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Deep Dive: How will ex-ante regulations impact Indian companies

While the aim might be to curb the dominance of foreign Big Tech, the innovation and growth of large Indian companies will also be adversely affected.

“If you bring ex-ante regulations, you are limiting the innovation of companies, which will, in turn, limit their scale. Don’t kill innovation. Don’t kill the ability of a firm like Jio, Zerodha, Tata Neu, MakeMyTrip, Policybazaar, etc., from becoming India’s Big Tech,” Navneet Sharma, Director General, CUTS Institute for Regulation and Competition (CIRC), told MediaNama, when asked what would be the impact on Indian companies if the government introduced ex-ante regulations.

Ex-ante regulation refers to rules that look at preemptively preventing large platforms from engaging in certain types of conduct that could result in reducing competition, as opposed to (the current model of) ex-post regulations, which go after companies by investigating allegations of misconduct after they have occurred. The Indian government is currently contemplating introducing ex-ante regulations for digital markets and in February 2023 set up the Committee on Digital Competition Law (CDCL) to prepare a draft Digital Competition Act.

While those arguing for such regulations appear to want to curb the market power of foreign Big Tech companies like Google, Apple, and Amazon, experts that MediaNama spoke to explained how ex-ante regulations will adversely impact Indian companies and restrict their innovation and growth. For example, companies like Naukri.com, PolicyBazaar, BookMyShow, and Zomato and Swiggy (together) are all dominant companies in their respective domains and will likely be classified as large platforms under the Digital Competition Act, which would subject them to restrictions that could affect their products and services, and consequently their market share and growth.

Additionally, not just large companies will be impacted, but smaller Indian companies, which rely on the products and services of larger companies (like Google for advertising) will also be impacted adversely. Startups might also be discouraged from scaling because of the additional obligations that might apply to them. Moreover, there is no evidence yet that ex-ante regulations have worked in other jurisdictions where they have been introduced. But when the Internet And Mobile Association of India (IAMAI) wrote to the CDCL arguing against ex-ante regulations, the industry body was sharply criticised by some. MapMyIndia CEO Rohan Varma and Shaadi.com founder and Shark Tank investor Anupam Mittal took to Twitter to publicly lambast IAMAI’s stance accusing the body of favouring foreign Big Tech companies. They even called out the leadership of IAMAI for being dominated by representatives of foreign tech companies. Subsequently, in the executive council elections in May, the leadership was changed. 

In response to IAMAI’s submission, Shaadi.com, Matrimony.com, Paytm, Tinder-owner Match Group, ShareChat, Spotify, and TrulyMadly sent a dissent note to CDCL in response to IAMAI’s submission, noting that “ex-ante regulation is needed in the digital sector” because “the status quo has failed, and is failing, to adequately constrain the power and conduct of the dominant digital gatekeepers that now control so many aspects of commerce and our lives.” 

Following the dissent note, a group of sixty stakeholders wrote letter to the Ministry of Corporate Affairs asking for more transparent and open consultation around the proposed Digital Competition Act.

How ex-ante regulations can affect innovation by Indian companies

Once you designate a company as a large company and subject them to additional obligations, their ability to design products and services that benefit users is going to be impacted because these companies might not be able to combine and use data like a smaller company can, to create innovative products and services for Indian users, Navneet Sharma explained. “For example, I search on MakeMyTrip, let’s say New Delhi to Pune, and I do not buy because the price is too much. But because the company is able to harvest my search data, the moment prices drop, it notifies me and asks me if I want to book. Ex-ante is probably going to put a lot of restrictions on this kind of innovation because inherent to my product design is my ability to harvest data, which will be disturbed by these regulations,” Sharma elaborated.

Similarly, there are apps like Jio, Paytm, and Tata Neu which offer multiple services and products on one platform and share data between these different offerings. If we introduce ex-ante regulations, they might not be able to combine their services and every service has to work independently, Amrita Choudhury, Director, Cyber Cafe Association of India (CCAOI), said.

“Because of scale, they attain economies, which allows them to average out costs. This allows them to curate beneficial deals for consumers, but my ability to offer these benefits was because of scale and the scale was because of my product design, which you are now disturbing with ex-ante regulations,” Sharma explained. 

Ex-ante regulation could also result in Indian consumers getting the latest products and services much later than their global counterparts. “What I am reading in press coverage about the EU’s DMA is that companies might be either delaying or denying certain product rollouts in the EU because of these regulations. So they will look at markets like Southeast Asia, Africa, Australia, North America, or elsewhere, where they don’t really have the regulatory friction,” Sharma explained. Two recent examples of companies delaying the rollout of their products in the EU because of ex-ante regulations are Meta’s Twitter competitor Threads and Google’s generative AI service Bard.

On ex-ante regulations targeted only at foreign companies

One way to avoid the impact of ex-ante regulations on Indian companies is to frame the regulations in such a way that they only apply to foreign Big Tech companies. While this is possible, it’s not something that experts we spoke to were a fan of. “There are ways to target only foreign tech companies. For example, if you decide the company size and the turnover size in a manner, you can always exclude some and include some. But the problem is, once you have a threshold, tomorrow Indian companies will start touching the threshold. Because Indian companies are now ambitious. Each of the big top 10 to 15 Indian companies is spreading its wings within India and outside. Are you telling them please don’t grow beyond this?” Sharma remarked.

Additionally, it could affect foreign investment in India. “India is in a good spot at this point in time geopolitically because most of the Western allies do not have relations with China, and we’re having FDI [Foreign Direct Investment] coming in. People want to invest here. Do we want to stop this?” Amrita Choudhury asked. And “if you’re only targeting foreign companies and they’re doing very well in other countries. Why would they function in a country like India?” Oleina Bhattacharya asked.

Choudhury further explained that discrimination between foreign and domestic companies shouldn’t be done because Indian companies might also harm competition. “Honestly, can a Jio not harm an Indian user? Or is the harm caused by Jio going to be less than a foreign company? Harm is harm caused by an Indian or a foreign company from wherever,” Choudhury opined. Also, “if you’re only targeting foreign companies that doesn’t seem fair, which is literally the point of the Competition Act, to create a level playing field,” Bhattacharya added.

Also if we start protecting domestic firms from regulations in this manner, it could lead to concerns of protectionism at the World Trade Organisation. “I don’t think that is something we want to do given our aspirations,” Choudhury remarked.

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Why ex-ante regulation from other jurisdictions cannot be adopted in India

Firstly, ex-ante regulations are being designed by studying specific companies and their practices. “Then on some assumptions you are then creating an ex-ante law that will impact the people who are now coming in. Thereby, you are restricting the new players, while their business models could be completely different from the models you studied and may not necessarily have the same impact,” Gowree Gokhale, Partner at Nishith Desai Associates, explained.

Secondly, these regulations are based on a lot of assumptions, which may be incorrect. “Ex-ante regulation is based on a perceived sense of harm. I mean, actual harm has not happened and you want to prevent it or you’re assuming that some harm will happen and you’re trying to prevent it. That’s how I understand ex-ante regulation to be. My only problem is that at this stage, there are a lot of assumptions that are not necessarily right,” Viswanath Pingali, Associate Professor of Economics at IIM Ahmedabad, remarked.

Thirdly, ex-ante regulations are not tried and tested anywhere: “Ex-ante has not been tried and tested. Even if you look at the EU’s Digital Markets Act (a classic example of ex-ante regulation), it is going to be adopted from 2024,” Amrita Choudhury pointed out. “We have not even seen the benefit of ex-ante in other jurisdictions and if you adopt that for India, I think at this stage at least, it’s likely to be disastrous,” Gowree Gokhale added.

How ex-ante regulation might affect smaller companies

While ex-ante regulations generally target larger companies that have major market share in their respective sectors, they might also impact smaller companies inadvertently. For instance, a lot of startups rely on Google and Meta for advertising and Play Store for distributing their apps, Oleina Bhattacharya, Programme Associate at Deepstrat, explained. “Once you disturb the ecosystem, their support system will also get adversely impacted,” Sharma noted.

Separately, Big Tech companies also sometimes play the role of instilling trust in the system, which is important for users. For example, the EU’s DMA requires Apple and Google to open up their app stores and allow third-party payment systems as well allow users to download apps from outside the official stores. “But what about unvetted payment gateways that might cause harm to people? Will there be trust in the system? Sometimes when smaller businesses come up in the app store, they meet the parameters of Android or Apple, and it is shown as safe. But if apps are not vetted for their credibility, as a consumer I will be concerned before I download something if I don’t know how safe it is,” Amrita Choudhury opined.

Alternatives to ex-ante regulation

  • Ease market dynamics with other types of interventions: “There are clearly two problems I concur. There is a stickiness in the market for power and there is a delay in the ability of a competition authority to administer justice. The solution has to be easing the market dynamics wherever there is stickiness. If data is a problem, then we have to address data portability. If we are saying technological know-how is a problem, perhaps that will have to be solved,” Sharma opined. Adding to this Choudhury recommended that provisions can be added to the upcoming Data Protection Act and Digital India Act, wherever concerns are identified.
  • Look at how Japan and South Korea are approaching this: “While we are always looking at the EU in this discussion, we also should see what the other countries where innovation has been encouraged are doing. For example, look at Japan or look at South Korea. If you look at what Japan is also doing, they have carefully identified the issues and they have tried to address those issues rather than going for a blanket thing,” Choudhury suggested.
  • See how digital public infrastructure experiments like ONDC play out: “What America and Europe both haven’t got is the large-scale digital public infrastructure. The kind of payment system we have got, the kind of ONDC we have got, none of them have got. And this is what I meant at the outset when I said that it’s a market problem – it has to be solved by a market solution, not a regulatory solution. We must allow the full results of UPI, ONDC, and other digital public infrastructure to be delivered,” Sharma suggested.
  • See how the newly introduced Commitment and Settlement framework works: The Indian government on April 3 passed the Competition (Amendment) Bill, 2023, which introduced a new Settlements and Commitments Framework that allows companies to negotiate with CCI if they are found to engage in anticompetitive agreements or abuse of dominance. Gowree Gokhale said, “In my view, since the provisions of Commitment and Settlement have just been introduced in the Competition Act, they should give it at least a couple of years to see in the Indian context how they evolve. In Competition law assessment, consumer benefit is also one of the key criteria to be examined. Hence, during commitment and settlement discussions, one can explain the consumer benefit that ought to be weighed in against some of the issues in that model. In the Commitment and Settlement conversations, such conversation would be possible, whereas ex-ante creates unnecessary restrictions.”
  • Set up a Digital Markets Unit: Oleina Bhattacharya recommended that a Digital Markets Unit, as suggested in one of the parliamentary standing committee reports, be set up. “The Competition Commission does not have the bandwidth to deal with so many or monitor so many companies. So, a DMU addresses these nuances of what is anti-competitive, what is not, and then the CCI can take it forward,” she explained.

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Why is India looking to introduce ex-ante regulations?

Competition in India is largely governed by the 21-year-old Competition Act of 2002. Since this Act was enacted when digital markets like e-commerce and social media were not that prominent and because these new-age markets work in different ways compared to traditional markets, there have been calls for an overhaul to the competition regime or a separate law for competition in digital markets. Some notable developments around this front include:

  • Parliamentary Standing Committee on Commerce report: In June 2022, the Parliamentary Standing Committee on Commerce submitted a report that called for ex-ante regulations targeted at digital markets and highlighted the urgent need for amendments to the Competition Act, 2002. “The Committee is of the opinion that it is high time India revamps and strengthens its ex-ante regulatory framework and takes steps to identify entities that act as gatekeeper platforms and set a threshold for qualifying as gatekeeper,” the report stated.
  • Parliamentary Standing Committee on Finance report: More notably, in December 2022, the Parliamentary Standing Committee on Finance submitted an extensive report advocating for ex-ante regulations as well. The report proposed designating leading players in the digital ecosystem as Systemically Important Digital Intermediaries (SIDIs) and subjecting them to certain ex-ante measures.

The Committee on Digital Competition Law (CDCL) was set up following the above two reports.

MediaNama had reached out to Rohan Verma (CEO, MapMyIndia), Snehil Khanor (CEO, Truly Madly), Naukri, Policybazaar, MakeMyTrip, BookMyShow, Zomato, and Phonepe for their views on how ex-ante regulations will impact Indian companies. We either didn’t hear back from them or they declined to participate in this story.

Update (20 July, 2023, 10:55 am): This article was rewritten following editorial input.

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