India’s Digital Tightrope: The Need For Proportionality

SUMMARY

The Bill proposes to regulate large companies designated as “systemically significant” by requiring them to follow a code of conduct

Several of the obligations are premised on the understanding that the business practices they prohibit do not have any benefits and cannot be justified

The article explains why in its current form, the Bill could compromise consumer welfare and hamper innovation

In March, India’s Ministry of Corporate Affairs (MCA) unveiled a new set of rules designed to promote fair competition in digital markets: the draft Digital Competition Bill (Bill). The Bill is a landmark legislative proposal that will reshape the way in which digital companies do business in India.

The Design Of The Bill

The Bill proposes to regulate large companies designated as “systemically significant” by requiring them to follow a code of conduct, rather than addressing specific instances of anti-competitive conduct after they have happened. 

The Bill proposes that the market regulator, the Competition Commission of India (CCI), detail the code of conduct on the basis of overarching principles, such as the obligation not to offer two services/products together.

Several of the obligations are premised on the understanding that the business practices they prohibit do not have any benefits and cannot be justified. They also mark a departure from the decisional practice of the CCI, which has underscored the benefits of several practices the Bill seeks to ban.

As we explain below, the Bill runs the risk of disproportionate regulation, and if enacted in its current form, could compromise consumer welfare and hamper innovation.

The Example Of Self-Preferencing

Take for instance the Bill’s prohibition of self-preferencing: large enterprises are restricted from favouring – whether directly or indirectly – not only their own products and services, but those of related parties and third parties with whom the company has had any type of business arrangement in the past.

But is it always harmful for a company to favour its own products or services? For example, if a user is looking to find information about a restaurant on a search engine, is it appropriate to ban the display of the location of the restaurant on the search engine’s maps application? 

Arguably, the display of the location is a product/service improvement, and the Bill’s prohibition will make it more difficult for consumers to find relevant information. It will also discourage large companies from foraying into new lines of business, such as offering apps that complement their offerings because it is unclear what “favouring” could mean. 

To the extent that the Bill bans all forms of preferencing, it runs the risk of disproportionately regulating valid business practices that benefit consumers and increase competition.

Similarly, are the goals of the Bill achieved by prohibiting partnerships between large enterprises and third parties? Is all differential treatment anti-competitive? For example, should an ecommerce player be prohibited from listing, in its search results, highly-rated products of a party with whom the player has had a business arrangement in the past? 

If the goal is to foster competition and enhance consumer welfare, the prohibition of legitimate arrangements between companies that enhance value for users runs the risk of being disproportionate.

In the interest of ensuring that the Bill does not prohibit legitimate commercial conduct, the Bill should empower the CCI to apply a careful analysis based on clear principles that distinguishes between pro-competitive and anti-competitive business practices, tailored to the facts of each case. In the absence of a more carefully calibrated approach, the Bill’s prescriptive rules will do more harm than good.

Looking Ahead

India’s digital ecosystem is growing at a rapid pace, with an exponential increase in the number of startups and the number of Internet users, and is poised to grow further. For example, the number of active Internet users in India is projected to grow to over 1.4 Bn users in 2025.

In this context, the introduction of any additional rules in the digital sector without a proportionality guardrail risks harming India’s growth trajectory, impacting incentives to innovate, and degrading consumer experience. 

It is essential to ensure that the favourable environment created to spur growth in the digital sector is not compromised by rules that err on the side of overregulation. 

The adoption of a balanced approach, following from a careful reconsideration of the Bill, will go a long way in protecting consumers, safeguarding business interests, and empowering the CCI to continue to proportionately and effectively regulate markets.

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