Law on Digital Competition

Description

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Context

To tackle unfair and predatory practices in the digital market space, the parliamentary Standing Committee on Finance will submit a report on how the competition law needs to evolve for the digital market.
The long-awaited Bill to amend the Competition Act, 2002, was finally tabled in the Lok Sabha recently.
As the dynamics of the market changes due to technological advancements, artificial intelligence, and the increasing importance of factors other than price, amendments became necessary to sustain and promote market competition.

Role of competition policy in digital markets

The innovations brought by digitalisation have generated substantial consumer benefits in many markets, including lower prices, greater accessibility and convenience, more variety, and new products.
At the same time, several concerns have been identified with respect to competition in many digital markets, in terms of market structure, the conduct of firms, and merger activity in the sector.
Each of these concerns points to declining competition intensity, demonstrated by increasing mark-ups, falling entry rates (especially in digital-intensive sectors), and growing concentration as a symptom of the problem.
Concerns about the competition impacts of durable market power could be particularly pronounced when:

A dominant firm behaves anticompetitively

for example using its position to exclude competitors from a market, or acquiring potential emerging competitors simply to prevent their products from reaching the market

Competition is distorted by regulation

that allows incumbent firms to maintain a dominant position for reasons unrelated to the attractiveness of its products to consumers

Features of demand or supply prevent entry by new firms, or expansion by dominant firms’ competitors

including very strong network effects or economies of scale and scope, information asymmetries between firms and consumers, switching costs, or consumer behavioural biases (such as framing bias - being influenced by the way different options are presented -, salience bias - focusing on the most prominent choice item - , and default bias - a low tendency to switch to unambiguously better offers)

Competition authorities have begun to explore issues ranging from labour market power by large firms, to consumer privacy. These efforts include both enforcement work, as well as broader competition policy and advocacy efforts.
There is, therefore, a great deal of work to be done to address competition concerns in digital markets, and to ensure that current regulatory frameworks are up to the task.

Note: The European Union has recently passed the Digital Markets Act and Digital Services Act.

Major change in dealing with new-age market combinations post amendment

Any acquisition, merger or amalgamation may constitute a combination. Current law says parties indulging in merger, acquisition, or amalgamation need to notify the Commission of the combination only on the basis of ‘asset’ or ‘turnover’.
The new Bill proposes to add a ‘deal value’ threshold. It will be mandatory to notify the Commission of any transaction with a deal value in excess of Rs 2,000 Crore and if either of the parties has ‘substantial business operations in India’.
The Commission shall frame regulations to prescribe the requirements for assessing whether an enterprise has ‘substantial business operations in India’. This change will strengthen the Commission’s review mechanism, particularly in the digital and infrastructure space, a majority of which were not reported earlier, as the asset or turnover values did not meet the jurisdictional thresholds.
When business entities are willing to execute a combination, they must inform the Commission. The Commission may approve or disapprove the combination, keeping in mind the appreciable adverse effect on competition that is likely to be caused.
The Commission earlier had 210 days to approve the combination, after which it is automatically approved.
The new Bill seeks to accelerate the timeline from 210 working days to only 150 working days with a conservatory period of 30 days for extensions. This will speed up the clearance of combinations and increase the importance of pre-filing consultations with the Commission.

What is gun-jumping?

Parties should not go ahead with a combination prior to its approval. If the combining parties close a notified transaction before the approval, or have consummated a reportable transaction without bringing it to the Commission’s knowledge, it is seen as gun-jumping. The penalty for gun-jumping was a total of 1% of the asset or turnover. This is now proposed to be 1% of the deal value.

What challenge do combining parties face in open market purchases?

There have been several gun-jumping cases owing to the combining parties’ inability to defer the consummation of open market purchases. Many of them argue that acquisitions involving open market purchase of target shares must be completed quickly, lest the stock value and total consideration undergo a change. If parties wait for the Commission’s clearance, the transaction may become unaffordable.
Similar to the European Union merger regulations, the present amendment Bill also proposes to exempt open market purchases and stock market transactions from the requirement to notify them to the Commission in advance. This is subject to the condition that the acquirer does not exercise voting or ownership rights until the transaction is approved and the same is notified to the Commission subsequently.

Does the amendment Bill address the issue of Hub-and-Spoke Cartels?

A Hub-and-Spoke arrangement is a kind of cartelization in which vertically related players act as a hub and place horizontal restrictions on suppliers or retailers (spokes). Currently, the prohibition on anti-competitive agreements only covers entities with similar trades that engage in anti-competitive practices. This ignores hub-and-spoke cartels operated at different levels of the vertical chain by distributors and suppliers.
To combat this, the amendment broadens the scope of ‘anti-competitive agreements’ to catch entities that facilitate cartelization even if they are not engaged in identical trade practices.

What is the amendment to the 'settlements' and 'commitments' mechanisms?

The new amendment proposes a framework for settlements and commitments for cases relating to vertical agreements and abuse of dominance. In the case of vertical agreements and abuse of dominance, the parties may apply for a ‘commitment’ before the Director General (DG) submits the report.
‘Settlement’ will be considered after the report is submitted and before the Commission decides. According to the amendment, the Commission's decision regarding commitment or settlement will not be appealable after hearing all stakeholders in the case. The Commission will come out with regulations regarding procedural aspects.

What are the other major amendments?

In the amendment Bill, a provision called ‘Leniency Plus’ allows the commission to give an additional waiver of penalties to an applicant who discloses the existence of another cartel in an unrelated market. This provision is subject to the condition that the information enables the Commission to form a prima facie opinion about the existence of the cartel.
Other noteworthy amendments include the appointment of the DG by the Commission rather than the Central government, giving the Commission greater control. According to the Bill, the DG has the power to conduct investigations, including raids. The Commission will only consider information filed within three years of the occurrence of the cause of action. As part of the Bill, penalties and penalty guidelines are proposed to be amended. For any false information filed, a penalty of five crore will be imposed, and for failure to comply with the Commission directions, a penalty of Rs 10 crore will be imposed. Additionally, the Commission will develop guidelines regarding the amount of penalties for various competition violations.
For an appeal to be heard by the National Company Law Tribunal (NCLT) against the Commission’s order, the party will have to deposit 25% of the penalty amount.

Significance of amendments

By implementing these amendments, the Commission should be better equipped to handle certain aspects of the new-age market and transform its functioning to be more robust. The proposed amendments are undoubtedly needed; however, these are heavily dependent on regulations that will be notified by the Commission later. These regulations will influence the proposals. Also, the government needs to recognize that market dynamics change constantly, so it is necessary to update laws regularly.

Looking Forward

Digital markets have posed significant challenges for competition law and policy frameworks in recent years. Anticompetitive horizontal mergers, agreements among competitors and vertical restraints can produce as much harm in digital markets as in traditional ones.
There is a growing consensus that at least some parts of the competition policy framework must be adjusted in response to digitalisation.
Some proposals include:

Enhancing merger control frameworks...

Including adjusting notification thresholds to capture anticompetitive acquisitions of emerging competitors, increasing the emphasis on innovation and dynamic competition issues, explicitly including digital-specific issues such as data access or intermediation power in merger legislation, and placing the burden of proof on merging parties to show the lack of competition harm in certain situations.
Ex-post assessments of past merger decisions have also been pointed to as an important tool to learn from past experience in digital markets as it accumulated.

Strengthening abuse of dominance (or monopolisation) enforcement...

In particular by either shifting the burden onto dominant firms to show the procompetitive effects of certain types of conduct, and by using more interim measures to preserve competition while a case is ongoing.

Clear guidelines...

To help firms understand the situations in which digital-specific competition concerns may arise, and how they will be analysed.

Enhancing the digital tools and expertise available to competition authorities...

Given the complex nature of these markets and the conduct that may arise. Authorities are establishing dedicated teams focused on digital markets, and are experimenting with new digital resources such as the use of artificial intelligence to monitor remedy implementation.

Deeper international co-operation among competition authorities

Given the cross-border nature of digital markets and the common issues they pose.

Greater use of market studies to take a holistic view of competition problems in digital markets...

Since they may emerge outside the context of a merger or enforcement case. Several authorities have used these tools to advocate for regulatory change and improve their knowledge in areas such as digital advertising, FinTech and patent assertion entities.

Final Thought

Looking ahead, the gains from greater co-operation and co-ordination among competition policymakers can be significant, both in terms of improving the effectiveness of the measures in question and reducing the compliance burden on firms from diverging approaches.

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