Action needed on lack of SIDI neutrality

In December 2022, the Standing Committee on Finance (committee) issued a report on Anti-Competitive Practices by Big Tech Companies (report). The report highlighted issues affecting competition in digital markets and made proposals to regulate competition in the digital market, pointing out the differences between physical and digital markets and emphasising that the two need to be regulated in different ways. While the committee’s proposals to regulate and promote competition in digital markets were steps in the right direction, they left gaps unaddressed. These have to be analysed and rectified before the implementation of the guidelines and legislation recommended by the report.

The report identified the ways in which systemically important digital intermediaries (SIDI), those being the dominant players in the digital market, can take part in practices that would adversely affect competition in the market if not regulated effectively. It recommended that digital markets be regulated by using a prior or preventative approach instead of trying to address issues after they arise. According to the report, this is a more effective method of preventing monopolisation, given the increasing returns and widespread network effects of the digital market. A main area of concern in the report was self-preferencing.

Self-preferencing is when SIDIs favour their own subsidiaries and services over those of their competitors when negotiating access to supply and sales markets. This may occur when parent or group companies of digital platforms push their own products and services on such platforms, thereby raising concerns of self-preferencing and the lack of platform neutrality. The occurrence of such practices in effect discourages consumers from accessing digital markets more freely, and is considered to be an anti-competitive practice under section 4(2)(c) of the Competition Act, 2002.

The report recommended that the practice of self-preferencing by SIDIs be proscribed to prevent barriers to competition being set up in the digital market. According to the report, SIDIs must be prohibited from engaging in practices such as presenting their own services in a more favourable manner, exclusively pre-installing their own offers on devices and integrating them in any other way in offers made by SIDIs on their digital platforms. As an extension to this, other anti-competitive practices such as providing higher discounts and preferential listings on their digital platforms should also be prohibited.

While the report sought to address self-preferencing and its impact on competition, it did not consider a similar anti-competitive practice that can occur between SIDIs. There may be instances where SIDIs agree to favour a certain competitor’s offerings over those of other competitors while granting access to online content in consideration for a fee or a portion of the revenue generated. Although the report highlights the issue of controlling access to platforms by the SIDI preferring its own subsidiary, it does not consider the issues that may arise as a result of a number of SIDIs engaging in preferencing arrangements for each other’s services. This can lead to the dominant players in the market favouring each other and eliminating competition from smaller players in the market who lack the resources to enter into such arrangements themselves. While exclusive tie-ups between dominant players have been dealt with as a separate issue by the committee, preferencing was not specifically addressed. If not dealt with, this would create loopholes of which SIDIs may take advantage to get around prohibitions on both self-preferencing and exclusive tie-ups.

Detailed proposals for regulating digital markets and enacting the Digital Competition Act have been under discussion for some time and stakeholders must be aware of the issues that arise in the regulation of digital markets. Given the structure of digital markets, after the event evaluation of anti-competitive behaviour in the digital market will not be adequate. Jurisdictions such as the EU, USA and France already have safeguards in place that prohibit the practice of preferencing by digital intermediaries. Detailed discussions on the regulation of digital markets must take place although they may have to wait for the final draft of the Digital Competition Act.

Vandana Pai is a partner and Head of the Investment Funds Practice and Priankita Das is an associate at Bharucha & Partners.