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    NASSCOM Suggests Strengthening the Existing Regulatory Framework Before Introducing a Digital Competition Bill

    It is desirable to strengthen the existing regulatory framework before deciding whether there is a need for a Digital Competition Act, the National Association of Software and Service Companies (NASSCOM) says in its comments on the draft Digital Competition Bill (DCB). Released by the Ministry of Corporate Affairs in March this year, the draft bill is part of the report presented by the Committee on Digital Competition Law (CDCL), which was set up by the government in February 2023, to examine and report on the need for a separate law for competition in digital markets. 

    In its report, CDCL points out the enforcement gaps present in ex-post regulation under the Competition Act, 2002. It also flagged the following issues present in the current Competition Act— the time-consuming nature of ex-post investigation and narrow remedies. NASSCOM argues that the delay in enforcement within the current Act is linked to capacity issues. The Competition Commission of India (CCI) has faced staff shortages since its inception. At the appellate level, the National Company Law Appellate Tribunal (NCLAT) does not have a dedicated bench for competition cases. As such, NASSCOM says that there is a need to add to the capacity of the CCI and the NCLAT. The Digital Markets Unit being set up by the CCI would need persons with technical expertise in digital markets. Within NCLAT, there is a need for dedicated competition benches which should include members with technical expertise to deal with matters involving digital markets.

    With respect to the narrow nature of the remedies and ex-ante regulation’s potential to rectify this, NASSCOM expressed the following concerns—

    • As per a report by the Competition Law Review Commission (CLRC), the Competition Act, 2002, has sufficient tools to address anti-competitive practices in digital markets. The report also suggested changes to strengthen the law and bring faster market correction. Since amendments to the law were only introduced last year, it is yet to be seen whether they achieve their objectives. As such, it may be premature to create a parallel framework in the competition law regime, till the amendments undergo an impact assessment. 
    • NASSCOM notes that while companies undergo repeated scrutiny for different types of conduct under the current competition law, the same will happen under an ex-ante regime as well. Under DCB, due and proper inquiry procedures would have to be followed for each violation. Matters can be clubbed only in case of substantially the same information, which is anyhow permitted under the Competition Act, 2002.
    • Finally, there is no past experience of successfully implementing an ex-ante competition law in digital markets. Even for the Digital Markets Act (DMA) in the European Union (EU), it would take substantial time before one can make confident assertions about the successful impact of ex-ante law. 

    Key points made by NASSCOM:

    Issues with what constitutes a “core digital service”: While CDCL has acknowledged that the list of core digital services (CDS) should be based on CCI’s enforcement experience, the list of CDS under the bill includes services where there is no prior indication of competition harms. This includes online social networking services, video-sharing platform services, interpersonal communication services, and cloud services.

    Narrowing the definition of “online intermediation services”: This definition has been taken from the definition of an intermediary from the Information Technology Act, 2000 (IT Act). Read together with the definition of electronic record under the IT Act, this definition applies to any service provider who receives, stores, or transmits third-party electronic records, or provides any service with respect to third-party electronic records. Given its broad nature, it makes the other CDSs listed under the bill redundant since they are already included under the scope of online intermediation services. As such, the definition of online intermediation services should be re-looked at and narrowed down.

    The definition of advertising in the bill should be narrowed down: The current definition is not limited to ad tech intermediation services. It could even include services that allow businesses to promote their products/services in any form. For example, services that give businesses the option to promote their offerings by way of a catalog on an inter-personal messaging platform could be classified as an advertising service, even if their core function is not advertising. This categorization runs the risk of equating diverse entities such as advertising intermediary services, including ad networks and ad exchanges, with other entities that merely provide advertising space on websites and mobile applications.

    What about the impact of the bill on startups? India, unlike the EU, is an emerging economy with scope for the growth of home-grown startups. Further, one of the objectives of the draft bill is to foster innovation. However, CDCL’s report does not provide an analysis of how DCB would promote innovation in the Indian context. It also doesn’t discuss the guardrails the DCB must have to ensure that it doesn’t stifle innovation, given that there is no global experience in implementing ex-ante regulation. 

    SSDEs should be allowed to contest their status: The bill designates companies that meet certain user and financial thresholds as Systematically Significant Digital Enterprises (SSDEs). These are organizations that would have to comply with the regulations set out under the bill. NASSCOM points out that some companies could meet the SSDE thresholds without having a significant market presence. It explains that certain entities like app-based taxi services have expressed apprehension about being designated SSDEs. In the past, CCI has examined complaints against app-based taxi service providers and has not found anyone to be dominant. Its 2022 study into app-based taxi service providers also did not recommend an ex-ante regulatory regime. 

     “Therefore, absence of an opportunity to an enterprise to contest its designation as SSDE, would unintentionally widen the scope of SSDEs, and may discourage entities from increasing their user-base,”  NASSCOM says. There could also be situations where large global enterprises are unwilling to offer services in India for fear of being designated as SSDEs due to their global turnover. It suggests that an enterprise should be given the opportunity to demonstrate that even though it meets the thresholds, it does not have a significant presence. 

    Quantitative thresholds are too low: The end user threshold set under the bill doesn’t reflect the number of internet users in India. As such, NASSCOM suggests that the threshold for end users needs to be grounded in reality. With respect to business users, there is merit in focused studies to understand how business users are getting impacted in the digital markets, especially for sectors prone to multi-homing, such as e-commerce, cab services, etc. 

    The problem with the low user thresholds becomes even more prominent since the two are not seen cumulatively. Given that digital markets are two-sided, the threshold for both end-users and business users should be fulfilled to meet the user’s threshold. Further, since the DCB intends to designate only those companies as SSDEs that have a significant presence, such entities should be measured on both sides of the market. 

    SSDEs should have the right to consult during framing of conduct requirements: The bill allows CCI to frame specific conduct requirements for each core digital service as well as other requirements like manner of calculation of turnover, calculating number of end-users, etc. The bill suggests that it may consult entities while framing regulations as well. NASSCOM explains that the framing of these conduct requirements needs a nuanced understanding of each business model/digital service which requires focused consultations with SSDEs. It also adds that since ex-ante regulations are supposed to be self-executing, there needs to be certainty among SSDEs about their conduct requirement/differential obligations with respect to each CDS from the beginning. Mandatory consultations with SSDEs before framing the requirements would help in reducing future disputes and litigations which may cause less administrative burden on CCI and the appellate machinery. 

    The bill notably also allows CCI to notify new core digital services or alter the list of core digital services present under it. NASSCOM points out that there is a need for a wider consultation involving SSDEs and relevant stakeholders to better inform the process of notifying additional core digital services. “There is always a possibility of unintended outcome and therefore, consulting stakeholders should be a mandate in the law,” it says, arguing that doing so could help identify only those services that have witnessed anti-competitive harms in the past or hold the possibility of future harms.

    Introduce proportionality into the bill: Presently, the powers exercised by the CCI do not have a guardrail of proportionality. This would ensure that CCI always considers whether there are other measures that can effectively achieve the same goal with fewer limitations. In the absence of a specific proportionality clause, excessive regulation could lead to increased compliance costs which in turn would adversely affect efficiency and innovation.

    There should be a provision to countervail benefits: NASSCOM argues that currently there is no provision under the bill for SSDEs to to claim that certain conduct, while potentially anti-competitive, provides countervailing benefits to users that outweigh the anti-competitive effects. Given that there is no need to examine anti-competitive behavior under an ex-ante regime, countervailing benefit is a necessary guardrail needed to avoid unintended consequences that can negatively impact competition. 

    It says that this is necessary as a guardrail because of either the total absence of an exception (in case of self-preferencing and restricting third-party application), or a narrowly worded exception (in the case of anti-steering and tying/bundling – allowed only when provision of such product or services is integral to the provision of a service). This guardrail would allow companies to carry out certain behavior which is beneficial to user protection. For instance, blocking unverified apps from sending unsolicited messages to users might not be ‘integral’ to the core digital service itself, but necessary to protect user interests.

    Ranking based on transparent parameters should be allowed: The bill prohibits companies from showing their own goods or services favorably irrespective of the possibility that in certain situations it need not be anti-competitive, NASSCOM says. It argues that the self-preferencing clause under the bill should allow for situations where the results displayed to the user are ranked objectively and transparently. The association argues that the language of the clause is broad enough to cover unintended situations like an SSDE advertising their products on their platform. As such, it says that the clause should include a carve-out for the ranking of products on objective and transparent parameters.

    Personal data of business users needs to be clarified: The bill requires SSDEs to seek the consent of end users and business users before inter-mixing or cross-using their data. The term consent has the same meaning under the draft bill as it does under the Digital Personal Data Protection Act, 2023 (DPDP Act). NASSCOM argues that if the intention of this clause is to protect end-users, then the protection already exists under the DPDP Act. However, if the intention is to promote competition, CDCL’s report does not provide a rationale on how obtaining the consent of users would address anti-competitive harms. The association says that the following parts of this clause don’t align with the DPDP Act— 

    • The DPDP Act does not refer to people as “end users” but as data principals. As such, it is incorrect to refer to the act in the context of end users. 
    • Under the DPDP Act and other international data protection laws, personal data is only understood in the context of individuals. This leads to confusion as to what is the meaning of ‘personal data of a business user’. 
    • Draft DCA forgets to account for legitimate uses for the processing of personal data without consent, as specified under the DPDP Act. 

    This clause can have unintended consequences such as the SSDE providing a service in a less personalized manner. End-users might see no ads at all which can impact businesses who rely on targeted ad services offered by SSDEs to increase their reach. It could also lead to the SSDE introducing a subscription model, leading to the service becoming less appealing for Indian users, thereby reducing their choices. With all this considered, NASSCOM said that this clause should be removed. 

    Restriction on impeding third-party app downloads should be reduced: The bill currently stops SSDEs from restricting or impeding the download of third-party apps. NASSCOM says that the term “impede” is overly broad and could end up covering legitimate practices. For instance, web browsers limit user access to unverified third-party websites by showing them a warning, etc. Under the current regulation, this could amount to slowing down the user’s ability to access such third-party websites, and therefore be prohibited.

    Tying and bundling restrictions should be reduced: As it currently stands, this provision extends not only to ‘requiring’ but also ‘incentivizing’ the use of other products or services. The term incentivizing widens the scope of the provision to include legitimate practices like discounts, subscriptions or showing advertisements. For instance, an SSDE advertising that they have a video calling service along with an email service could be considered incentivizing the use of an online video-communication service alongside the use of an e-mail service.

    The penalties under the bill are disproportionate: Penalties on the basis of global turnover are excessive and not proportional to the harm sought to be remedied. It has been settled position in law based on the Supreme Court’s decision in the Excel Crop Care versus CCI case that imposing penalties based on total turnover instead of relevant turnover could be disproportionate, especially for multi-product companies.

    Companies involved in an investigation should have a right to CCI Director General’s findings and supplementary report: NASSCOM argues that since the draft bill is an ex-ante law, there is a greater need for procedural guardrails, like, concerned parties should be entitled to receive a copy of the director general’s investigation findings to defend themselves effectively.

    You can read the entire submission here.

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    The post NASSCOM Suggests Strengthening the Existing Regulatory Framework Before Introducing a Digital Competition Bill appeared first on MEDIANAMA.

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