory authority discretion.

 

Consequences of SIDI designation


Despite regulations being specifically aimed at SIDIs, the impact on such entities would differ based on their capabilities and resources. For instance, platforms based out of India such as BookMyShow, Swiggy, PolicyBazaar, etc. also hold the chance of being classified as a SIDI. Their capability and resources highly differ from the Big Tech companies that are well equipped to meet the obligations under the proposed Bill without compromising on their innovation potential. As a result, such a classification could exert considerable influence on their operations and their ability to be creative and innovative.

Additionally, defining SIDIs based on their scale and size and regulating them under an ex-ante framework could affect smaller platforms and startups. Although obligations will only be imposed on larger platforms that have been designated as SIDIs, smaller platforms would be disincentivized from scaling up as they would be subjected to additional regulations, once they pass the threshold to become a SIDI.


Certain apprehensions exist in relation to consumer welfare, as well. Implementation of regulations can impede platforms like Paytm and TataNeu by forcing them to operate independently due to compliance requirements which in turn might disrupt their current collaborative model of working together and sharing data. This change could impact their services and engagement with customers. Further, once the regulations are enforced, foreign platforms would be hesitant to introduce their rollouts in the Indian market because of the regulatory friction that they could encounter while establishing their operations. Precedents such as the delayed release of Meta’s Threads and Google’s Generative AI service Bard  in the EU due to its Digital Markets Act prove that platforms favour jurisdictions with lesser restrictions. Paradoxically, while the intent behind such a classification is to foster fair competition, it will inadvertently create a sense of apprehension among platforms, impacting their progress and deterring potential investments in the country. This could have far-reaching consequences for the market and those platforms that fall under the SIDI classification.


The legislations in foreign countries and the aforementioned, shed light on the ramifications of classifying platforms into SIDIs. Moreover, there's a challenge in determining the right regulatory approach. Therefore, it's essential to find an approach that not only encourages smaller platforms but also doesn't discourage innovation among SIDIs.

 

Guiding India’s regulatory approach


Firstly, it is important to acknowledge that different digital platforms function in different ways. Although unified by their reliance on data, they differ significantly in terms of their functionality and revenue streams. For instance, zero-price markets such as Facebook and YouTube often prioritise their user base whereas subscription-based services such as Netflix and Amazon Prime focus on quality of service, therefore making them similar to traditional markets. Thus, a uniform application of the regulations will have a significant impact on these platforms as they are not homogeneous competitors in one common sector. Therefore, the regulations imposed on SIDIs should be tailored to the business model of the platform rather than their use of digital technology. To this extent, it is advisable to adopt an approach similar to that in the UK and Germany where the regulatory authorities are provided more discretion. Rather than enlisting several obligations in the legislation which a platform once identified as a SIDI should comply with, the proposed Bill should allow the CCI to impose regulatory obligations on a case-to-case basis and also form decisions that are more appropriate to the type of service the regulated platform undertakes.


Secondly, lawmakers should also consider adopting an approach similar to the American Innovation and Choice Online Act. The Act restricts private parties from initiating actions under the proposed Bill, aiming to reduce the regulatory authority's burden of handling numerous complaints. The CCI may examine this option and contemplate the inclusion of a provision in the Bill that exclusively authorizes itself to independently address issues on a suo motu basis. In addition, the regulatory authority might also consider setting up a digital markets unit within itself to deal with complaints that are related to digital marketplaces. This could fundamentally reduce the burden on CCI and also could lead to better decision-making by digital marketplace experts who are appointed in this unit.


Thirdly, the proposed bill should be conceptualized on the ‘participative antitrust’ model. The participative approach seeks to engage the regulator, SIDIs, and stakeholders, which may include smaller players, in the design of compliance measures, thereby providing legal certainty to the SIDIs regarding the measures that they have to comply with. In the model that has been adopted abroad, it is clear that the platforms find it difficult to comply with obligations that have been imposed on them due to the lack of consultation with relevant stakeholders. This might result in regulatory authorities imposing obligations that ignore the market and market trends, while participative antitrust seeks to frame obligations on the basis of dialogue that takes place amongst the regulatory authority, SIDIs, and stakeholders. This would allow valuable contribution in terms of insights about the market and a decision that favors market interests could be formed. Furthermore, engaging in dialogue enhances the trust, credibility, and legitimacy of the regulator's actions.


Conclusion


The constant growth of the digital sector has sparked debates on the regulation of anti-competitive practices in the digital sphere. India in this regard, is all set to have the Digital Regulation Bill introduce the concept of SIDIs which brings on certain restrictions on the large players. This may lead to unintended consequences on both the domestic and foreign platforms thereby impacting consumer welfare, hindering innovation and stifling competition. Taking inspiration from global regulatory approaches, India should embrace a nuanced strategy, by tailoring obligations to individual business models and promoting a participative antitrust model that envisages a dialogue between regulators, SIDIs and stakeholders to ensure fair competition, legal certainty and fostering of innovation.

 

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