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Urvi Pathak*
(This is the third post of a three-part series)
I. INTRODUCTION
This is the third of a three-part series on the ongoing debate on India’s proposed Digital Competition Bill (DCB). The first piece unpacks the false choice between regulation and innovation in the context of the DCB, finding that regulation can benefit innovation and lack of regulation can hinder innovation. However, the success of such regulation hinges on thoughtful policy design choices, such as considerations of state capacity and the chosen regulatory architecture. In this vein, the second piece explores the state capacity necessary within the enforcing regulator, the CCI, to implement the DCB. This third piece analyses the principles-based approach adopted by the DCB and offers recommendations to ensure that this relatively novel regulatory design meets with implementational success.
In the dynamic realm of digital regulation, two philosophies have emerged as contenders. The first philosophy is the principles-based approach to regulation which entails that parent law comprises only high-level principles, leaving the specifics to be fashioned through delegated legislation. As opposed to this, the rule-based approach, traditionally adopted in most Indian statutes, provides the specifics of permissible and prohibited conduct in the parent law itself.
Simply put, principle-based regulation may restrict itself to “All motorists should drive safely and not drink while driving”, whereas a rule-based approach will provide specific parameters such as “Driving above 80 kmph will result in fines”, or “Driving with a blood alcohol content of more than 0.03% will result in fine or imprisonment”.
DCB is a beacon of the relatively novel principles-based approach with the object of ensuring fair competition in digital markets. However, given considerable apprehensions expressed by stakeholders, the DCB will require a host of measures to fructify this approach.
II. DEVELOPMENT OF PRINCIPLES-BASED APPROACH IN INDIA
The principles-based approach was first detailed in the landmark report of the Financial Sector Legislative Reforms Commission (“FSLRC”) in 2013 as one recommendation to improve India’s financial laws architecture.
A decade later, the Economic Survey 2023 (“ES 23”) has revisited this concept with vigour, citing Nobel laureate Herbert Simon who famously asserted that humans are inherently equipped with limited rationality since the future is full of “unknown unknowns”. Drawing on this idea, the ES 23 emphasises accepting the “unknown unknowns” as a baseline condition of law-making. Rather than falling into the regulatory trap of trying to account for every possible scenario in legislating, the ES 23 advocates moving towards framing simpler laws. Evidently, the idea of “unknown unknowns” is especially true for digital competition, which inherently involves dynamic business models and fast-paced market forces.
The recommendations of the ES 23 and the FLSRC are quickly materialising in the current regulatory landscape. There is a growing regulatory appetite for the principle-based approach, especially in technology-heavy and financial domains. For instance, substantive policy decisions in financial sector laws on foreign exchange, securities markets and company law have been framed in subordinate legislation. The Reserve Bank of India has also announced a conscious shift in favour of principles-based regulation. Similarly, the NITI Aayog recommended principle-based regulation for fantasy sports, and the Ministry of Electronics and Information Technology has adopted two key principle-based laws: the Digital India Act (presently under consideration), and the Digital Personal Data Protection Act, 2023 (already in force).
III. CCI’S UPCOMING ROLE IN OPERATIONALISING THE PRINCIPLE-BASED DCB
Under the DCB, Systemically Significant Digital Enterprises (“SSDE(s)”) and Associate Digital Enterprises (“ADE(s)”) providing Core Digital Services (“CDS”) must comply with certain obligations. These obligations include restrictions on tying and bundling and anti-steering.
The DCB, in tune with the principles-based approach, confines itself to painting the broad strokes of such obligations. The CCI is entrusted with the mandate of fleshing out these obligations through regulations. Crucially, the CCI wields immense discretion in this role. The CCI will fashion a dedicated set of regulations tailored to each CDS, since obligations necessitated for online intermediation services may be markedly different from those for search engines. Similarly, the CCI is entrusted with the discretion to tailor differential obligations for SSDEs and ADEs based on their size and business models. Obligations may also vary between an SSDE and its ADE counterpart.
The DCB’s thrust on subordinate legislation has been met with some resistance among stakeholders. Opponents argue that the DCB’s intent and scope cannot be meaningfully understood till the CCI’s regulations are unveiled. Consequently, there are concerns that the DCB may be rendered a dead-letter law without the implementing regulations.
For instance, tying and bundling are restricted under the DCB, except when it is “integral” in providing the CDS. However, the DCB does not define the term “integral” or provide guidance to the CCI on the manner of interpreting it. Consequently, the fate of SSDEs being able to provide consumers with the convenience of bundled products lies entirely in the CCI’s hands.
The lack of adequate legislative guidance has also led to impressions that the principles-based obligations are blanket prohibitions and that the DCB adopts a “big is bad” approach, wherein only large digital enterprises with considerable market power are burdened with an extra layer of compliance. Businesses’ uncertainties also come from the holistic shift in digital regulation towards a principle-based approach, considering the limited practical experience of such laws which are in their nascent stages. Consequently, digital markets fear the noose of overregulation tightening around them.
IV. MAKING PRINCIPLE-BASED REGULATION A SUCESS FOR DIGITAL COMPETITION
As highlighted by both the FLSRC and the ES 23, adopting a principle-based regulation, especially in dynamic digital markets, offers significant advantages. However, given the apprehensions among market players and the lack of legislative guidance in the DCB, several practices must be adopted to steer the DCB toward its intended objectives.
First, while the DCB is premised on key themes of bringing “contestability and fairness” in markets, and “lowering entry barriers”, the missing link is the absence of localised definitions of these terms in Indian competition jurisprudence (for a discussion along similar lines in the context of the DMA please see here). In line with the FLSRC report’s recommendation, the CCI ought to release a regulatory scoping agenda for the DCB which can bridge the gap between market and regulator practices through dialogue. This agenda should outline the CCI’s regulatory scope, the market problem sought to be corrected, and a cost-benefit analysis of the proposed intervention. By doing so, the CCI can ensure that the DCB’s objects are crystallised through a consultative process.
Second, as highlighted by the FSLRC Report, in embracing principle-based regulation, the regulator’s technical know-how and sufficient personnel strength cannot be assumed; rather, it must be tangibly demonstrated. Presently, the CCI is facing a staffing crunch, lacks requisite technology experts and has made limited forays in market studies on e-commerce and cab aggregators. In this regard, the CDCL Reports’ recommendation to fortify the Digital Markets and Data Unit, CCI’s designated wing for digital expertise, must be prioritised.
Third, the process of delegated legislation must be met with bolstered checks and balances. At the outset, CCI’s public consultation process, carried out each time regulations are notified, is admirable but can benefit from improvements. A paper by Carnegie India sheds light on measuring regulators’ responsiveness through a series of questions, such as: does the regulator publish data on the effects of the regulation prior to its introduction and after its implementation? Does the regulator conduct external audits of its consultation process? Measuring the CCI’s practices against these benchmarks can result in a more transparent strategy for formulating regulations, thereby instilling stakeholder confidence.
Further, effective execution of delegated legislation extends beyond the purview of the CCI alone; the ecosystem of checks and balances also involves the Parliament and the judiciary. Worryingly, the Parliament has not fulfilled its role of reviewing rules and regulations delegated to expert bodies. For instance, only 13 regulations of the total regulations issued have been reviewed by Parliament in 23 years. Similarly, the specialised Committee on Subordinate Legislation last reviewed CCI regulations in 2010. This highlights the urgent need for Parliament to assess CCI regulations post-facto rigorously.
Judicial review of CCI orders faces its share of troubles, particularly since the abolition of the Competition Appellate Tribunal which specialised in competition appeals. Now, appeals from CCI orders are rerouted to the NCLAT which also takes up appeals from the domains of company and insolvency laws. As a result, the NCLAT’s burden has seen a manifold increase, fracturing its ability to devote focused attention to building expertise in competition jurisprudence. The CDCL Report, recognising this challenge, has recommended setting up a separate NCLAT bench specifically for competition cases, including those emanating from the DCB. Therefore, courts are poised to play a key role in developing a digital competition jurisprudence unique to India’s digital landscape.
V. WAY FORWARD
As articulated by the FLSRC and the ES 23, a principle-based approach offers the most effective strategy to navigate the “unknown unknowns” of anti-competitive concerns in digital markets. The CCI plays a pivotal role in implementing the DCB since its regulations will shape the obligations on SSDEs and ADEs.
To dispel misconceptions that the DCB adopts a “big is bad” approach and to instill confidence among digital players of all sizes in the CCI, several reforms are required to ensure congruence between the CCI’s process of formulating regulations and the DCB’s objects. These reforms include crystallising CCI’s regulatory agenda, enhancing its capacity and bolstering checks and balances while framing subordinate legislation, both within the CCI’s practice and in external domains of Parliament and the judiciary. A synergy among these institutions will determine the success of the DCB in ensuring fair competition in digital markets.
*Urvi Pathak is a Research Fellow with the Corporate Law and Financial Regulation team at Vidhi Centre for Legal Policy, urvi.pathak@vidhilegalpolicy.in. The author was a part of the team which assisted the MCA in the preparation of the CDCL report.
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