The Corporate & Commercial Law Society Blog, HNLU

Tag: Competition Law

  • Digital Competition Bill: Complementing or Competing with the Competition Act?

    Digital Competition Bill: Complementing or Competing with the Competition Act?

    BY Winnie Bhat, SECOND- YEAR STUDENT AT NALSAR, HYDERABAD
    Introduction

    Data is the oil that fuels the engine of the digital world. The economic value and competitive significance of data accumulation for companies in the digital age cannot be overstated. It is in recognition of this synergy between competition and data privacy laws, that the Competition Commission of India (‘CCI’) has imposed a fine of Rs 213 crore on Meta, the parent company of WhatsApp, for abusing its dominant market position under Section 4 of the Competition Act, 2002 (‘CA’).

    As digital markets evolve, so too must the legal frameworks that regulate them. This article considers whether the proposed Digital Competition Bill, 2024 (‘DCB’) enhances the current competition regime or risks undermining it through regulatory overlap. In doing so, it assesses how traditional competition tools have been stretched to meet new challenges and whether a shift toward an ex-ante model is necessary and prudent.

    Reliance on Competition Act, 2002

    In the absence of a dedicated digital competition framework, Indian regulators have increasingly relied on the CA to address issues of market concentration, data-driven dominance, and unfair terms imposed by Big Tech firms. One of the clearest examples of this reliance is the CCI’s scrutiny of WhatsApp’s 2021 privacy policy. In the present case, CCI found that WhatsApp’s 2021 privacy policy which mandated sharing of users’ data with WhatsApp and thereafter its subsequent sharing with Facebook vitiated the ‘free’, ‘optional’ and ‘well-informed’ consent of users as WhatsApp’s dominant position in the market coupled with network and tipping effects effectively left users with no real or practical choice but to accept its unfair terms.

    This contrasts with the CCI’s previous stances in Vinod Kumar Gupta v WhatsApp and Harshita Chawla v WhatsApp & Facebook, where it declined to intervene because data privacy violation did not impact competition. However, in a slew of progressive developments, a market study by CCI has now recognized privacy as a non-price competition factor and the Supreme Court’s nod in 2022 for CCI to continue investigation in the Meta-WhatsApp mater has effectively granted CCI the jurisdiction to deal with issues relating to privacy that have an adverse effect on competition.

    The facts of this case very closely resemble that of Bundeskartellamt v Facebook Inc.,2019 wherein the German competition regulator had flagged Facebook for imposing one sided terms about tracking users’ activity in the social networking market where consent was reduced to a mere formality. Both cases illustrate how dominant digital platforms exploit their market power to impose unfair terms on users, effectively bypassing meaningful consent. This pattern reflects a deeper structural issue—where existing competition law, focused on ex-post remedies, is used to address the unique challenges of digital markets. It is precisely this regulatory gap that the proposed DCB seeks to fill through its ex-ante approach.

    Abuse of dominant positions by Big Tech companies in the digital era occurs in more subtle ways as the price of these services is paid for with users’ personal data. A unilateral modification in the data privacy policy leaves users vulnerable as they have little bargaining power against established corporate behemoths. These companies collect huge chunks of “Big data” by taking advantage of their dominance in one relevant market (in the present case, the instant messaging market) and use them in other relevant markets (social networking, personalized advertising, etc.) which gives them a significant edge against their competitors. This creates entry barriers and a disproportionate share of the market goes to a few large corporations resulting in monopoly-like conditions.

    To deal with such issues, competition law first identifies a corporation’s dominant position in the market. Once this is established, it investigates the factors that lead to the abuse of this position. Here, the factor is collection of data which invades the privacy of users without their free and informed consent. The CCI, in its ruling against Meta, held WhatsApp to be in violation of Sections 4(2)(a)(i), 4(2)(c) and 4(2)(e) of the CA, dealing with imposition of unfair conditions in purchase of service, engagement in practices resulting in denial of market access and use of dominant position in one market to secure its market position in another relevant market respectively.

    The Digital Competition Bill, 2024

    The proposed Digital Competition Bill, 2024  when enacted, would signify a landmark shift in how India approaches competition regulation in digital markets. Unlike the CA, which operates on an ex-post basis; acting upon violations after analysing their effects, the DCB introduces a proactive approach that seeks to regulate the conduct of Systemically Significant Digital Enterprises (‘SSDEs’) through an ex-ante framework. SSDEs are large digital enterprises that enjoy a position of entrenched market power and serve as critical intermediaries between businesses and users. The DCB aims to curb their ability to engage in self-preferencing, data misuse, and other exclusionary practices before harm occurs, rather than waiting for evidence of anti-competitive outcomes. While this progressive approach aims to address the unique challenges posed by the dominance of digital giants, it also raises critical concerns about legislative overlap, disproportionate penalties on corporations and potential legal uncertainty.

    A key issue with the coexistence of the DCB and the CA is the overlap in their regulatory scopes. The CA, particularly through Section 4, targets abuse of dominance through a detailed effects-based inquiry. As evidenced in the CCI’s ruling against WhatsApp, a compromise or breach of data privacy of the users will not be tolerated and has the potential to be considered as a means of abuse of an enterprise’s dominant position. By contrast, the DCB imposes predetermined obligations on SSDEs, which are deemed to have significant market power. Section 12 of the DCB prescribes certain limitations on the use of personal data of the users of SSDEs, whereas Section 16 grants the CCI the power to inquire into non-compliance if a prima facie case is made out, regardless of the effects such non-compliance may have on competition.

    Concerns about dual enforcement

    This duality creates an ambiguity. For instance, should a prima facie case involving data misuse by an SSDE, which unfairly elevates its market position, be assessed under the CA’s abuse of dominance provisions, or should it fall exclusively within the purview of the DCB? The risk of dual penalties further compounds these challenges. Section 28 (1) of the DCB empowers the CCI to impose significant fines (not exceeding 10% of its global turnover) on SSDEs for non-compliance with its obligations. However, under Section 48 of the CA, these entities are also subject to penalties for engaging in anti-competitive behaviour that may stem from the same act of data misuse.

    Although, the protection against double jeopardy only applies to criminal cases, the spirit of double jeopardy is clearly visible in this case, wherein businesses could face disproportionate punishments for overlapping offenses, raising concerns about fairness and proportionality. This mirrors similar concerns in the European Union, where the Digital Markets Act (‘DMA’) (India’s DCB is modelled on EU’s DMA) and Articles 101 and 102 of the Treaty on the Functioning of the European Union (traditional EU competition law provisions) operate in tandem. However, EU’s DMA grants the European Commission overriding powers over the nations’ competition regulating authorities, which brings unique challenges and is not applicable in India since the regulating authority (CCI) oversees implementation of both the CA and DCB. This vests the CCI with considerable discretion in deciding which act takes precedence and their spheres of regulation. The MCA report leaves potential overlaps in proceedings to be resolved by the CCI on an ad hoc basis. Therefore, statutory clarity on the application of the DCB and the CA are essential to avoid inconsistency in outcomes.

    The Way Forward

    To address these challenges, India must focus on creating a harmonious regulatory framework. Moreover, a Digital Markets Coordination Council could be established to harmonize enforcement actions, share data, and resolve jurisdictional disputes. Such a body could include representatives from the CCI, the Ministry of Electronics and Information Technology (MeitY), and independent technical experts to ensure holistic oversight.

    Proportional penalties are another area for reform. Lawmakers should ensure that corporations do not have to bear the burden of being punished in two different ways for the same offence. Introducing a standardised penalty framework across the DCB and CA would prevent over-penalisation and ensure fairness.

    Since the DCB has not been enacted yet, India can pre-empt these concerns of overlap and ensure that the CA and DCB complement rather than compete with each other. The exact scope of a solution to these concerns is beyond the scope of this article, but by learning from the EU’s experiences and adopting a coordinated, balanced approach, India can create a regulatory framework that promotes innovation, safeguards competition, and protects consumers’ rights and interests in the digital age.

  • The European Commission’s Fine On Meta For Tying Allegations And Why India Needs To Do More

    The European Commission’s Fine On Meta For Tying Allegations And Why India Needs To Do More

    BY ANUSHKA GUHA, THIRD-YEAR STUDENT AT NLU, ODISHA

    INTRODUCTION

    The European Commission (‘EC’) fined Meta for tying Facebook Marketplace (‘FM’) to its social media platform, Facebook, in November 2024. FM is Meta’s online classified advertisement service which was introduced in 2016 and can be used to sell and buy products. Tying is a practice in which the availability of a product or a service is made conditional upon the availability of another. The EC found that Facebook had used its dominant position in the market for social networks and in the market for displaying classified ads to tie both services. What this essentially does is, expose all users of Facebook to FM, regardless of whether they want to see those ads or not. Such practices pose a competitive disadvantage for other online classified ads services, as they do not have access to the enormous database of social media users like Facebook does. Meta has also been accused of imposing unfair trade conditions through its terms of service that authorizes it to use ad-related data of competing classified ads service providers, who advertise on Facebook and Instagram, for the benefit of FM.

    GLOBAL SCRUTINY ON META

    This comes at a time when Meta is also under the scrutiny of the United States Federal Trade Commission for its acquisition of WhatsApp and Instagram resulting in the elimination of competition among social media platforms. The EC has previously fined Meta for providing misleading information during the WhatsApp-Facebook merger in 2014. In India, the Competition Commission of India (‘CCI’) has penalised Meta for abuse of its dominant position over WhatsApp’s contentious privacy policy introduced in 2021, which authorized the messaging platform to share user data with its parent company Meta and its subsidiaries. 

    This is not the first time Meta has been accused of tying its services. The launch of Threads in 2023 raised concerns about tying, as it requires one to have an account on Instagram. Meta, formerly known as Facebook, acquired Instagram, a photo-sharing app, in 2012. Although marketed as a competitor of microblogging platform X, the prerequisite of an Instagram account to operate the application makes it vulnerable to antitrust scrutiny, because the functioning of Threads and Instagram is fundamentally different. The Turkish Competition Authority, Rekabet Kurumu (‘RK’), has been investigating Meta’s anti-competitive practices since last year. In December 2023, the RK launched an investigation into the alleged tying of Threads and Instagram. 

    Subsequently, in January 2024, Meta was fined $160,000 per day for failure to adequately address competition concerns arising from its dominance in social networking, consumer communication, and online advertising. Most recently, the RK fined Meta $37.20 million over data-sharing practices between Facebook, WhatsApp, Instagram, and Threads.

    TYING : THE INDIAN PERSPECTIVE

    Tying is prohibited under section 4(2)(e)  of the Competition Act, 2002, in the context of abuse of dominance. The CCI’s interpretation of tying has been a bit more restrictive than its European counterpart. This is especially demonstrated by the element of ‘coercion’ which is very narrowly considered by the CCI. We will try to understand this through two cases: Harshita Chawla v. WhatsApp and Facebook (‘Harshita Chawla’) and the Baglekar Akash Kumar v. Google LLC (‘Google Meet case’). 

    In Harshita Chawla, WhatsApp was accused of tying its Unified Payments Interface, WhatsApp Pay (‘WPay’) services with its messaging platform. The CCI dismissed the allegations on two grounds: first, that the element of ‘coercion’ in using the two products was absent; and second, that it did not cause foreclosure of competition in the market for payments services. It is prima facie amply clear that WhatsApp’s messaging platform and WPay operate in different relevant markets, which is a consideration that was taken into account by the CCI as well. However, its rationale for reaching the conclusion stands on shaky ground. The CCI has failed to consider here that WPay is not independent of the messaging platform, and users need to have a WhatsApp account in order to use it. While the implementation of WPay did not foreclose competition in the market of payment services by itself because it is a heterogeneous market, WhatsApp’s conduct is in clear violation of Section 4(2)(e) for two reasons: first, that users need to use the messaging platform in order to use WPay; and second, that WhatsApp leveraged its dominance in the smartphone-based OTT messaging service market to enter into the payments services market.

    A similar reasoning was used in the Google Meet case. In 2020, Google was accused of anti-competitive tying following the integration of its video-conferencing service Google Meet (‘Meet’) with its client mail service, Gmail. This meant that Meet came pre-installed with Gmail and the latter could not be used without the former. CCI dismissed the allegations on Google on two grounds. Firstly, users were free to use Meet without having a Gmail account. They just needed a Google account, not Gmail. Additionally, they were not under an obligation to necessarily use the video-conferencing service while using Gmail. Secondly, it did not restrict users from using other video conferencing apps with their Google account, thus reaching the conclusion that users are not being ‘coerced’ to use Meet and Gmail together. This approach again overlooks the fact that a dominant enterprise (here, Google) leveraged its position in one relevant market (here, client mail service) to enter into another relevant market (here, video-conferencing service). 

    A PROBLEMATIC APPROACH

    The CCI’s narrow interpretation and mandatory requirement of ‘coercion’ in order to constitute tying is arguably not a favorable one. As demonstrated by both the cases above, it clearly neglects the presence of leveraging. Even if we consider that WPay did not cause foreclosure of market competition in Harshita Chawla, it does not weaken the fact that if a user wishes to use WPay, they would necessarily have to pass through WhatsApp, thereby increasing the market power of the messaging platform and giving it a competitive edge over its counterparts in that relevant market. Additionally, the CCI completely ignores the aspect of consumer inertia or status quo bias with its disproportionate focus on coercion. The concept of status quo bias assumes that consumers refrain from making active choices to change the status quo regardless of economic irrationality. In comparison, it has been due importance by the EC on more than one instance, a notable one being the Google Search (Shopping) decision, where it was observed that of the total consumers, only 1% looked at the second page of Google search results. Similarly, a user with a Gmail account is more likely to tilt towards using Meet over other video-conferencing apps, simply out of convenience, or one may say, irrationality. 

    If we apply the Indian approach to the present case of Meta tying FM with Facebook, chances are that Meta will probably escape CCI’s scrutiny, specifically with respect to tying, because it does not ‘coerce’ Facebook users to necessarily use FM. Users can use the social media platform without using the classified ads services and are also free to use other classified ads services while using Facebook. This approach ignores the aspect that FM is a service that cannot be used in isolation without having a pre-existing Facebook account. Consumer inertia is a significant factor in this case, considering the enormous user base of Facebook. Additionally, as compared to any other online classified ads services, Meta obviously has access to a variety of personal data of millions of users across the world (‘Big Data’), which gives it a significant competitive advantage. Something that has been consistently also ignored is the annoyance caused to the users who do not want to use the additional services but are unable to disable them. These are factors that must be taken into account by CCI while adjudicating upon tying allegations in the digital market. 

    CONCLUSION AND THE WAY FORWARD

    In evolving digital markets, Big Data raises competitive concerns, when dominant undertakings use it to the detriment of other competitors, by indulging in tying and leveraging. Being a non-price parameter for competition, possession of Big Data by technological giants (‘Big Tech’) puts non-dominant enterprises at a disadvantage. This is where competition regulators are expected to step in. As Big Tech is under stringent scrutiny around the world, remarkably in jurisdictions other than the European Union, it calls for stronger compliance strategies. For more market-friendly effects of antitrust regimes, it is essential to go beyond the imposition of fines. A monetary penalty, no matter how hefty it is, does not act as an effective deterrent for Big Tech as compared to the money that they make every minute of the day. Antitrust watchdogs should go further than that, and ensure the termination of the services or modification of anti-competitive features of such services, in order to protect and promote competition in the market. Considering liberal jurisdictions like the United States are becoming more active in scrutinising the distortion of competition by Big Tech, it is essential for developing economies like India to catch up as well, and not shy away from imposing stringent measures in the interest of consumer welfare. As we anticipate India’s ex-ante framework, one can hope that CCI will take its lessons and adopt a more dynamic approach in the future. 

  • Assessing the Deal Value Threshold: Shortcomings and the Way Forward

    Assessing the Deal Value Threshold: Shortcomings and the Way Forward

    BY DHRUV MEHTA, FIFTH-YEAR STUDENT AT JINDAL GLOBAL LAW SCHOOL, SONIPAT

    introduction

    Recently, the Parliament passed the Competition Amendment Act, 2023, which makes substantial amendments to the Competition Act, 2002 (‘Act‘). Amongst the plethora of amendments, the most prominent amendment is the introduction of the deal value threshold (‘DVT‘). DVT is the additional threshold that requires notification (in the absence of any exemption) of a merger or acquisition with a deal value threshold of INR 2,000 crores (USD 0.24 billion) where either of the party to the deal has ‘substantial business operations in India’ (‘SBOI‘). Through the introduction of the Competition Commission of India (Combinations) Regulations, 2023 (‘Draft Regulations‘), the Competition Commission of India (‘CCI‘) has brought more clarity with respect to the ‘transaction value’ and ‘substantial business operations’ under the DVT framework. Through this blog post, the author examines the limitations in the CCI’s interpretation of the DVT and offers recommendations to enhance its clarity and effectiveness.

    Once the Amendment Act was passed, the onus was now on the CCI to quickly define what constitutes ‘value of transaction’ and ‘substantial business operations’. The CCI has followed the footsteps of Germany and Austria by rightly defining what exactly constitutes ‘value of transaction’ and ‘substantial business operations’. However, there are a few shortcomings as to how transaction value has been interpreted and defined by the CCI.

    Transaction Value: Shortcomings and Recommendations

    a. Incidental Arrangements

    Regulation 4(1)(c) of the Draft Regulations requires the value of a consideration to include ‘incidental arrangements’ for calculating DVT. The definition of ‘incidental arrangement’ is confusing and excessively broad. Examining whether a transaction is notifiable would be difficult if an incidental arrangement is accepted in its current form as it may encompass unconnected transactions that weren’t anticipated by the parties when entering into the main transaction.

    To ensure certainty for parties involved in a transaction and to reduce ambiguity in applying the DVT, the CCI should limit ‘incidental arrangements’ to those arrangements foreseen by the parties when the transaction was initiated. Such arrangements should also be explicitly documented in the transaction records. Furthermore, under Regulations 9(4) and 9(5) respectively, read along with Regulation 4(1)(b), the CCI has the power to review interconnected steps of a single transaction when the transaction meets the test of interconnection. In the past, the CCI has exercised its powers by reviewing interconnected transactions in proceedings against the Canada Pension Plan Investment Board and ReNew Power Limited under Section 43A of the Act.  

    This makes the proposed provision unnecessary if ‘incidental arrangements’ are linked to the transaction because the CCI already has the power to look at subsequent transactions that are interconnected. It is recommended that given CCI’s ambit to assess interconnected transactions, it should reconsider the need for incorporating ‘incidental arrangements’  under the value of a transaction. Furthermore, in the event that the CCI decides to retain the said clause, ‘incidental arrangements’ should only include, transactions foreseen by the parties which are included in the transaction documents during execution.

    b. Uncertainty in the Valuation of Non-Compete Clauses

    The draft regulations require that the value of any non-compete clauses be included while calculating the value of a transaction for DVT. There are a few shortcomings with the said requirement.

    Firstly, it is often difficult to attribute value to non-compete clauses. The value of such non-compete clauses is often reflected in the purchase price listed in the transaction documents. When a non-compete clause is not listed in the transaction document, it is often challenging to assign an exact value to such a clause, and assigning an exact value would compromise the DVT’s inherent predictability and clarity. This would be against the ICN Recommended Practices for Merger Notification and Review Procedures, which highlight how important it is for merger control systems to have clear, transparent rules- especially in light of the growing number of deals happening across several jurisdictions.

    Secondly, the value of the transaction is the value that is attributed to the non-compete provision. If the CCI wants to attribute a separate and distinct value to a non-compete agreement that is separate from the value of a transaction, it should not speculate on assigning the value to the non-compete agreement. Rather, when the board of directors of the acquirer or the seller gives a specific value to the non-compete agreement at the time of the transaction, the CCI should also value the non-compete at the same specific value as given by the board of directors.

    It is recommended that the CCI amend the Draft Regulations to include the value of non-compete clauses and agreements as part of DVT as listed in the transaction documents. It should also be made clear in the Draft Regulations that the CCI can only assign a value to a non-compete agreement if it has been given careful thought and approval by the boards of directors of the target company and the acquiring company.

    c. Valuation of Options and Securities

    According to the Draft Regulations, the whole value of the options and securities to be acquired, along with the assumption that such options would be exercised to the fullest extent possible, must be included in the consideration for the DVT for a transaction.

    It is observed that by including the whole value of options, DVT could be breached or relatively small transactions could also be flagged. Moreover, including the full value of options that could potentially be exercised may lead to an overstatement or understatement of their value, as the price at the time of exercise could differ from the price when the option is initially granted. In the USA, the Hart-Scott-Rodino (‘HSR‘) rules state that valuation reports presented to the board of directors would be used as a point of reference for determining the value of a consideration when the same value is unknown but capable of being estimated. The CCI could adopt the practice as stated by the HSR rules, where it could consider the value of an option not on the basis of assumption but instead based on valuation reports presented to the board of directors.

    In line with the stance in other countries and the CCI’s own decisional practice, it is advised that the whole value of shares received upon exercising an option be considered only if and when the option is exercised. Further, to eliminate any doubt regarding the value of the options, the CCI could only take into account the entire value of the options if they are exercised at the per-share price paid to shareholders (perhaps as a way to assign a portion of the transaction value to particular persons).

    Substantial Business Operations: Shortcomings and Recommedations

    Under the Draft Regulations, SBOI is established if, within the 12 months preceding the transaction, the business demonstrates that 10% or more of either (a) its global user/subscriber/customer/visitor base, (b) global gross merchandise value, or (c) global revenue from all goods and services in the prior financial year, is attributable to India. The author welcomes the CCI’s target-only approach for judging local nexus. However, to ensure that transactions having a limited nexus to the Indian markets are adequately filtered out, the CCI needs to make a few amendments to the SBOI framework in India.

    • Redefining ‘Users, Subscribers, Customers, and Visitors’

    Considering ‘every download’ as a ‘user’ would be an overstatement and therefore the threshold of ‘users, subscribers, customers, and visitors’ could lead to double counting as the said requirement is extremely expansive. For a single product business, such as a social networking website, there is a possibility to have a different number of subscribers than users or visitors, and these subscribers may not be active users or visitors. Thus, such ‘visitors’ might not contribute towards the economic value of the target enterprise and should be discounted from the threshold.

    Furthermore, the CCI could have taken inspiration from Germany and Austria who have provided adequate guidance on how to compute the user threshold for digital markets. The Digital Markets Act of the EU also includes clear definitions for terms such as ‘active end users’ and ‘active business users‘ tailored to various products and services such as online intermediation services, search engines, social networking platforms, video sharing services, and more. The measurement of such users, subscribers, customers, and visitors should be carried out according to industry standards as providing an exhaustive list is nearly impossible.

    The CCI through a guidance note could narrow down the ambit of ‘users, subscribers, customers, and visitors’ to that of ‘monthly active users’, ‘unique visitors’ and ‘daily active users’ in the digital markets for assessing SBOI as done by German and Austrian Competition regulators. The CCI could further bring more clarity to its implementation of DVT by referring to the rulings of Meta’s Acquisition of Kustomer and Meta’s acquisition of GIPHY.

    Under the ambit of ‘users’ the CCI could consider both direct and indirect users. Taking inspiration from the aforementioned cases, the CCI could define direct users as those who were paying for the product as well as who are licensed customers. Indirect users would be considered as those who accessed the application, for example, GIPHY library through third-party mediums/applications such as Facebook, Instagram, Twitter, and Snapchat. Moreover, it is important to highlight that the CCI ought to establish distinct standards for evaluating activities across various sectors, just as the German and Austrian guidelines on transaction value threshold do.

    Thus, the author suggests that the criteria of ‘users, subscribers, customers, and visitors’ be replaced by ‘active users which consists of daily, monthly, yearly, direct and indirect users, and unique visitors’. Further, as specific definitions are provided in the Digital Markets Act for ‘active business users’ and ‘active end users’ the CCI could provide guidance for the same across various sectors.

    Conclusion

    The CCI is seen to be taking some major strides in regulating competition in new-age deals within the digital sphere. Taking inspiration from Germany and Austria, the Competition Act was amended to introduce the deal value threshold, which effectively provides the CCI the jurisdiction to assess those digital mergers with little or no assets or revenue. The CCI has tried its best to bring more clarity with regard to the interpretation of transaction value and substantial business operations under the DVT framework. However, it remains to be seen as to how the practical implementation of DVT would be undertaken by the CCI. As highlighted, under the ‘substantial business operations’ prong, the CCI should bring more clarity by clearly redefining ‘users, subscribers, customers, and visitors’.  Towards the final step, the CCI also needs to streamline its approach to reviewing interconnected transactions and the valuation of non-compete clauses.

  • CCI Needs to Reconsider its Approach-Balancing Patent Rights and Public Welfare

    CCI Needs to Reconsider its Approach-Balancing Patent Rights and Public Welfare

    RAVNEET KAUR, THIRD-YEAR STUDENT AT RGNUL, PUNJAB

    Introduction

    Section 4 of the Competition Act, 2002 (‘Competition Act’) lays down the practices, which if undertaken by a dominant enterprise, would amount to abuse of dominant position. One of such practices is ‘unfair’ or ‘discriminatory’ pricing. Generally, unfair pricing of a commodity can have two connotations. It can either be unreasonably high or unreasonably low compared to the expenses incurred in its production.  

    While predatory pricing, dealing with the latter scenario, has been specifically included within the ambit of unfair pricing under section 4(2)(a) of the Competition Act, excessive pricing has neither been mentioned nor defined. Does that imply that an enterprise possessing a dominant position could conveniently impose unreasonably high prices on people, prices that have no rational nexus with the costs incurred? This is certainly not the case. In the Indian context, excessive price forms a subset of unfair price.

    However, this inclusion has not been able to yield any outcome so far. In reality, excessive pricing is rarely considered as an abuse of dominant position. This policy of non-intervention in case of excessive pricing stems from two reasons. Firstly, regulation of prices might cut incentives for new players; secondly, the self-regulatory mechanism is assumed to operate in the market. However, this approach tends to get problematic when applied in the pharmaceutical industry where the commodity in question is an on-patent drug, resulting in the failure of a self-regulatory mechanism.

    Approach Towards Pharmaceutical Industry

    This policy of non-intervention in case of excessive pricing has been time and again applied in the pharmaceutical industry as well. The Competition Commission of India (‘CCI’) has been rather reluctant in making a prima facie case of abuse of dominance against an enterprise where it is accused of charging excessive prices.

    The reluctance of the CCI in this regard could be attributed to two factors-

    1. Research and Development Costs

    In the pharmaceutical industry, particularly, enormous and unwarranted margins between manufacturing cost and market price often go unchecked. This is because there is a general perception that the manufacturing of drugs is preceded by years of research and expenditure that comes with it. Therefore, it is argued that using conventional benchmarks (such as price-cost comparison) could reduce the incentive for further research and development (‘R&D’). It is primarily because if firms expect price regulation to capture a sizable share of a market, their incentives for innovation and entry into new markets will be diminished, damaging consumer welfare in the long run. In the case of Biocon Ltd. v. F. Hoffmann-La Roche AG, the complaint against the ‘excessive pricing’ of the anti-cancer medicine Trastuzumab was dismissed. The grounds cited were that the original drug price increase was justified by the enormous expenditures invested in R&D and innovation.

    • Interface of Patent Rights and Maintenance of Competitive Environment

    The prime argument that is offered to pitch for non-intervention in case of excessive prices is that it is an exercise of lawful monopoly. In the Indian context, the Patents Act, 1970 (‘Patents Act’) guarantees a statutory and time-exclusive right to the patentee to decide upon the commercial exploitation of the patented drug. This right includes the determination of prices. Touching upon the aspect of excessive pricing, it is argued that monopoly prices are an accolade that enterprises get for making uncertain and risky investments. The US Supreme Court, in the context of monopoly pricing, observed that “mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free market system”. A situation like this generates a collision between two statutes. While the Competition Act seeks to maintain competitive conditions in the market, the Patents Act safeguards the rights of a patentee.

    Analysing the Problematic Approach

    Regarding the clash between the Competition Act and the Patents Act, it is worth pointing out that while section 3 of the Competition Act provides some sort of exemption under section 3(5) to the actions arising out of rights vested under the Patents Act, no such exemption has been granted under section 4. In simpler words, if a certain action attracts applicability under section 3 of the Competition Act but has arisen out of the rights guaranteed under the Patents Act, it would be exempted from the rigours of the Competition Act. However, an action which results in the abuse of a dominant position would not be exempted even if it stems from the rights guaranteed under the Patents Act. The intention of the legislature is unambiguously clear in not permitting the rights of a patentee to get in the way of a competitive environment. With particular reference to the pharmaceutical industry, this distinction indicates that if the prices imposed by an enterprise qualify as ‘unfair’ within the meaning of section 4, it would amount to an abuse of the dominant position irrespective of the fact that the enterprise has a statutory right to decide upon the determination of prices of an on-patent drug.

    Further, the opinion on non-interference in the cases of excessive pricing is mostly premised on the principle of self-regulation. In the absence of market failures, excessive prices motivate potential competitors to enter the market and are, therefore, self-correcting. However, the application of this principle presupposes the availability of alternatives for the commodity in question and the absence of entry barriers for new players to enter the market. As for the pharmaceutical industry, primary and secondary manufacturing are the two fundamental steps in the production of drugs. Producing a drug’s active pharmaceutical ingredient is known as primary manufacturing. The process of incorporating the active ingredient into a delivery system is called secondary manufacturing. Therefore, it is this Active Pharmaceutical Ingredient (‘API’) that has therapeutic qualities.

    When a new drug is invented, the manufacturing enterprise gets the API patented. Now, in order to manufacture the drug of the same efficiency, the API used in the formerly manufactured drug is a pre-requisite. By patenting the API, the enterprise successfully eliminates the possibility of a new player entering the market and selling the drug at a lower price. The problem aggravates when the drug in question does not have any comparable or reasonable substitutes. In the pharmaceutical industry, ‘therapeutic substitutability’ is a mandatory requirement for some other drug to have the potential to cause competitive constraints over the drug in question.

    This essentially questions if consumers, faced with a price increase, could easily switch to other alternatives without the therapeutic efficiency being compromised. In the case of critical diseases like cancer, the availability of therapeutically substitutable drugs is unlikely. Seeking to reap the benefits of a situation like this, in the absence of competitors or reasonable substitutes, enterprises hike the prices of their drugs manifold. Consequently, the self-regulatory mechanism escapes applicability in a case like such, with heavy entry barriers and no substitutes. A consumer, faced with this adversity of unreasonable prices, is made to choose between life or death. If he chooses life, the financial burden continues to grow heavier until it becomes impossible to endure and if he refuses to pay the exorbitant prices, his life is on the line. Top of FormBottom of Form This clearly flies in the face of the idea behind the recognition of providing access to essential medicines at affordable prices as a core obligation under the right to life in the constitutional context.

    To date, the Indian authorities do not have a developed jurisprudence pertaining to excessive pricing. Owing to this, the authorities tend to seek aid from the jurisprudence developed in foreign countries. United Brands Company and United Brands Continental BV v Commission of the European Communities Brands case, for instance, is the most cited precedent in this regard which has its shortcomings, one of them being the determination of benchmark price. CCI’s indifferent approach towards this lacuna is highly problematic. The only apparent and discernible solution to this problem is establishing an authority to fill the void of undeveloped jurisprudence. CCI should formulate guidelines to govern cases about excessive pricing with special reference to pharmaceutical industries. These guidelines must ensure that public welfare and patent rights co-exist harmoniously.

    Conclusion

    The challenge here is to strike a balance between the rights of a patentee and the obligation towards the public. Allowing the prices of life-saving drugs to go unregulated would mean denying people the right guaranteed to them by the makers of the constitution under Article 21. The enterprises, undoubtedly, enter the market with a vision to gain maximum profits but these profits should not be permitted to come in the way of larger public interest. Going by business wisdom, it is needless to say that the market price of a drug has to exceed the expenses incurred and that there has to be a margin between the cost of production and the market price but this margin should not go unchecked. It is for the CCI to ensure that this margin is reasonable and caters to the interests of both the enterprise and the general public. The regulatory guidelines are the need of the hour to inhibit big players from benefitting from the masses’ helplessness.

  • Examining Loopholes and Challenges in the Draft Digital Competition Bill

    Examining Loopholes and Challenges in the Draft Digital Competition Bill

    BY KASHVI SINGH SHEKHAWAT, SECOND-YEAR STUDENT AT NLU, ODISHA

    Digital platforms have significantly transformed the global economy and society and are central to 21st-century technological advancements. They have introduced innovative products and services that were unimaginable a few decades ago which break down borders to deliver these benefits worldwide. 

    The COVID-19 crisis has highlighted the importance of digital platforms, but also raised concerns about market dominance and anti-competitive practices. In response, the Ministry of Corporate Affairs proposed the Draft Digital Competition Bill (‘the Bill’) on March 12 to curb these practices, promote fair competition, and improve market transparency.

    This Bill, which aims to regulate digital markets and curb anti-competitive practices contains potential loopholes that could undermine its effectiveness. This might impact the Bill’s ability to effectively curb anti-competitive practices, ensure fair competition, and promote market transparency. Thus, there is a crucial need to identify and address areas where the Bill may fall short ensuring a more robust and comprehensive regulatory approach.

    Ex-Ante Regulation

    Ex-ante regulation involves setting rules and guidelines in advance to prevent market issues before they arise, as opposed to addressing problems after they occur (which is ex-post regulation). It’s a proactive approach aimed at maintaining fair competition and preventing market failures from the outset. This is typically used to address market failure but this is not the case with India. As per the ITIF’s Hamilton Index Report, India is a top producer in key industries with a thriving digital market and the third-largest startup ecosystem. However, concerns about market power in digital markets persist with claims that consumer data feedback loops, network effects, and economies of scale favor incumbents, potentially leading to market concentration. While network effects can benefit consumers, market concentration is not an inevitable outcome. Digital markets often exhibit multi-homing, where consumers use multiple platforms, enhancing competition. Market power in dynamic markets can drive innovation, reflecting Schumpeterian “gales of creative destruction” where firms continually innovate to compete.

    Even if market failure exists, ex-ante bans as proposed by the Bill must demonstrate that they improve the current system. The ITIF report suggests that ex-ante regulation might hinder market forces essential for correcting failures and enhancing consumer welfare. The report also highlights that the current ex-post enforcement model has limitations but that does not prove that ex-ante regulation would be better. The complementarity between ex-ante and ex-post regimes does not necessarily enhance consumer welfare and could maintain administrative costs while risking false positives. Thus, the questions arise that whether the benefits of an ex-ante regime outweigh the potential harms.

    Tailored Regulatory Approach

    The approach of implementing more tailored, company-specific rules, as seen in the Bill following the UK’s Digital Markets, Competition and Consumers model aims to mitigate false positives in theory. This strategy gives regulators the discretion to craft individualized conduct codes for each company rather than imposing blanket rules across entire industries. However, this strategy poses challenges. Firstly, it runs the risk of generating high administrative costs that the ex-ante regime was meant to avoid. For instance, the Bill anticipates extensive non-compliance inquiries involving costly processes like discovery, detailed fact-finding, and potentially adversarial proceedings. Secondly, as noted previously, such an approach could lead to concerns about regulatory capture, where regulatory decisions might favor established players over new entrants. This could result in disparate treatment within the digital market ecosystem. Thirdly, the government’s ex-ante regulatory approach could impose significant burdens on digital companies, potentially making operations untenable and stifling venture investments in tech startups. High regulatory risks can deter investors by affecting returns and business conditions, with increased compliance costs and scrutiny especially challenging for resource-limited startups. 

    In essence, instead of effectively addressing market failures, the Bill could potentially create a regulatory framework that escalates administrative expenses and selectively benefits certain digital entities while disadvantaging others.

    Systematically Significant Digital Enterprises

    The Bill’s definition of Systematically Significant Digital Enterprises (‘SSDE’) is problematic. Firstly, its quantitative threshold targets companies solely based on their size, without considering whether they possess market power—a necessary though not sufficient condition for market failure. Additionally, the Bill includes a vague and ambiguous qualitative test for identifying SSDEs if quantitative criteria are not met. This test vague because it involves assessing broad and subjective factors, such as a company’s influence on digital markets or its potential effect on competition, without clearly outlining how these factors should be measured. The absence of precise definitions makes it difficult for companies to understand the criteria they must meet, leading to inconsistent application by regulators. This uncertainty can result in varying interpretations, leaving digital firms unsure of how they will be classified.

    This could lead to an ad hoc regulatory regime, granting excessive discretion to regulators and creating uncertainty for many digital firms. This uncertainty is further compounded by the Bill’s company-specific approach to rulemaking, which raises concerns about regulatory capture and the potential for the Bill to be used to pick digital winners and losers in India.

    According to the Competition Commission of India, at least 580 companies from the digital service and e-commerce sectors alone would qualify as SSDEs in India. This contrasts sharply with the European Union’s Digital Markets Act (‘DMA’), which designates only 6 gatekeepers. Thus, this large number of designated SSDEs would impose significant compliance burdens on these companies, potentially hindering their ability to introduce new services and innovate. 

    Innovation

    The Bill proposed in India raises significant concerns regarding its potential impact on innovation. Firstly, unlike the EU’s DMA and the UK’s Digital Markets, Competition and Consumers Bill, the Indian Bill does not mandate a finding of market power as a prerequisite for applying its quantitative tests. This omission suggests that the Bill could target companies purely based on their size, rather than addressing genuine market failures, which regulation should ideally target. Moreover, the Bill’s provision for a three-year designation period with automatic renewal, coupled with limited opportunities for revocation, fails to account for the dynamic nature of market power in digital markets, potentially leading to regulatory overreach. Secondly, while the Bill proposes company-specific restrictions, its approach of imposing per se bans on various common business practices is likely to stifle pro-competitive behavior. For instance, prohibitions on practices like self-preferencing, where digital platforms prioritize their own products over third-party offerings could hamper innovation and reduce consumer choice. Such practices often enhance user experience and foster competition among digital platforms, as seen in cases where companies like Google leverage scale to improve search quality and compete effectively with rivals.

    Thus, the lack of clear market power criteria, broad SSDE designation criteria, and per se bans on common business practices raise significant concerns about the Bill’s potential negative impact on innovation in India’s digital economy.

    Cost- Benefit Analysis 

    The Bill in India raises critical questions about its potential impact and necessity in the digital sector. One fundamental concern is whether the costs and benefits of digital competition regulation have been adequately assessed. As it currently stands, the objectives of the Bill appear to diverge from traditional competition law principles, which aim primarily to safeguard consumer welfare. Instead, akin to the EU’s DMA, the Bill seems more focused on assisting competitors rather than directly benefiting consumers. This shift could open the door to rent-seeking behaviors from private entities with vested interests, potentially leading to demands for extensive product-design changes that may not align with consumer preferences. Thus, the costs of the Bill are palpable. In the EU, similar regulations have delayed products like Meta’s Threads due to compliance uncertainties. Consumer experiences have also been impacted, such as Google’s changes to search result functionalities under DMA rules, which affect user convenience and business outcomes.

    While proponents argue the Bill addresses digital market risks, India already has robust competition laws and sector-specific regulations under the Competition Commission of India (‘CCI’). Introducing the Bill would mark a departure by using size-based criteria reminiscent of older regulatory regimes which could potentially disrupt India’s current approach aligned with international best practices.

    Enforcing the Bill would demand significant resources and expertise across multiple domains, similar to challenges faced by the European Commission with the DMA. There are grounds for revisiting or reevaluating the proposed legislation unless the benefits of the Bill clearly outweigh its costs in enhancing public welfare. This includes ensuring regulatory interventions support innovation and do not unduly burden digital businesses in India’s dynamic market landscape.

    Conclusion

    There is a need to enhance the collaborative nature of enforcement by establishing regulatory dialogues involving gatekeepers, business users, end-users, and external stakeholders such as experts and auditors as designating SDSE’s will lead to more litigations. This inclusive approach aims to encourage gatekeepers to comply with regulations without allowing regulatory capture. Such dialogues are seen as essential for improving compliance monitoring. This dialogue should be meaningful and not merely procedural, ensuring that the obligations outlined by the CCI are genuinely developed through these interactions. CCI should also take a more proactive role in assisting and resolving complaints from businesses. This proactive stance would enable quicker and more effective resolution of issues, strengthening overall compliance with the Bill Furthermore, alongside enforcement efforts by the CCI and national authorities, there is a call for greater private enforcement. This would allow businesses using gatekeeper services to initiate legal actions in courts, seeking injunctions and damages for bill violations. Private enforcement mechanisms can swiftly identify infringements and act as a robust deterrent, thereby bolstering overall Bill compliance.

  • Navigating Open Market Purchases Under The Competition (Amendment) Act, 2023

    Navigating Open Market Purchases Under The Competition (Amendment) Act, 2023

    BY BIANCA BHARDWAJ, A THIRD-YEAR STUDENT AT NLU, JODHPUR

    [Note: The following post is Part-II in a two-part series]

    Having expounded upon the merger control regime in India along with the dilemma of open market purchases as well as compliances in the previous part, the following part details the impact of the draft combination regulations along with the global position and suggestive solutions.

    V. Impact of the Draft Combination Regulations, 2023 

    The CCI Draft Combination Regulations, 2023 further clarify the rights that can be safely acquired in such transactions. Under Regulation 6, the acquirer would be allowed to avail certain rights such as dividend, subscription to rights issue, bonus shares, etc. The acquirer can also dispose the shares or securities acquired and exercise voting rights only to the extent of liquidation and/or insolvency proceedings. 

    These regulations are crucial because they adequately address the problem of acquiring de facto control through such transactions. By specifying that the voting rights of the acquirer would only be allowed in limited circumstances, it does away with the problem of acquisition of control in public bids.  The European Commission, for example, recognised this issue in the case of Marine Harvest ASA, whereby it was held that exemption to a public bid would not be provided if the seller acquires a significant block of shares amounting to de facto control. The element of de facto control is adjudged based on the votes cast at previous ordinary and extraordinary general meetings. Lastly, even the proviso to Regulation 6 also states that exemption would not apply where the acquirer directly or indirectly, influences the target enterprise.

    VI. Global Position 

    A quick sojourn of international antitrust laws would also reveal that similar dispensations have been made worldwide.Article 7(2) of the European Union Merger Regulation (‘EUMR’) provides that standstill obligations shall not prevent the implementation of a public bid or of a series of transactions in securities including those traded on a stock exchange and Article 7(3) gives the Commission the power to grant derogations. However, statistics reveal that the EU has rarely granted such exemptions. These derogations are subject to a twofold-criteria: (1) high degree of urgency in the transaction and (2) the lack of any plausible competition issues raised by the proposed transaction. Moreover, the EU has repeatedly held that while acquiring voting rights is not prohibited on securities purchases, the exercise of these rights is actively discouraged to prevent gun jumping. 

    Similarly, in Brazil, the transactions made through stock markets or organized over the counter market do not need the approval of the antitrust authority for their consummation. On the other hand, certain sophisticated merger regimes of UK and Italy do not impose any standstill obligations and parties are free to implement transactions without approval 
    by undertaking a self-assessment of the potential competition concerns. 

    In comparison, the Indian regime reflects a balanced approach as the regime retains its suspensory character without any absolute derogations. At the same time, there is no absolute ban on exercise of voting rights attached to shares bought in such transactions like in the EU. Moreover, there is sufficient scope for the parties to provisionally implement their transaction and subsequently wait for clearance while retaining certain rights. 

    However, a suggestion must be noted in this regard. It is not clear why the amendment did not adopt the CLRC report’s recommendation to mandate an escrow account. If the transaction is later disapproved by the CCI, the reversal of the transaction could be eased by selling the shares in the escrow account and undo any competitive harm.  

    VII. Way Ahead

    The rationale behind merger control in antitrust is to promote economic efficiency and enhance the process of corporate restructuring in the country. In this context, the amendment is welcome as it aligns with international best practices and will boost transactional efficiency in India. However, there is still uncertainty regarding how the Takeover Code would complement the amendment, given the requirement of obtaining a statutory approval for open offer still stands. In the meantime, as fertile jurisdictional ground develops and the Draft Regulations are adopted, it is crucial that parties tread with caution and avoid acquiring beneficial rights before securing the watchdog’s approval and attract potential scrutiny. 

  • Navigating Open Market Purchases Under The Competition (Amendment) Act, 2023

    Navigating Open Market Purchases Under The Competition (Amendment) Act, 2023

    BY BIANCA BHARDWAJ, A THIRD-YEAR STUDENT AT NLU, JODHPUR

    [Note: The following post is Part-I in a two-part series]

    Introduction

    The merger control regime in India has undergone monumental changes with the recently passed Competition (Amendment) Act, 2023 (‘Act’). One of these changes include the dilution of standstill obligations for open market purchases by way of introduction of section 6A in the Act. This amendment is crucial as it lifts the blanket prohibition on combinations to await the approval of the Competition Commission of India (‘CCI’) before executing a combination and facilitates the ease of doing business. 

    Consider this example: Company A and Company B announce a merger. The merger deal is structured as a multi-stage process where firstly, Company A will acquire 30% equity shares in the target B through an existing shareholder; and secondly, Company A announces a public bid for buying up the remaining shares. The following day the Board of Directors of the respective companies authorize and complete the market purchase and a notice is also filed with the CCI for approval of the merger.

    Earlier, Company ‘A’ would receive backlash for implementing the open offer without clearance from CCI. However, with the recent amendment, the CCI is expected to take a lenient view to open market transactions subject to certain conditions. In this context, this article discusses the ambiguities leading to the amendment and appraises the consequences of the same, especially in the context of the Draft Combination Regulations, 2023.  

    II. Merger Control Regime in India

    In order to understand the development introduced by the Amendment, it is necessary to appreciate the scheme of mergers and combinations in the competition regime. Essentially, the merger control regime in India is a mandatory and suspensory one. In broad terms, this implies that parties that propose to enter into a merger (referred to as ‘combinations’ in India) must first, give notice to the CCI in accordance with the requirements prescribed by Section 6(2) of the Act. Second, as part of the suspensory regime, the parties are pre-empted from carrying out any integration before receiving the approval of the CCI. 

    Section 5 and Section 6 of the Act are the key provisions regulating such mergers.  Any potential merger or acquisition that fulfils the thresholds laid down under Section 5 must be mandatorily notified to the CCI. Thereafter the CCI proceeds to investigate under section 6 to determine if the combination has or is likely to have any adverse effect on competition (‘AAEC’) in India.

    Standstill obligations are embodied under Section 6(2A) of the Act. Before the amendment, the Act prescribed a standstill obligation of 210 days, or until the approval by the CCI – whichever is earlier – on the parties to a proposed combination, from the date of notifying the proposed combination to the CCI. During this period, the parties were prevented from giving effect to the combination and must operate their businesses as independent entities. Notably, this period has now been reduced to 150 days, along with an exemption for open market purchases to implement the acquisition without approval.

    Later on, if the CCI is of the opinion  that the combination is likely to hamper competition, it can modify the combination through remedies, for example, by divestiture of assets, or it can revoke the combination altogether. 

    III. The Dilemma of Open Market Purchases or “Open Offer”

    The relevant laws governing open offers are the Competition Act, 2002 and the Securities and Exchange board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Code’). An open offer is made by the acquirer to the shareholders of the target company inviting them to submit their shares at a specific price.  As per the Takeover Code, an open offer is triggered when the acquirer takes control over a target company or shares or voting rights in the target company beyond certain threshold limits. There are primarily two threshold limits:

     (i)  Acquisition of 25% or more shares or voting rights 

    (ii) Acquisition of more than 5% shares or voting rights in a financial year

    Further, Regulation 8 (11) of the Takeover Code mandates that the acquirer is responsible for obtaining the necessary statutory approvals before concluding the open offer. In practice, such statutory approvals generally consist of approvals from regulatory bodies like CCI, Reserve Bank of India (‘RBI’), Telecom Regulatory Authority of India (‘TRAI’) etc. 

    Therefore, as soon as the threshold limits were crossed, the acquirer was simultaneously required to notify the open offer to the CCI and await its approval. However, unlike negotiated transactions, market purchases have low liquidity leading to significant volatile conditions. The acquirer has to seize the small window of opportunity on a stock exchange platform before the cost of acquisition rises in a few minutes. Moreover, these obligations also impeded confidentiality concerns as notifying the transaction could trigger public scrutiny and drive the price of the stock. Resultantly, the acquirer was placed in a dilemma- whether to await the CCI’s approval and forego the window of opportunity or to face penalty for gun jumping?

    The rationale behind standstill requirements was stated in the Ultra Tech Cement case, where the CCI was of the opinion “the objective of standstill obligations is to ensure that the parties remain as independent competitors as they were before the proposed transaction”.  As a result, a perusal of CCI’s decisional practice reveals that it had previously adopted a stringent approach against such transactions. For instance, in the combination between Thomas Cook India Limited (‘TCIL’) and  Sterling Holiday and Resorts India Ltd. (‘SHRIL’), the CCI imposed a penalty of Rs. 1 crore. TCIL had issued an open offer to purchase 26% equity shares from public shareholders of SHRIL. The open offer, which was part of an interconnected transaction, triggered the thresholds under Section 5 and was authorized before submitting notice to the CCI. Hence, the parties were held liable for gun jumping under Section 43 of the Act which was upheld by the Supreme Court.  

    In contrast to this stringent approach, the amendment offers several benefits. First, it removes the challenges associated with the volatility of the markets, allowing companies to move quickly in response to market changes, which is crucial in fast-moving sectors like tech and e-commerce. Second, as the EU experience shows, it could improve cross-border investments in the Indian economy. Third, it would also expedite the merger approval process for the CCI with respect to securities transactions and unarguably, quicken the process of combinations. 

    IV. Compliance requirements under the amended law

    As per the newly inserted Section 6A, an acquirer is permitted to implement the open offer or an acquisition of shares or securities by way of a secondary transaction, either as a single transaction or a series of transactions. This is subject to the conditions that:

    (i) the notice for the combination transaction has been given to the CCI as per the Act and the regulations thereunder; and

    (ii) the acquirer does not exercise any ownership or beneficial rights or interest in relation to such shares or convertible securities (including voting rights and receipt of dividends or any other distributions), except as may be specified by regulations, till such time that the combination is approved by the CCI.

    Notably, this amendment is in line with the recommendations of the Competition Law Review Committee (‘CLRC’) Report. The report had identified the dilemma and observed that “…mandating a standstill on acquiring of shares pending the approval of the combination may hamper the viability of acquisitions via public bids”. Accordingly, it suggested that the CCI allow parties to such transactions to purchase securities, provided they surrender all beneficial rights (of dividend and voting) attached to such securities until the combination gets a green signal. However, the amendment does not prescribe that such securities should be placed in an escrow account pending CCI’s approval, a proposal which was put forth in the CLRC report. 


  • Unlocking Competition Law For Public Sector: Challenges & Prospects

    Unlocking Competition Law For Public Sector: Challenges & Prospects

    BY ANOUSHKA ANAND AND MD. HASHIR KHAN, FOURTH-YEAR STUDENTS AT NLU, JODHPUR

    Introduction

    India’s journey towards industrialization began in the mid-20th century, shortly after gaining independence from British colonial rule. The country sought to reduce poverty, promote self-sufficiency, and enhance economic growth. The establishment of Public Sector Undertakings (PSUs), thus, became a cornerstone of India’s planned development strategy, which aimed to harness and channel resources effectively for national development. Since then, PSUs have been instrumental in the development of strategic sectors such as defense, energy, telecommunications, and transportation. These sectors are crucial for national security, self-sufficiency, and infrastructure development. Examples include Bharat Heavy Electricals Limited in the power sector and Bharat Electronics Limited (BEL) in defense electronics. PSUs have also aided in regional development – Oil and Natural Gas Corporation is a prime example of a PSU that has contributed to the development of several regions in India through its oil exploration and production activities.

    After the enactment of the Competition Act 2002, which aimed to prevent anti-competitive practices and maintain a level playing field in the market, anti-trust scrutiny was made applicable to PSUs and private entities alike. However, under Section 54, the act provided for an exemption for activities related to sovereign function and allowed the central government to exempt the act, by notification, for enterprises performing a sovereign function or if such exemption is necessary for the public interest. Despite this, the application of the act to PSUs has not been smooth, with various concerns regarding the definition and demarcation of ‘sovereign function’ and ‘non-sovereign function’. The recent Supreme Court ruling in Coal India, however, settles the dust to an extent, when it comes to implementation of the act to PSUs.

    The Supreme Court Ruling

    The case arose when the Competition Commission of India (CCI) fined Coal India Limited (CIL) ₹591.01 crore for imposing unjust and discriminatory terms in fuel supply agreements (FSAs) with power producers for non-coking coal. In essence, CIL was found to provide lower-quality essential resources at inflated prices, along with unclear conditions in the contract regarding supply standards and quality. The regulator argued that Coal India and its subsidiaries operated without market competition and held a dominant position in the Indian non-coking coal production and supply sector. CIL contended that it bases its operations on the ideas of advancing the common good and making sure that coal, a crucial natural resource, is distributed fairly. Further, it argued that it uses differential pricing to encourage the production of captive coal with the aim of preserving the greater functioning ecosystem and pursuing welfare goals. The court, however, took a two-tier approach to reject the contentions of the appellants in this case. Firstly, it delved into Section 2(h) of the Competition Act to investigate if CIL fell within the definition of “enterprise” which is defined as a “person or a Department of the Government who or which is, or has been, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services, of any kind”. The court held that CIL would fall into the category of a person since the term includes a company or a corporation under Section 2(i). Further, under Section 2(i) the term goods includes products manufactured, processed, or mined, thus the court concluded that there is no doubt that the appellant is a person, who is engaged in activity relating to production, storage, supply, distribution, and control of goods. Secondly, the court analyzed Section 2(h) to see if CIL fit within the exception carved out under the provision– the same being an activity of the government related to sovereign function. It went on so far as to say that what is excluded from the act is a government department performing sovereign functions and not a government company. Following this, the court concluded that carrying on business in mining, cannot, by any stretch of imagination, be described as a sovereign function.

    Implications

    The judgment’s pivotal advantage lies in its recognition of the paramount importance of competition in driving efficiency and fostering performance improvements within state monopolies and Public Sector Undertakings. By subjecting these entities to the purview of competition law, the market environment is revitalized, thereby cultivating a culture of innovation, cost optimization, and enhanced service delivery for consumers. This measure not only instills healthy competition but also stimulates these entities to evolve and adapt to changing market demands, ultimately benefitting the broader economy. Further, the endorsement of divestment and privatization by the court is a welcome move since if PSUs are subjected to market-driven pressures, they are compelled to streamline their operations, reduce inefficiencies, and elevate the quality of goods and services provided to consumers.

    However, at the same time, the judgment’s accentuation of competition and efficiency may have inadvertent ramifications on general welfare schemes provided by PSUs. As these entities grapple with the imperatives of competition and profit optimization, there is a prospect of diverting focus from welfare objectives to revenue maximization. For example, a government-owned telecom service provider offering reduced tariffs for rural areas to ensure connectivity for all citizens might start to focus on more lucrative urban markets, potentially neglecting the expansion and maintenance of services in remote or less profitable regions, impacting connectivity and communication access for marginalized communities. The complexity further deepens when considering turnover calculation, a fundamental aspect in assessing the applicability of enforcement mechanisms. Unlike private enterprises, PSUs often operate in sectors with complex interdependencies and cross-subsidization, making the calculation of turnover more intricate. When it comes to sanctions, traditional mechanisms might not be as effective for PSUs. Turnover-based fines, a common approach in competition enforcement, might prove cumbersome to compute given the intertwined roles of PSUs in both economic and social spheres. Additionally, monetary penalties might not effectively deter anti-competitive behavior if the financial burden is borne by taxpayers, diverting from the intended purpose of competition enforcement.

    Unsettled Concerns

    While the debate has been settled to an extent, it is still unclear as to what other activities would be qualified as “sovereign functions” other than those dealing with atomic energy, currency, defense and space. Additionally, Section 54 gives the Central Government powers to exempt an enterprise in the name of public interest – however, there is a lack of specific guidelines as to what comprises “public interest” and to what extent can these enterprises be exempted. In the absence of specific guidelines, the act bestows a wide discretion to the government which could be easily misused and exposed to subjective interpretations. Furthermore, exceptions must be defined to encompass a wide range of essential services, such as government-delegated water supply to economically disadvantaged or remote regions.

    A Way Forward

    There needs to be legislative changes to address the aforementioned concerns and to clear ambiguity regarding the extent and scope of competition law on PSUs. A solution could be the introduction of a public interest assessment mechanism that allows competition authorities to consider the broader public welfare implications when evaluating the competitive conduct of PSUs. This assessment should involve weighing the benefits of competition against the potential adverse effects on public services, national objectives, or other social and economic factors. An example of balancing the applicability of competition law on PSUs or State Owned Enterprise (SOEs) and public interest can be taken from the Italian Competition Authority’s (ICA) decision on breaches of competition rules by Ferrovie dello Stato (FS), the Italian incumbent railway undertaking. While the authority qualified the conduct of FS as a serious competition breach, it levied on it a competition fine of a negligible amount, relying on a special provision that allows the authority to impose the fine of a symbolic amount in certain circumstances. In this case, the authority considered the economic efficiencies and public welfare due to the long-awaited electrification of the Bulleno link as a strong factor for the minimal fine imposed.

    Further, it is time to consider a strict demarcation between the social and commercial functions of Public Sector Undertakings. In essence, this proposition advocates for a deliberate separation of roles that PSUs undertake in the realms of social welfare and commercial enterprise. While PSUs historically embraced multifaceted responsibilities, the interplay of competition law and changing economic landscapes necessitates a refined approach. By delineating their functions, much like the distinct poles of a compass, PSUs can navigate the course more effectively, shedding the inefficiencies that stem from blurred roles and curbing the rampant issue of free-riding. A cardinal benefit of demarcation is the enhanced accountability it ushers in. With delineation, PSUs are better equipped to define their objectives and allocate resources accordingly. This crystallization of purpose not only simplifies governance but also paves the way for enhanced transparency, making it easier to track performance against set goals. Additionally, the separation of roles allows for a more precise evaluation of how PSUs interact with markets and whether their actions may have adverse consequences on competition. For instance, when the social and commercial functions are distinct, it becomes easier to scrutinize whether a particular PSU is using its dominant position in one sector to gain an unfair advantage in another, potentially anti-competitive manner.

    While the concept of clear delineation holds promise, its execution is not without challenges. Identifying the line that separates social and commercial functions demands meticulous analysis, considering factors such as public interest, economic impact, and market dynamics. Striking the right balance between social welfare and business viability requires deliberate calibration. Nonetheless, navigating the delicate balance between PSUs and the Competition Act underscores the need for a nuanced approach that fosters both public welfare and fair market dynamics.

  • Revisiting the ‘Adverse effect’ factor in unilateral commissions: ZOMATO/ SWIGGY CASE

    Revisiting the ‘Adverse effect’ factor in unilateral commissions: ZOMATO/ SWIGGY CASE

    BY PRANAY AGARWAL, THIRD-YEAR STUDENT AT GNLU, GUJARAT

    Introduction

    Unilateral terms of an agreement are seen with suspicion and are often subjected to legal challenge on the grounds that it is arbitrary and unreasonable in nature. The unilateral terms which are abusive and are imposed on others under a‘compelled’      agreement, are also covered within the purview of ‘practice’ encouraging anti-competitive agreements under Section 3(3) of the Competition Act, 2002 (“the Act”). Such a broad interpretation can also be traced to the judgment of BMW Belgium SA v. Commission of European Communities , where the European Court of Justice (“ECJ”) defined the scope and validity of the agreement promoting unilateral conduct of a party. The principle was even adopted for Indian market in Aluminium Phosphide Cartel case to recognise bid rigging as a ‘practice’. However, for the application of the Section, the conduct should have an Appreciable Adverse Effect on Competition (“AAEC”).

    In a recent letter addressed to Competition Commission of India (“CCI”), the Jubilant FoodWorks, the holding firm of Domino’s have indicated their intention to pull out from the deals with food delivery platforms like Zomato and Swiggy due to high commissions charged by these food delivery giants. The letter is a shockwave of the allegations of National Restaurant Association of India (NRAI) against exorbitant commissions charged by the food delivery platforms which ranges between 10% to 30% and the resultant investigative raids by CCI.

    In the case that ensued, the CCI made the order in favour of the food delivery giants to hold their unilateral conducts not anti-competitive. While normally, the judgment of CCI is in accordance with the principles enshrined in the Indian Contract Act, 1872 (“Contract Act”), the Indian watchdog neglected in taking note of the future outcome of such unilateral terms and the adverse impact it may have on the competition in the market.

    In view of these contemporary developments, this article analyses the status of the unilateral conducts like charging of high commissions, which are however part of the agreement and are therefore valid under the Contract Act, in light of the competition laws and principles of the country. The article then investigates deeper into the facets of AAEC and the importance held by ‘public interest’ in the determination of the case, thus giving a critical analysis of the CCI’s stance. 

    Unfair terms of agreement and unilateral conduct

    Unfair terms of a contract have been a contentious issue in the contract law of every jurisdiction. While some protection has been offered under Section 23 of the Contract Act which considers contracts with objects opposed to public policy     ,reliance is often placed by both the consumers and the courts upon the principles of equity and justice embodied under Article 14 of the      Constitution to escape its pre-conditions. In the recent case of NRAI v. Zomato Ltd. & Anr., one of the major contentions of NRAI was related to the one-sided terms of the contract, particularly      the commission clause. However, from the principle given in the United States v. Parke Davis & Co., the concurrence by even an unwilling party will result into a valid contract.

    This makes it apparent that Section 23 will not be applicable in the present case, even if the Restaurant Partners (“RPs”) did not have any choice but to agree with the unilateral terms. However, the unilateral conduct of the dominant players and unfair trade practices has been a      major issue in the country since the initiation of debates around the Monopolies Restrictive Trade Practices (Amendment) Bill, 1983. The legal void in the contract laws was also recognised in the 103rdReport of the Law Commission of India which recommended the insertion of the provision dealing with unconscionable conducts.

         Given the above legal position, the CCI’s order seems legally justified. However, the order will have dire consequences on the market competition in the future due to its economic and legal value. The problem however could have been avoided if CCI had interpreted Section 3 of the Act from a broader perspective like the ECJ did in BMW Belgium SA case . Although it can be inferred that the provision has been applied in the CCI’s order, the commission made a narrow interpretation of the adverse effect factor by failing to note of the provision, thus showing its ignorance of its prior legal instance and relevant circumstances of the case. This mistake can have a huge impact on not only the market and RPs, but also their customers, thus affecting the economic structure as a whole. 

    Looking from a broader perspective: A Review of the ‘Adverse Effect’ factor

    Section 3(1) of the Act introduces the principle of Appreciable Adverse Effect on Competition       violation of which prohibits the enterprises from entering into anti-competitive agreements. It refers not to a particular list of agreements, but to a particular economic consequence, which may be produced by different sort of agreements in varying time and circumstances. It majorly deals with the acts, contracts, agreements, conducts and combinations which operate to the prejudice of the public interests by unduly restricting competition or unduly obstructing due course of trade.

    However, for the factor to be applicable, reliance has to be placed upon the words ‘appreciable’ and ‘effect on competition’. In the present context, therefore, it is pertinent to       effectively analyse           the food delivery market of India, especially with respect to the separate relevant markets of both Zomato and Swiggy. Moreover, the nature of the restraint and conditions in the respective relevant markets before and after the restraint also has to be judged for giving a proper application to the principle of AAEC.

    The term ‘appreciable’ has been defined by ECJ in Volk v. Vervaeke, where reliance was placed upon the probability ofthe pattern of trade such that it might hinder the very objective of the competition law. Similarly the Commission Notice on Agreement of Minor Importance provides for the circumstances under which actions are not viewed as significantenough to appreciably restrict competition. This further gives a concrete meaning to the term ‘appreciable’.

    Unlike the term ‘appreciable’ which has been given restricted to certain circumstances, the phrase ‘effects on competition’ has to be judged with reference to the market share in the relevant market and thus it becomes an important task to define ‘relevant market’. In the present context, the mammoth task was attempted by both NRAI and Zomato/Swiggy giving narrow and wider interpretations respectively. But in this aspect, it is safe to accept       the position of CCI to simply refer Zomato/Swiggy as online intermediaries for food ordering and delivery.

    Zomato and Swiggy are the biggest food delivery platforms in India, who conjointly holds      90-95% of the Indian food delivery business. Further, as on January 2022, the market valuation of      these giants stood at $5.3 billion and $10.7 billion respectively which shows the dominant position enjoyed by them, which is also prima facie evident by the circumstances of the case.

    Bad news for consumers? Highlighting the significance of ‘Public Interest’

    While the economies of scale can be achieved with the reasonable commissions and the reduced costs will benefit the customers in the form of higher quality and lower prices, exorbitant prices will instead result in the reduction of the profits. The impact of such losses will then be passed down to the ultimate customers, thus having a negative effect on the consumers and RPs. Hence, the unilateral act of charging high commissions without any formal communication to the RPs hurts the interests of the general public and also takes away the ability of RPs to compete independently if they come out of the contract.

    In light of the above, the public interest test cannot be ignored while considering the economic consequences the AAEC may cause. Therefore as indicated in Standard Oil Co. v. United States, the factor of AAEC operates on the prejudice of the public interests. Public interest in this sense is the first consideration before the courts while considering the validity of the agreements under Section 3 of the Act. Moreover, Section 19(3) of the Act which provides for factors determining AAEC under Section 3 gives due regard to the accrual of benefits to the customers.

    However, the term ‘public interest’ has to be constructed from a wider perspective with respect to the circumstances of every case. This proposition was made clearer in Haridas Exports v. All India Float Glass Manufacturers Association, where the Apex court clarified that public interest does not necessarily mean interest of the industry but due regard has also to be given to all possible customers in the market for ensuring that the law achieves its objective of fair competition and public justice. 

    Conclusion

    Unilateral fixing of commission rates by the players like Zomato and Swiggy who enjoy a dominant position in the food delivery market in India has been declared by the CCI to be not anti-competitive. However, such narrow application of Section 3 of the competition act influenced by the provisions of contract laws of the country does more harm than good and has the potential to defeat the object of the competition laws. In such scenario, the importance of AAEC factor and test of ‘public interest’ should be relied upon to secure fair competition in the market as well as the interests of both the producers and the customers. While the decision has huge ramifications, one can only hope that the position is rectified in the subsequent decisions.

  • Antitrust Implications of Dual Role Played by Food Intermidiaries vis-a-vis the Recent Tussle Between NRAI and Zomato-Swiggy

    Antitrust Implications of Dual Role Played by Food Intermidiaries vis-a-vis the Recent Tussle Between NRAI and Zomato-Swiggy

    BY PRIYAM INDURKHYA AND RITURAJ SINGH PARMAR, THIRD-YEAR STUDENTS AT NLIU, Bhopal

    Introduction

    CCI, the antitrust watchdog of India, has ordered a probe against food service aggregators like Zomato and Swiggy (FSAs) on a complaint filed by National Restaurant Association of India (NRAI) for the violation of section 3 of the Competition Act. Out of the several anticompetitive malpractices alleged by NRAI, the CCI, vide order dated April 4, 2022, has observed that a prima facie case exists against Zomato and Swiggy on the following three conducts— (i) dual role played by FSAs by listing their own cloud kitchen brands exclusively on their platform, akin to private labels, thereby creating an inherent conflict of interest in their role as an intermediary on one hand and as a participant on the other hand, (ii) entering into exclusive contracts with restaurant partners, (RPs) thereby compelling them to be exclusively listed with FSAs, (iii) imposing price parity terms on the RPs, thereby restricting them to offer lower prices or providing better terms to customers on the platforms other than that of the FSAs. 

    In light of the recent developments, this article attempts to analyse the anticompetitive concerns arising out of the dual role played by Zomato and Swiggy. The authors, in addition to examining the violation of section 3, also delves into the violation of section 4 of the Act.

    Analysis of probable violation of s. 3(4) read with s. 3(1) of the Act

    The Act, under s. 3(1), prohibits enterprises from entering into an agreement which causes or is likely to cause appreciable adverse effect on competition within India. Furthermore, s. 3(4) of the Act defines vertical agreements as those agreements which are entered into between enterprises which operate in different markets, and at different levels of the production chain. In the present case, the agreement between the FSAs and the RPs is in the nature of vertical agreements since both of them are in different markets and at different levels. The FSAs are in in the market of application-based food delivery platforms in India, while the RPs cater to the market of providing food services. 

    Vertical agreements are not per se anticompetitive and they require a rule of reason analysis to determine their legality. The rule of reason analysis under s. 19(3) of the Act entails weighing various procompetitive and anticompetitive effects of the agreements. The authors herein contend that the vertical agreements entered into by Zomato and Swiggy with a select few RPs fail to pass the rule of reason test, and are therefore, in violation of section 3(4) read with s. 3(1) of the Act.

    The anticompetitive effects arising out of the dual role played by the food intermediaries significantly outweigh the procompetitive effects, if any. The anticompetitive effects listed under s. 19(3)(a)—(c) include creation of entry barriers to new entrants in the market, foreclosure of competition, and driving existing competitors out of the market. It is contended that the listing of cloud kitchens on their own platform certainly causes these anticompetitive effects.

    Having their own vested interests in the downstream market, the food intermediaries are more inclined towards those RPs which are either their private labels or those which pay huge commissions to them. This inclination can be manifested in a host of ways which include, but are not limited to, skewed search results, customer reviews, favourable listings, among others. The data masking and lack of transparency in sharing the modus operandi of the intermediaries further exacerbates the situation. Given such a background, it becomes extremely difficult for the new entrants to cross the entry barrier and break into the market. Moreover, such a conflict of interest is also detrimental to the interests of the existing players in the market. The vested interest of the intermediaries in favour of a select few RPs puts other players in a disadvantageous position, and has a potential to drive them out of the market. Thus, Zomato and Swiggy acting as a participant as well as an intermediary, gives rise to anticompetitive effects listed under s. 19(3)(a)—(c). Moreover, such a dual role neither promotes any technological innovation, nor does it lead to accrual of benefit to consumers.

    In fact, the Competition Commission of India (CCI) had earlier released a Market Study on E-Commerce. The study focused on competition aspects pertaining to e-commerce marketplaces and platforms. Out of the five major concerns identified by CCI, the first one was the Platform Neutrality (or lack thereof). The other concerns included, deep discounting, i.e., discounts of preferred sellers being selectively funded by the platform, price parity clauses in the agreements,  exclusive agreements, and the skewed search rankings along with misuse of data The study delineated two major issues concerning the neutrality of e-commerce platforms. The first is the intermediary’s access to competitively sensitive transaction data on its platform. This data is utilised by the intermediaries to enter into and strengthen their position in the downstream market through private labels. The second is the intermediary’s control over search parameters and results which gives preferential listing and favoured placement to its own brands and preferred sellers on the website. Interestingly, the concerns identified by the CCI in the Market Study are similar to those which are identified by the Commission in its prima facie order against Zomato and Swiggy.    

    Analysis of probable violation of s. 4 of the Act

    It is to be noted that the prima facie order passed by the CCI only suspects the probable violation of section 3 of the Act due to the dual role played by the intermediaries. However, the authors herein contend that the said conduct of Zomato and Swiggy also attracts section 4 of the Act.

    For analysing the violation of section 4 of the act i.e., Abuse of dominance, it is indispensable to firstly, delineate the relevant market, secondly, show that the enterprise is dominant in the relevant market and thirdly, it has abused its dominant position. 

    Relevant market

    Unlike section 3, section 4 in strict sense requires delineation of relevant market to assess the competitive constraints that the enterprise faces. The relevant market in the present case is the ‘market of application-based food delivery platforms in India’. The market has two major players viz., Zomato and Swiggy. The said delineation of relevant market is justified because, firstly, there is substitutability in the delineated market, which is an essential criterion for the relevant product market under section 2(t) of the Act. The service of app-based food delivery is user friendly and unique as it allows customers to order food hassle free from any location. It also provides an array of choices to the consumers in terms of budget, cuisine, restaurant partner ratings, mode of payment and safety classifications. These attributes make app-based food delivery services non substitutable with other services of like nature viz., dine-in, take out, direct orders and vertically integrated food chain services. Secondly, the market of app-based food delivery also satisfies touchstone of section 19(7), like the consumer preferences, and price of goods or services. Furthermore, CCI has also approved this delineation of relevant market in the case of In Re Prachi Agarwal & Ors. v Swiggy..  In this case, it was alleged by the informant that Swiggy was abusing its dominant position in the market by charging unreasonable and unfair prices. CCI, in that case, had delineated the relevant market as “App based food delivery with restaurant search platform across territory of India”. Given that Swiggy is involved in the present case as well, the delineation of the relevant market should be on similar lines in this case as well. The relevant market delineated in the present analysis, i.e., “Market of application-based food delivery platforms in India” is similar to that of the market delineated by the CCI in the Prachi Agrawal case. Therefore, the said delineation of the relevant market is justified. 

    Dominance 

    After establishing relevant market, the next stage is to assess dominance of Swiggy and Zomato in the relevant market. There is a twofold approach in assessing dominance of any enterprises under the Act viz., the definition of dominance under section 4 and the factors enunciated under section 19(4) of the Act. The definition provides that dominant position means position of an enterprise which enables it to operate independently of competitive forces prevailing in the market. In the much-celebrated DLF case, CCI has held that the presence of one-sided agreements generally results in loss of customers, however, if such agreement doesn’t result in loss of customers, then this amplifies the ability of enterprise to operate independently of the competitive forces. Zomato and Swiggy also entered into one-sided terms and conditions with the RPs, like committing them exclusively to be listed on their respective platforms, charging exorbitant commission ranging upto 25%-30%, imposing price parity terms, and compelling the RPs to fund the discount provided by platforms. Despite these unviable conditions, Zomato and Swiggy have duopoly in the market of food delivery business with a cumulative market share of 95%.This shows the dependence of consumers (RPs) on these platforms which in turns reflect their ability to operate independently of competitive forces prevailing in the market.  

    The conduct of Zomato and Swiggy also satisfies factors mentioned under section 19(4). The first factor is market share of an enterprise. Market share of around 50 per cent could be considered large enough for an undertaking to be presumed as dominant. The market share of Zomato and Swiggy is 52% and 43% respectively. The second factor to be considered is the creation of entry barrier in the market. It is pertinent to note that there has not been an entry of any significant player in the food delivery market from the last three years. The application-based food delivery market requires huge fleet in order to deliver food on time. Both Zomato and Swiggy have a fleet consisting of 1.5 lakh and 1.3 lakh drivers respectively. Mobilising such a huge fleet of drivers on a pan India level is not a cakewalk for a new entrant. The third factor is the countervailing buying power. The presence of duopoly between Zomato and Swiggy in the relevant market left RPs with a Hobson’s choice because despite of anticompetitive practices of Zomato and Swiggy, RPs have no other option but to keep availing services of these FSAs. This reflects the sheer absence of countervailing buyer power in the relevant market. Moreover, the acquisition of Uber Eats, Blinkit, and other app-based food delivery platforms by Zomato further reflects upon its dominance in the relevant market. Thus, the cumulative factors of market share, entry barrier, countervailing  buying power, and the acquisition of existing market players establish the dominance of Zomato and Swiggy in the market of application-based food delivery platforms in India. 

    Abuse of dominance 

    The next and final stage is to prove abuse of dominance as dominance per se is not prohibited under the Competition Act. The market of application-based food delivery platforms in India provides wide array of food choices to customers and they have to choose in accordance with their taste and preferences.  But it is not that easy because human character is tuned in a way that it directs more attention towards the thing it sees and the entire advertisement industry is cashing on this tendency.  Thus, a product’s visibility is directly proportional to consumer’s propensity to purchase it. Both Zomato and Swiggy have equity participation in their platforms through their cloud kitchens and their private labels. It is alleged that they manipulate the search results and divert user traffic to increase visibility of these kitchens. Furthermore, the platforms provide access to data like consumer preferences and patterns to their cloud kitchens and private labels. The cumulative effect of all these is that it puts the other RPs in discriminatory conditions for sale and therefore the act of FSA squarely falls under section 4(2)(a)(i) i.e., imposing discriminatory condition in sale of goods.

    The conduct of FSA also violates section 4(2)I of the Act, i.e., using dominant position in one relevant market to enter into another relevant market. As discussed earlier, Zomato and Swiggy are dominant in the market of app-based food delivery. In addition to their principal role of acting as a medium between customers and RPs, they also list their own cloud kitchen brands exclusively on their platform, akin to private labels. These private labels like the Bowl Company, Homely and Breakfast Express fall under the relevant market in which the other RPs are operating. Thus, FSAs like Zomato and Swiggy use their dominant position in the market of app-based food delivery to enter into another relevant market in which the other restaurant partners are operating in the first place.

    It is clear from the above analysis that the conduct of Zomato and Swiggy perpetrates abuse of dominance in the market of application-based food delivery platforms in India. 

    Conclusion

    It is pertinent to note that Zomato has not denied the allegations of listing its own cloud kitchen brands on its platform. In its defence, it has only contended that, “…it does not have any ownership in any of the restaurants listed on its platform nor own or operate cloud kitchens or private labels or restaurants. Thus, no claims for discrimination and preferential treatment can be made against it.” The CCI did not find merit in Zomato’s contentions as they solely relied upon the ‘ownership’ of the RPs and cloud kitchens to argue that there can be no anticompetitive malpractice.  

    As highlighted by NRAI, in lieu of providing access to the Kitchen Spaces, Zomato charges a commission from the RPs, on the rents as well as on the orders received by them through the Kitchen Spaces. Therefore, even though Zomato does not ‘own’ the Kitchen Spaces, or the RPs which function through those Kitchen Spaces, the revenue structure employed by Zomato for this arrangement has a potential to attract anti-competitive concerns and thus calls for a deeper scrutiny. Moreover, the Commission should not limit its examination only for the violation of section 3 of the Act. Instead, it should also consider the dominance of the FSAs to enquire into the possible violation of section 4 of the Act.