India’s competition regulation, the Competition Act, 2002, is “two decades ago and may not always account for considerations that are unique to the current platform economy. […] The Committee is surprised at the undue delay in undertaking the necessary procedure for the codification of recommendations of the Competition Law Review Committee (CLRC). It is of the strong opinion that prompt action in undertaking appropriate changes in regulatory framework is crucial in the fast-paced digital market,” the Parliamentary Standing Committee on Commerce said in its report on Promotion and Regulation of E-Commerce in India presented to the Rajya Sabha on June 16.
Why it matters: The Competition Commission of India is currently investigating tech platforms across various sectors like e-commerce, app stores, food aggregators, search, operating systems, etc. But the antitrust watchdog faces many unique challenges in these investigations because the competition laws in the country were framed with traditional markets in mind. Because of this, CCI last week announced that it is setting up a Digital Markets Unit to address tech anti-trust, but the Parliamentary Committee report from Thursday suggests that a dedicated unit alone won’t suffice and competition laws must be amended based on the suggestions made by the Competition Law Review Committee (CLRC), which was set up by the Indian government during the year 2018-19 to review and suggest amendments to the Competition Act, 2002.
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Which parts of the Competition Act should be amended?
How relevant markets are delineated: Before examining abusive conduct, CCI has to ascertain whether the entity in question is dominant within the relevant market. “Establishing dominance in relevant markets is fraught with complexities due to the multisided and cross-cutting nature of the e-commerce market. It has been argued that many tools that are traditionally used in the assessment of relevant markets may not adequately capture features such as the impact of direct and indirect network effects on prices, the presence of interconnected but distinct markets on different sides of the platform, and the implicit price of data paid by a consumer,” the Parliamentary Committee noted.
- Recommendation: The CLRC in its report submitted on July 2019 “recommended widening the scope of delineation of relevant markets under Sections 19(6) and 19(7) of the Competition Act to accommodate for factors that may apply to new-age digital markets. Further, while the CLRC Report concluded that non-monetary considerations such as data may be captured in the definition of price as per the Competition Act, a comprehensive legal assessment that captures such nuances of e-marketplaces is yet to be examined by the CCI in practice,” the Parliamentary Committee said.
“The Committee would further like to emphasise that delayed action in undertaking necessary amendments to the regulatory framework may result in unwanted irreversible effect on competition in digital market.” — Parliamentary Committee report
Metrics used to establish dominance: Once the relevant market is established, the next step in an antitrust investigation is the establishment of dominance within the relevant market. “It is pertinent to mention here that the business modes of e-commerce platforms are different from traditional business models wherein the priority of e-commerce platforms is the expansion of user base, growth of the platform as opposed to profit maximisation, access to data, and network effects. It is, therefore, argued that a traditional assessment using statutory metrics such as market share does not serve as a useful proxy for dominance,” the Parliamentary Committee noted. “CCI is technically empowered within the framework of the Competition Act, 2002 to adopt a differentiated standard for ascertaining dominance in digital markets, given that dominance is assessed on a case-by-case basis. However, even if one accounts for unique features of digital markets, establishing the high threshold of the dominance of a particular e-marketplace may not be a simple exercise within the contours of the existing jurisprudence on dominance and may require a departure from the existing jurisprudence on dominance,” the Committee added.
- Recommendation: The Committee recommended that “guidance elaborating on the different dominance standards for digital markets be issued by the Competition Commission of India (CCI) pursuant to adequate stakeholder consultation. The Committee opines that such guidance will not only provide certainty to stakeholders but also have a far-reaching signalling effect on all market players. The Committee further recommends that clear and precise qualitative and quantitative parameters may be outlined in the guidance taking into account the realities of the digital market.”
Tools to examine anti-competitive agreements: While determining whether an agreement has an Appreciable Adverse Effect on Competition (AAEC), CCI considers a limited set of factors laid out in Section 19(3) of the Competition Act, these factors do not account for the factors that are unique to the platform economy, the Committee said.
- Recommendation: CLRC “recommended the widening of Section 19(3) to make it an inclusive provision with a view to allowing newer considerations which may be relevant for digital markets to be factored in while assessing AECC of an agreement. […] The Committee, therefore, recommends that factors laid out in Section 19(3) of the Competition Act, 2002 are updated after due consultation with stakeholders without further delay. The Committee further recommends that the Competition Commission of India (CCI) be empowered to undertake necessary updation to Section 19(3) in line with market realities,” the Parliamentary Committee said.
Factors used to assess mergers and acquisitions: When companies wish to pursue mergers or acquisitions, they have to get CCI approval if their proposal qualifies the prescribed thresholds of asset value or turnover. “The CCI, however, does not have any residuary power to examine transactions which do not meet the asset value or turnover based thresholds prescribed in the Competition Act even if they entail clear competitive harm to Indian markets,” the Parliamentary Committee pointed out. “Globally, including the European Union (EU), Germany and United Kingdom (UK), competition regulators are increasingly recognising that significant combination transactions in digital markets may escape the traditional thresholds of asset value and turnover,” the Committee explained. In India, the CLRC in its report observed that “in digital markets, acquisitions often derive value from some business innovation of target companies which often do not have a large asset base. Further, the business model of tech companies is often focused on creating a large user base and not on revenue maximisation. Therefore, asset and turnover-based thresholds may not fully capture the significance of a transaction for competition.”
- Recommendation: “The Committee opines that the enactment of the Draft Competition (Amendment) Bill, 2020 that will empower the Central Government to notify additional criteria to widen the ambit of merger scrutiny is the need of the hour to prohibit e-marketplace giants from engaging in anti-competitive transactions that may irremediably tip the Indian e-commerce market. The Committee, therefore, recommends that a sincere effort is made for the enactment of the Draft Competition (Amendment) Bill, 2020 at the earliest. The Committee further recommends that a comprehensive framework for identifying entities that have significant market power may be worked out and references may be drawn from international practices around the world in this regard,” the Parliamentary Committee noted.
The need for ex-ante regulation
What is ex-ante regulation? Ex-post regulations are about reacting to a situation or behaviour, ex-ante regulations are about the apprehension of a situation before it takes place.
What is wrong with ex-post regulations? “The Committee was also informed that ex-post enforcement does not always lead to optimal restoration of competition in evolving and fast-paced markets, especially involving gatekeepers. It may also be mentioned that ex-post investigations are limited due to the fact that the investigations are applicable only to the narrow claims made in each specific case. They may do little to address similar anti-competitive conduct arising in regard to the same entity’s conduct in a different/associated market or a different entity’s conduct resulting in the same issues as investigated,” the Parliamentary Committee said.
What are regulators doing globally? “Regulatory bodies around the world have recognised the unique nature of e-marketplaces, the asymmetric relationship between platforms and business users, shortcomings in ex-post regulation framework and have accordingly, devised various mechanisms to bridge the regulatory gaps,” the Committee noted while giving examples of EU’s proposed Digital Markets Act, the Digital Market Unit in the United Kingdom, and the introduction of an ex-ante regime for regulating the conduct of entities having Paramount Significance for Competition Across Markets (PSCAM) in Germany.
High-time India strengthens its ex-ante regulatory framework:
“The Committee is of the opinion that it is high time India revamps and strengthens its ex-ante regulatory framework and take steps to identify entities that act as gatekeeper platforms and set a threshold for qualifying as gatekeeper.” — Parliamentary Committee report.
- Identifying gatekeepers: The Committee noted that the first step to formulating an ex-ante model of regulation is the identification of entities that act as gatekeepers in the digital markets. [Gatekeepers are companies that control access to key channels of online distribution. Apple’s App Store is an example.] To achieve this, “the Committee recommends that the Competition Act, 2002 be amended to prescribe additional quantitative criteria such as number of registered/active consumers and sellers on the platform, number of transactions taking place and volume of revenue generated to identify entities that act as a gatekeeper platform. Further, in line with international emerging practices, criteria such as assessment of resources of the platform, volumes of data aggregated, and its bargaining position vis-à-vis its business users and consumers, its gatekeeping function and ability to set the rules of the ecosystem may also be included. The Committee further recommends that an obligation must be placed on platforms to suo moto notify the regulator once it reaches the prescribed gatekeeper threshold,” the Parliamentary Committee stated
- Formulation of a code of conduct: The second step to the ex-ante framework is the formulation of a code of conduct that will be applicable to digital platforms. “It is crucial to understand that digital platforms have vastly different business models and monetisation schemes. One may rely on advertising as its main source of revenue while the other may have no business interest in promoting pure-play advertisements on its platform. […] Therefore, it is imperative that any attempt at regulating digital platforms must be tailored to the business model of the platform,” the Committee noted. As far as e-commerce is concerned, the Committee recommended that CCI “formulate a mandatory code of conduct that clarifies acceptable conduct between operators of e-marketplaces on the one hand and their business users and consumers on the other after extensive consultation with all stakeholders. The code should be comprised of a set of core principles as well as a list of hardwired do’s and don’ts and must be tailored to the business model of the platform. Certain practices that may be prohibited ex-ante, subject to the business model of the platform include self- preferencing, discriminatory treatment between business users, using data anti-competitively and including most-favoured-nation clauses in contracts between business users and the platform.”
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