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India's Competition Law Report is a mixed bag for investment and innovation

By Nikhil Sud, Regulatory Affairs Specialist, Albright Stonebridge Group

India’s Competition Law Review Committee, constituted last year by the Ministry of Corporate Affairs, recently submitted a dense 220-page report to the Ministry, making many recommendations regarding India’s Competition Act and the functioning of the Competition Commission of India (CCI), India’s competition regulator. The Ministry will review the report before deciding how to proceed. As discussed below, some of the report’s recommendations may boost – while others risk chilling – investment and innovation in India.

Procedure

The report’s procedure-related recommendations – some of which are discussed below – merit attention not only because procedural fairness is key to any regulatory exercise but also because several CCI investigations and decisions have been procedurally inadequate and overturned on procedural grounds.

The report recommends merging the CCI with the Director General’s office (DG), which is the CCI’s investigative wing. This can undermine the DG’s independence despite the report’s assurance to the contrary, resulting in the CCI’s influence over the DG (e.g., the DG may feel inclined to align its conclusions with the CCI’s views including the CCI’s prima facie order) or the CCI’s deference to the DG (e.g., the CCI may defer in part to the DG’s conclusions rather than review them de novo). The current separation provides an important layer of scrutiny, as evidenced by the several DG conclusions that the CCI has disagreed with and by the opacity plaguing some DG investigations over the years. Eliminating this scrutiny can discourage investment and innovation in India.

The report recommends that the National Company Law Appellate Tribunal (NCLAT) – which hears appeals relating to companies including from the CCI – have a separate bench for competition law appeals. This is praiseworthy because competition law is highly specialized and complex (particularly given the rapidly evolving technology landscape) and therefore requires deep expertise in competition law, rather than general expertise in matters related to companies. In fact, ideally, the Competition Appellate Tribunal (COMPAT), which was an appellate body dedicated to competition law appeals and which the NCLAT replaced, should be reinstated. Relatedly, the report’s suggestion to amend the Competition Act to permit other regulators to advise the CCI on competition law matters is concerning given the highly specialized nature of competition law, even if other regulators’ mandates mention competition (which they ideally should not, again because competition regulation is extremely specialized). If anything, the advice should flow only in the opposite direction.

The report suggests retaining the CCI’s ability to engage with the parties and others before issuing a prima facie order. This is commendable because such engagement can yield insights critical to forming an educated albeit preliminary view. In fact, the Ministry should consider mandating such engagement. Such engagement is particularly important given the reduced rigor that might result from the DG’s merger with the CCI (discussed above).

Separately, the report notes that the CCI should not require the informant to substantiate its allegations but permits the informant to freely engage with the CCI subject to time constraints. The Ministry should consider limiting the informant’s role per the definition of an “informant” – i.e., to providing information to the CCI (including the DG), based on which the CCI forms its prima facie view or the DG conducts its investigation, and to responding to the CCI’s or DG’s questions regarding that information. Allowing the informant to do more – e.g., defend or oppose the DG’s conclusions – risks fundamentally transforming the nature of these proceedings from inquisitorial to adversarial. It also risks allowing the informant greater influence than necessary (given the DG’s responsibility to conduct a thorough investigation and the CCI’s responsibility to review the DG’s conclusions thoroughly) or appropriate (because the DG’s conclusions may stretch beyond issues on which the informant has credible knowledge). Relatedly, awarding informants this greater role risks demotivating the DG and CCI from exercising their roles rigorously, which would be gravely unfair because the informant may, by definition, be biased.

Separately, and consistent with due process principles, the report commendably suggests expressly providing the CCI the ability to pass orders at various stages of its proceedings; requiring that parties be heard before certain orders are passed; and requiring that certain orders be appealable. The report also recommends that proceedings be quick and adhere firmly to clear timelines; while this may promote efficiency and predictability, it may compromise rigor especially in substantial and complex matters. Separately, the report’s suggestion for a governing board is concerning because its rationale is unclear, it could convolute proceedings, and it could render the CCI vulnerable to external influence (through the “external perspective” that the report states a governing board would bring). The report also suggests adopting a formal framework per which the CCI should continually develop regulations with public input. This is helpful given the evolving landscape of competition-related issues, but the pendency of such regulations can create uncertainty. Relatedly, the CCI should ensure that consultations for such regulations are wide and robust.

Relevant markets

The report recommends not expressly requiring the CCI to define relevant markets when assessing horizontal and vertical agreements. This risks undermining the rigor of the CCI’s analysis. Though cartels are presumed to harm competition, cartelization allegations can be refuted through an analysis of the impact of competition. That analysis – which is also key to assessing other horizontal agreements and all vertical agreements – would benefit critically from defining relevant markets. Surprisingly, and in contrast with international jurisprudence, the report worries that defining relevant markets could make the CCI’s analysis “too rigorous.” Is there such a thing as too much rigor? Of course, measures that do not enhance the quality of the CCI’s analysis need not be implemented – but such measures cannot be said to enhance rigor either, because rigor and quality are inextricably linked. The report’s use of the word “rigor” thus reveals its acknowledgment (inconsistent with its recommendation) that defining relevant markets would enhance the quality of the CCI’s analysis. Also, the report finds that “the concept of relevant market is implicit in the assessment of vertical agreements,” and the report relies on that finding and on the CCI’s decisional practice to assure readers that the CCI will incorporate the relevant market in its assessment. Why not then make the concept explicit? That would bind the CCI, foster fairness and predictability, and be consistent with the report’s approach in certain other instances where it recommends amendments to the Competition Act even though the CCI’s decisional practice already adheres to the proposed amendment.

Separately, the report suggests requiring the CCI to consider the “costs associated with switching demand/supply to other products” when defining the relevant market. This suggestion is commendable. Switching costs, particularly in the technology space, play a surprising and important role, often challenging traditional notions of dominance and anticompetitive harm.

Agreements

The report makes several praiseworthy suggestions regarding agreements. For example, it recommends amending the Competition Act to expressly include liability for the “hub” in a “hub-and-spoke” cartel – i.e., an agreement in which a third party (the “hub”) facilitates collusion between two or more entities which compete with each other (the “spokes”). Additionally, and consistent with the CCI’s decisional practice and international jurisprudence, the report commendably suggests amending the Competition Act to note that the tied and tying products or services in a tie-in arrangement must be “distinct” – i.e., if there was no tie-in arrangement, a substantial number of customers would have purchased one of the products or services without purchasing the other product or service. Additionally, the report suggests including “consumer harm” among the factors the CCI should consider when assessing allegedly anticompetitive agreements. This is commendable because competition law should focus on protecting consumers and relatedly, competition in general, not individual competitors.

Separately, the report recommends replacing “foreclosure of competition by hindering entry into the market” with “foreclosure of competition” as one of the factors the CCI should consider when evaluating whether an agreement has “an appreciable adverse effect on competition.” This recommendation is somewhat puzzling because the factors are meant to limit the meaning of “an appreciable adverse effect on competition” but this new factor, “foreclosure of competition,” is arguably synonymous with “an appreciable adverse effect on competition,” rendering the limiting list of factors limitless. This tautological amendment therefore risks at best reducing the Competition Act’s clarity and at worst regulatory overreach. The report’s intention is to implicitly accommodate the reduction of existing competition (besides the hindering of potential competition). Express accommodation could have prevented these risks. However, this accommodation – implicit or express – requires caution and rigorous analysis, so that the CCI does not conflate anticompetitive harm with the harm to competitors that results from vigorous, healthy competition.

Combinations

To the benefit of investment and innovation in India, the report recommends a “green channel” for most combinations, whereby the combining parties merely provide the CCI information regarding the combination and then proceed to consummate the combination. The report’s recommendation stems from its recognition that the “vast majority of mergers and acquisitions…have no major concerns regarding appreciable adverse effects on competition.” The report balances this recommendation with strict consequences if the combining entities provide inaccurate or incomplete information.

Unilateral conduct

The report recommends not expressly requiring the CCI to assess the effects on competition when the CCI evaluates abuse of dominance allegations. This recommendation for statutory silence risks significantly chilling investment and innovation in India. The Competition Act currently (lacking this express requirement) risks being interpreted as a per se approach to abuse, whereby any practice listed in Section (4)(2) of the Competition Act – e.g., any limitation on market access – is a violation, regardless of its actual impact on competition. This recommendation sharply contradicts the fundamental purpose of competition law (to protect consumers and competition, not individual competitors), the context of the Competition Act’s abuse of dominance provisions (as evidenced by language throughout the Act and its legislative history), much of the CCI’s decisional practice, appellate competition law decisions in India, and international jurisprudence. Ignoring effects is particularly problematic in the technology space, where the conduct at issue often generates innovative products and services for consumers. Ignoring effects can force successful technology platforms (who have produced countless consumer-benefiting innovations and caused no anti-competitive harm) to share their resources with competitors, thereby encouraging free-riding and undermining platforms’ incentives to succeed.

The report justifies its recommendation on various weak grounds. For example, the report assures readers that the CCI will assess effects, by stating that the CCI has assessed effects in the past. Why rely on decisional practice? Expressly requiring assessing effects will eliminate uncertainty, particularly because the CCI has sometimes not assessed effects when it should have (as the report alarmingly admits). Another justification the report offers is that the requirement to assess effects is implicit in the Competition Act. Why rely on something implicit? Making it explicit will bind the CCI. The report also states that exploitative abuse – one form of unilateral conduct – does not merit assessing effects on competition. Assuming that is true, the report should have carved out an exception for such conduct while expressly stating that other unilateral conduct requires assessing effects.

Separately, the report prudently – and consistent with international jurisprudence – resists incorporating the concept of “collective dominance” into the Competition Act. That concept could spur regulatory overreach. The report correctly observes that “the existence of two strong players in the market may be indicative of competition between them, unless they agreed not to compete,” in which case Section 3 of the Competition Act (addressing anticompetitive agreements) already applies. To similarly prevent over-enforcement, the report resists incorporating the “attempt to monopolize” as a violation under the Competition Act, but recommends a study of India’s technology space to assess the need for that incorporation. The report’s caution is commendable, but caution must also accompany the study the report recommends. The technology space frequently presents conduct that may seem anticompetitive given traditional antitrust notions, but is not anticompetitive. Over-enforcement risks eviscerating the tremendous consumer-benefiting innovation that abounds in India’s technology space.

Separately, the report inappropriately omits requiring “associative links” (or “associated links” as the report calls them) between the markets involved in allegations of leveraging – i.e., allegations that a firm is leveraging its dominance in one market to enter or protect another market. This omission departs from international jurisprudence and risks regulatory overreach as it allows the CCI to claim leveraging even in relation to markets which are not linked closely enough for a leveraging theory to logically hold.

The report commendably recognizes the reasonable exercise of intellectual property rights as a defense against abuse of dominance allegations. This approach is consistent with other parts of the Competition Act and international jurisprudence.

Technology and new-age markets

Every aspect of the report discussed above and below impacts the CCI’s assessments of conduct in the technology space, but the report discusses certain technology-related matters in a chapter titled “Technology and New-Age Markets.” As discussed here, some of this chapter’s observations are prudent, while others are concerning.

For example, the report overstates the role of “returns to scale” and “network effects” in fueling dominance. Ascertaining the existence, nature, and extent of their impact requires a careful analysis of the particular conduct at issue, including the numerous effects of the multi-sided markets often at play. Assuming that returns to scale and network effects always or almost always fuel dominance in the technology or internet space is inappropriate, even if it may be intuitively appealing. In fact, network effects can often help prevent abuse. While the report does not require expressly listing “network effects” as a factor the CCI must consider, it considers the Competition Act’s language broad enough to imply that “network effects” can be a factor. That is a reasonable position, but not when juxtaposed with the report’s overstatement (discussed above) of the role of network effects.

The report acknowledges that low switching costs and multi-homing (the ability to use multiple services concurrently) – characteristic of the technology space – can counteract network effects. However, network effects may be harmless even in the absence of low switching costs and multi-homing. Further, the report does not grapple sufficiently with low switching costs and multi-homing, and therefore does not appreciate how significantly they can undercut dominance that network effects may have fueled. In fact, the report hastily concludes that “ensuring interoperability between various platforms and service providers in digital markets” is important. This conclusion ignores the reality that multi-homing is already widespread in the technology space, and that mandating interoperability risks undermining competition and innovation by preventing platforms from implementing any distinguishing features (including modest quality control measures) that might undermine interoperability. It risks compelling platforms to cater to the lowest common denominator to consumers’ detriment. Prudently, however, the report notes that any such requirement should be imposed only after wide-ranging consultation.

The report also concludes – without rigorous analysis – that data plays a “critical role” in fueling dominance and has “the potential to…[become] a barrier to entry in digital markets.” The report’s use of the word “potential,” while facially comforting, is rendered essentially redundant when the report concludes that the Competition Act is “broad enough to include control over data as a factor for determining” dominance; through this language, the report suggests that the CCI should include control over data as a factor in its analysis. However, data is non-rivalrous (anyone can collect data that others may already have collected) and not inherently valuable (the value lies in the expertise that translates data into innovative products and services). These traits weigh against concluding that data fuels dominance. They also weigh against the report’s separate conclusion that data is a form of “price,” as does the fact that some technology products and services may not demand data in return for using the service, but merely collect it as incidental to that use.

Separately, the report should have strongly emphasized that before the CCI attempts to define relevant markets in the technology space, the CCI must understand exactly how consumers perceive and use the products and services at issue, given the rapidly emerging and increasingly novel products and services in the technology space and the challenges they have posed to the CCI over the years.

Fundamentally, the report does not appear to appreciate that the technology and internet space in India is vibrant and intensely competitive with countless innovative Indian and international companies competing vigorously to provide consumers top-notch products and services. The report also does not seem to appreciate how devastating over-enforcement can be for this competition and innovation. Academics have argued that competition law authorities should strongly resist intervening when the conduct at issue produces innovations that benefit consumers, given the high likelihood of erroneous decisions because of the complex issues at play, and given that the harms of over-enforcement exceed the harms of under-enforcement.

Separately, and prudently, the report recognizes that “most favoured nation” (MFN) clauses (per which a seller agrees not to charge on the signatory platform a price that is higher than the price the seller charges on other platforms) can create procompetitive benefits. The report therefore recommends the CCI analyze such clauses by assessing their impact on competition, rather than assuming they harm competition. Separately, the report concludes that the Competition Act’s Section 3 (addressing agreements) is sufficient to cover algorithmic collusion and commendably refrains from suggesting legislative intervention over “autonomous algorithmic collusion,” citing international practices and the “absence of credible evidence demonstrating the anti-competitive concerns associated with such collusion.”

Remedies

The report requires the CCI to issue guidance on the computation and implementation of penalties, and provide reasonable grounds should it choose to depart from its guidance in a particular case. This recommendation will help create predictability for businesses.

The report also provides welcome clarity around the definition of “turnover” which is used to calculate penalties, including the exclusion of revenues generated outside India. Further, the report commendably emphasizes the importance of basing penalties on “relevant turnover” – i.e., turnover relating to the products or services at issue. Relatedly, the report prudently requires the CCI to issue guidance stating that “relevant turnover” must be the starting point for computing penalties. However, the report should have gone further: it should have recommended amending the Competition Act to make this an express requirement. That would be consistent with the Indian Supreme Court’s and COMPAT’s jurisprudence and principles of proportionality, alleviating investors’ fears that penalties may be overly harsh. In justification of not recommending this amendment, the report states that certain situations would not merit assessing relevant turnover. Assuming that is correct, the report should have carved out exceptions for those circumstances while making the assessment of relevant turnover an express requirement for other circumstances.

In a commendable and long overdue move, the report requires the CCI to accept settlements and commitments from the parties being investigated. This is consistent with international practices and will help significantly boost efficiency, reduce uncertainty for businesses, and devise effective solutions to address potentially anticompetitive conduct.

The report refrains from requiring hearings dedicated to discussing penalties. Such hearings could be beneficial because many aspects of penalty-calculation can be complex and subject to debate. Dedicated hearings on penalties can help ensure that the CCI determines penalties thoughtfully, such that they are proportionate to the harm identified. They can also help ensure that the discussion around the substance of the case (i.e., not the penalties) is not rushed to accommodate a discussion on penalties.

The report should have strongly cautioned the CCI against entertaining structural remedies in abuse of dominance cases. Jurisdictions around the world overwhelmingly adopt behavioral remedies over structural ones in abuse of dominance cases, partly because structural remedies for unilateral conduct are unnecessary, risk eviscerating key efficiencies, and are difficult to implement.

About the author: Nikhil Sud serves as Regulatory Affairs Specialist at the Albright Stonebridge Group. He is a lawyer by training and specializes in legal and policy issues relating to technology.