Ministry Of Corporate Affairs Invites Public Comments On Draft Digital Competition Bill

The most anticipated report by the Committee on Digital Competition Law (CDCL) has finally been submitted to the Finance Minister. The Committee suggested a separate ex-ante legislation to regulate the tech giants and systemically significant digital enterprises (SSDEs). The draft legislation aims to selectively regulate on ex-ante basis and empower the Competition Commission of India to take preemptive measures to curb anti-competitive practices.

In the draft bill, the committee recommended a dual test to designate an enterprise as an SSDE – the significant financial strength (quantitative threshold) and significant spread test (number of business users and end users). The enterprises should self-assess their fulfilment of these thresholds and report to the CCI. 

Further, the committee also proposed that the notifying enterprises should also identify other enterprises within its group which are directly or indirectly involved in the provision of core digital services as Associate Digital Enterprises (ADEs).

Key Features of Draft Digital Competition Bill (DCB):

- Every enterprise should institute a transparent grievance redressal mechanism upon designation as SSDEs. The specific operational modalities of setting up such a mechanism should be outlined by the CCI by way of regulations.

- Empower the Central Government to exempt certain enterprises or classes of enterprises from the purview of the draft bill.

- CCI to onboard experts to its technical capacity to ensure early detection and disposal of cases, dynamic regulation-making and other ancillary regulatory functions in digital markets.

- Set up a separate bench within the NCLAT for speedy disposal of appeals, specifically relating to digital markets.

- Global turnover of the entire group of enterprises to be considered as the basis for calculating the ceiling on penalties under Draft DCB. The penalty is capped at 10% of the global turnover of SSDE’s, in line with the Competiition Act, 2002. However, the appropriate quantum of penalty shall be determined on case-by-case basis. 

A Look-Back:

 - In December 2022, the 53rd Parliamentary Standing Committee on Finance, chaired by Jayant Sinha, recommended that the government should introduce a digital competition act to ensure a fair, transparent and contestable digital ecosystem which will boost start-up and MSME ecosystem. 

- Following the recommendations of the parliamentary panel, the Ministry of Corporate Affairs constituted CDCL committee in February 2023, headed by Dr. Manoj Govil, Corporate Affairs Secretary. The committee was initially given three months’ time to submit its report, however, multiple extensions have been sought.

Speaking to BW Legal World, Pranjal Prateek, Partner, Khaitan & Co, said that, "All large digital entities which meet the twin test of  (i) “significant financial power” i.e. financial thresholds based on Indian turnover, global turnover, gross merchandise value, and global market capitalisation or equivalent fair value and (ii) “significant spread” i.e. number of users metric which measures the reach of the entity will be impacted by the new proposed law. A handful of such threshold meeting entities under the proposed law would require to abide by certain pre-defined obligations and conduct requirement (e.g. not engage in favouring its own products/services over third party products/services). It is worthwhile to note that the draft law envisages enough flexibility and do not subject all identified large digital entities to the same conduct requirements. The CCI has been given enough discretion to subject different digital entities and their services to differential conduct requirements and also account for factors such as economic viability, prevention of fraud etc."

Prateek further said that the draft law recognises that certain large digital players who enjoy significant market power given the peculiar nature of digital markets, are potentially capable of exploiting smaller entities which depend on them.

"These large entities may also leverage their strong position in one digital market to further expand their product/service offerings in allied / neighbouring business (e.g. mobile operating system operators could enter digital payment services) by favouring its own product/service and unfairly thwarting competing offerings by smaller start-ups. The draft law specifically casts ex-ante obligation on such large digital entities to not enter into such practice, failing which penalties will follow. Thus, the draft law safeguards the interests of start-ups and other upcoming innovators. In addition, it should be noted that given the sufficiently high thresholds which need to be met persistently for at least a period of three years, smaller digital startups from India are unlikely to be caught in the net of the draft law," Prateek added.

Prateek further stated that end-users would benefit from more choices, lower prices and better quality of digital products/services due to creation of an environment where third-party digital service providers can effectively compete with the identified large digital entities and among each other. Digital markets continuously evolve, and healthy competition could further spur new innovation which ultimately benefits end users.  

Speaking to BW Legal World, Avaantika Kakkar, Partner (Head-Competition Law), Cyril Amarchand Mangaldas, said that, "The Digital Competition Law will impact all tech companies that meet any of the broad thresholds listed in the Draft Bill. These thresholds include quantitative as well as qualitative criteria. Enterprises are expected to self-assess and report to the CCI based on applying the thresholds over a period of 3 years."

She further said that the real impact of all the proposed regulations worldwide (there are fundamental similarities internationally) on the start up ecosystem will be tested and will show over time.

"It is anticipated to help along the competitive challenges that the start ups face but it is not clear how the success of these interventions will eventually be tested. In the short run, the larger companies will be restrained," Kakkar added.

Kakkar said that the law, as it reads would perhaps ensure that the end users are not subjected to unfair conditions by the so designated Systemically Significant Digital Enterprises.

"Whether the end consumer is subject to unfair conditions by other enterprises operating in the digital space, remains an open question," Kakkar said.

Speaking with BW Legal World, Vaibhav Choukse, Partner & Head, Competition Law at JSA Advocates & Solicitors said, "This is a welcome development. The draft rules enlist certain kinds of M&A transactions which will not require approval from the Competition Commission of India including intra-group transactions, certain types of minority and creeping acquisitions, and rights issue as these will not have an impact on the competition in the market. The rules will replace and modify the existing categories of M&A transactions that are exempt. The rules also modify the affiliate test required to map overlaps between the parties to the M&A transaction. This will reduce regulatory burden of the CCI as well as provide a big relief to the parties involved in M&As."

With inputs from Meghana Kasarla