From household names to multinational enterprises, digitalization brought in India by global firms has been welcomed with open arms, following the mantra of “Athithi Devo Bhava (The guest is god)”. Post-pandemic, largely the entire populous has adopted digitalization, which was earlier an alien concept. The growth of the digital market has subsequently led to the rise of large digital enterprises, which operate on the expansive Indian digital network. Thus the pressure to curb anti-competitive practices falls on the competition authority, namely the Competition Commission of India (CCI). And perhaps the response to these rising concerns has been sound in the form of the Draft Digital Competition Bill 2024 (DCB).

The committee on digital competition law which was set up in February 2023 has indeed very methodically analyzed the vast jurisprudence on digital competition laws and drafted the DCB to regulate digital markets. This article aims to analyze the newly introduced concept of Systematically Significant Digital Enterprises or SSDEs. The designation of an enterprise as SSDE is done either by the Commission or by self-reporting as provided under section 4 of the DCB, based on the criteria under section 3 of the Bill, thus the inter-relationship between the new age section 3 and 4.

What are SSDEs?

SSDEs is a concept similar to that of gatekeepers under the Digital Markets Act of the EU or Strategic Market Status/ SMS under the Digital Market, Competition and Consumer Bill of the U.K. SSDEs are such enterprises that have a significant presence in the Core Digital Service, which the enterprise may provide. The bill lists nine different kinds of digital services as part of Core Digital Services including online search engines, social networking services, operating systems etc. An enterprise may be designated as a SSDE based on either the quantitative or the qualitative criteria under section 3 of the bill for a time period of three years.

The quantitative criteria are primarily statistical, based on turnover in India or globally; or global merchandise or market capitalization along with the number of end or business users. The concept has been established after an in-depth analysis of the DMA and the DMCC, formulating a similar model for qualitative criteria. The underlying tests in this qualitative approach are: a) the significant financial test; b) significant spread test, focusing on the monetary metrics and user metrics respectively. Thus making the metric more inclusive and resultantly widening its ambit. When an enterprise meets these quantitative thresholds it is automatically designated as a SSDE by the commission moreover entails self-reporting obligations under section 4 of the bill.

Qualitative criteria are subjective and discretionary in nature. Section 3(3) of the bill consists of nearly sixteen factors which the commission may consider while designating an enterprise as SSDE. These criteria are independent in nature, therefore if an enterprise does not meet the quantitative threshold it may still be designated as a SSDE based on factors such as network-effects, economic power, market size and structure etc.; the concept again has been borrowed from foreign jurisprudence. The threshold under these qualitative criteria is lower than that of dominant entity under section 19(4) of the Competition Act 2002.

Key formulation of section 3

While the quantitative and qualitative criteria are the backbone of section 3 of the Bill, there is more to it that meets the eye. The new bill offers a list of inclusive and flexible Core Digital Services that attract the application of the bill and particularly in the context of section 3 attract the concept of having significant presence in these Core Digital Services. The Committee recognised the ever-evolving nature of digital markets and in light of that has widened the definitions of the various Services under schedule 1. While there are eight pre-identified services in the schedule, clause (i) aims to expand the application of the Bill to any other kind of online or digital service which may not be expressly provided in schedule 1, for example food delivery services. Thus the expansive scope of section 3 will allow the commission to seamlessly integrate future development in technology and cater to the rapidly advancing digital market.

Another key feature herein is the ex-ante application of the act and its impact on designation of enterprises as SSDE under section 3 and 4. It is pertinent to note that the Competition Act 2002 was primarily an ex-post legislation thus the Commission could only intervene once the damage was done or seen to done. Taking into account the jurisprudence and the nature of digital markets, the committee has aimed to enforce the DCB in an ex-ante manner. Thus these identifications and other relevant provisions are applicable prior to the occurrence of the actual results.

Another unique characteristic of the section 3 and 4 is concept of Associate Digital Enterprises. The Committee has in foresight recognised how most of the large scale digital enterprises may use corporate structuring to escape the applicability of the Act. Thus in order to prevent such activities, the commission may also look at the group to which an enterprise belongs and designate an enterprise within that group as Associate Digital Enterprise under section 4 of the Bill. This allows the commission to exercise wider powers and keep up with the pace of the growing digital markets.

Why these designations are important?

The objective of competition law is primarily twofold: a) it is enacted for economic efficiency; b) to maximize public interest. Keeping in mind these objectives, the designation of digital enterprises is done to ensure that even in the volatility of such digital markets there can be economic efficiency and due regard for public interest.

Large scale digital enterprises that may be designated as SSDEs have enormous influence over both end users and business users, thus the risk of anti-competitive behavior is exorbitant. Digital markets because of their open and transparent nature are susceptible to a unfair conditions, with larger enterprises exercising extreme market power and causing threats of unfair competition. The committee already recognized certain practices such as self-preferencing, anti-steering, deep discounting, tying and bundling etc. and all this is done with the aim to ensure fairness in market conditions. Thus, ensuring a level playing field in such a volatile environment is the primary objective of the Bill and section 3-4, crucially, help identify target companies that run the risk of anti-competitive practices.

Data has become the most significant factor in digital markets, with large scale enterprises having access to sensitive personal and public data, it is extremely important to ensure that there is no misuse of such data while also protecting the interest of other smaller enterprises in the segment. While the Digital Personal Data Protection Act (DPDPA) looks to protect such data from the consumer perspective, the competition angle of this remained untouched until the idea of the DCB came into existence. Thus to ensure that there are no anti-competitive practice regarding collection of data such designations help pour more responsibility over such enterprises.

It is also pertinent to note that unlike other markets, digital markets have lower entry costs however, because of the extreme volatility and the presence dominant enterprises with major resources while entering competition may not be so difficult, existing in the competition is an insurmountable task. Thereof larger enterprises have the ability to use their resources to eliminate competition or even cause entry barriers giving the market a monopolistic outlook. Such designations and the simultaneous obligations will enforce these enterprises to restrain from such practice and allow smaller enterprises to grow and compete.

Margin for Error

While the DCB seems well-prepped for the coming future, there is always room for error in such situations. Perhaps one of the biggest shortcomings of the provisions is the extent of discretionary power given to the Commission. As previously discussed, designation of a company as SSDE may be done based on quantitative or qualitative metrics, and while quantitative metrics remain fixed and defined, the qualitative metrics are heavily discretionary. Under section 3(3) of the Bill, the Commission has sixteen different metrics and may designate an enterprise as an SSDE based on any one of those metrics. Such vast discretionary powers will open the gates for political interference and the risks for false positives (type I error) and false negatives (type II error) increase and the subsequent impact of such type I and type II errors may be detrimental to the overall market.

While the ex-ante identification is a step forward, such identification may result in the unintended consequence of deterring investments in digital markets. Enterprises may avoid scaling up in order to avoid designations and further increase in compliance cost because of the designations. Enterprises may also look to decrease operation scales in order to avoid designations. Increased obligations will also be detrimental to foreign multinational companies that may want to invest in India as they’ll have to comply with several provisions of the proposed Bill, which may hinder foreign investment in India.

Way forward and concluding remarks

While discussing the subsequent legislations applicable to digital markets the Committee deliberated on the application of legislations like the Digital Personal Data Protection Act, Draft National Data Governance Framework Policy, the Proposed Digital India Act, Draft E-Commerce Policy, 2019 etc. indicating that the aim of this Bill is to compliment the ongoing regulatory process of inculcating digital markets and its wide range of activities. Thus section 3 and 4 of the Bill play a crucial role in regulating the competition aspect of digital markets and thereof formulating a “Family of digital laws in India”. DCB’s sector agnostic approach makes it adequately prepared for the future, more so in the light of recent AI development. The most significant feature of this Bill is that it perhaps puts the Indian Competition regime at par with the more advanced and developed jurisprudence such as that of EU, UK and Australia. This allows India to not only just position itself on a strong global footing but also set national and international precedent. Thus, the new section 3-4 tandem follows the footsteps and the influence of corresponding sections of the Competition Act, 2002 while keeping its identity intact.

Vinayak Sharma and Adarsh Tripathi are law students at Army Institute of Law, Mohali.