Sirwin
Sirwin

Growth of Digital Enconomy - A Challenge for Competition Regulators

By bitiuris | lawonchain | 10 Jul 2022


Introduction

An unprecedented growth of the digital economy in India was witnessed in the recent past with the massive expansion of the e-commerce, mobile taxi aggregator and e-wallet businesses. Digital Economy is driven by two factors – supply side and demand side.[1] On the supply side; access to the internet is a key component besides a transactions infrastructure which enables secured online payments. Whereas the demand side is fuelled by consumer trends and behavior. With the internet penetration of 51% in the urban areas and 16% in the rural areas[2], ensuring a fair play in the online marketplaces becomes challenging for competition regulators.   

Most of the major online businesses are driven by economies of scale and rely on network effect to reach the tipping point[3] after which profits are anticipated to kick in. They often try to do this by locking-in customers into their network.[4] This purports a need for defining essential and non-essential facility. In an essential facility there is a need for a regulatory framework which ensures interoperability between different players in the sector so as to avoid creation of concentrated networks or practical barriers for new players.

Digital Economy in India

Digital Economy or new economy is used to define sectors in which the companies either produce or extensively rely on technology.[5] While many companies nowadays have a strong information technology infrastructure to support their operations, they do not constitute a digital economy sector. The earliest entrants of the digital economic space in India were Business Process Outsourcing(BPO) units. The service rendered by them is, in its essence, customer support where technology is the medium of delivery. The BPOs were setup on a model which was more or less similar to brick and mortar model with no excessive funding by Venture Capitalists as seen in online marketplaces such as Flipkart. Data protection and Information Technology law compliance were the key areas which needed regulation compliance. Competition law regulation in this sector had a limited scope as the BPO model operated on three types of agreements which are limited to third part agreements, the captive agreements and build operate transfer.[6] The third-part agreements in this sector may sometimes be exclusive but they are not anti competitive in nature vide section 4 of the Competition Act, 2002. Vendors competed against each other and even in-house processes for corporate clients. Quality of service and client confidentiality are often the bargain chips for these vendors.      

At present, with the advent of online marketplaces/retailers, taxi aggregators and online payments directly engage with the masses. There is a paradigm shift in the digital econoshpere in India as the competitors move towards disruptive marketing practices. This has led to the dominance of some of the key players and the possible abuse of that dominance has been investigated by the Competition Commission of India(CCI) such as in the case of Ola.[7]   

Digital marketplaces and services in India

There are three key sectors in the Indian digital space that has seen a sporadic growth in terms of users, viz., e-commerce, mobile taxi service and e-wallets. Unicorns[8] such as Flipkart started as online retailers under a vertical integration setup where it sold products under the ‘WS Retail’ brand. However, it later changed its model and switched over from an inventory based model to establishing itself as an online marketplace.[9] Later in 2016, the Foreign Direct Investment(FDI) policy barred the business to consumer model of e-commerce.[10] A hundred percent FDI investment is allowed under this model. This paved the way for entry of the global marketplace giant, Amazon, which operated under an Indian subsidiary of its parent company. Various regulatory guidelines have been issued by Department of Industrial Policy and Promotion(DIPP) such as a cap of 25% of sales from a single vendor or its sister companies. Marketplaces are also not allowed to offer discounts or influence prices.[11] This has made the work of competition regulators easier as it has mechanisms to prevent oligopolistic tendencies from taking shape.

Similarly, in the mobile taxi segment CCI has entertained complaints by ‘informants’ vide section 19(1)(a) of the Competition Act, 2002 and carried out investigations, carefully consideration the relevant geographic markets. In separate cases filed against Ola and Uber, the two major[12] mobile taxi aggregators, the informants alleged that the two players dominated the market and abused this dominance by the way predatory pricing and massive incentive schemes. A dominant position of the player in itself is not prohibited under the competition law regime in India, it is the abuse of that dominant position that is prohibited.[13] Other important factors in determining the dominant position are the relevance of the market, the relevant product and the geographical market. “A geographic market is not merely the physical territory in which the competing enterprises operate by only that part of the territory where the ‘conditions of competition for supply of goods or provision of services or demand of goods or services are distinctly homogenous and can be distinguished from the conditions prevailing in the neighboring area.”[14] The Commission had, in these cases, determined the relevant market to be “radio taxi services” and the relevant geographical area as “operations restricted to within city limits.” [15] On the account of violation of section 3 of the Act, the commission held that the availability of funds or access to innovative technology developed for operating in the relevant market was not an entry barrier. Although it did acknowledge that the “competition remained stiff.”

While the Rule of Reason says that the facts of the case are the basis for finding the effect on competition, the Per Se Rule dictates that the facts of the case are unnecessary if the acts or practices themselves limit or restrict competition.[16] The Per Se Rule can therefore be a powerful tool if the anti-competitive practices in the digital sphere are indentified and specifically censured.

Predatory Pricing and the cash-back phenomenon

Predatory pricing by the dominant players in the market, is an abuse of their dominant position. It is essentially selling of goods or services below the costs determined by regulation with a view to reduce or eliminate competition.[17] CCI’s power to adopt any relevant concept based on the nature of the industry for the assessment of predatory pricing[18] by the players will provide the much needed flexibility that it requires in the complex and dynamic digital economy.

E-commerce marketplaces such as Flipkart, Amazon and Snapdeal have often been accused of predatory pricing.[19] The heavy discounts offered on products on these marketplaces are coupled with cash-backs in order to fuel sales. However, introductory or promotional prices may not always be predatory.[20] It is the conduct, duration and the ultimate impact on the market that are needed to be assessed. The cash-back schemes offered by many e-commerce and e-wallet companies also came under the radar of the CCI when allegations were made raised about its predatory nature. The Commission has exercising its powers vide section 19(1)(a) of the Competition Act, 2002  instituted an expert panel to look into the matter.[21]

The cash-back schemes offered by the e-wallets such as PayTM, Mobikwik and online hotel booking services such as OYO are not always the same. Often loyalty points are misrepresented as cash-backs which the consumer falls prey to believe, has the same value in the virtual form as that of the Indian currency. While cash-backs offered by PayTM mostly have the same value in Indian currency as reflected in the e-wallet. Mobikwik often provides cash-backs in the form of ‘Super-Cash’ which are essentially loyalty points which are touted as non-transferable virtual currency having the same value in the Indian currency, thereby restricting its use to its own platform. OYO on the other hand has its own virtual wallet which is nothing but a loyalty points wallet which stores what it calls ‘OYO money’. It is offered as incentives which are given after a successful checkout from a hotel booked on its platform or through referrals. The problem is that it creates an impression in the minds of the user that the amount reflected in the ‘OYO money’ represents the actual value of the Indian currency. This happens as the amount of ‘OYO money’ displayed on its interface is accompanied by the official rupee symbol. Further, it allows for partial payments with that ‘money’ along with payment options through e-wallets and other online payment option such as internet banking. The cap on the partial payment on the ‘OYO money’ depends on its ongoing schemes and it is revised from time to time. This not only signals to unfair trade practices of misspelling but also create a negative network effect.[22]

E-Wallets

The e-commerce and the mobile taxi segments have, to a greater extent, an underlying market upon which it built itself. Innovative technology has been leveraged using which it delivers services on an online platform. This does not hold true for e-wallets. It is, in itself, a completely revolutionary technology. It provides greater accessibility, especially in the micro-financing sphere of the digital economy. Integration of core banking payment systems has made its role all the more crucial in the present world.   

While the regulation of e-wallets and payments bank is governed by the Reserve Bank of India, its interoperability becomes a key concern as the centralized billing payment system is controlled by National Payments Corporation of India(NPCI) is a non-profit company which is promoted by a syndicate of  banks.[23] E-wallets have become an essential facility[24] which has the capability to effectively extend payment and banking facilities at a micro-financial level (and to process small value payments) with an ability to penetrate rural areas where banking operations are not feasible. In such a case, competitive barriers may hamper the financial inclusion plans and adversely affect the implementation of the Direct Benefit Transfer(DBT) schemes.

NPCI only allows the e-wallets to function as Business Correspondents(BC) of the banks. This means that these e-wallets cannot function without ‘banking operations’ at its core.[25] Banks also treat e-wallets as ‘merchants’ while processing payments through them. This allows them to charge commissions on transaction processed through the e-wallet platforms. A wide user base of the e-wallets such as PayTM has ensured interoperability to a greater extent. However, this did not stop the State Bank of India from disabling transactions on PayTM in order to promote it own e-wallet SBI Buddy.[26]

Further, the e-wallets have been left out of the Unified Payments Initiative(UPI) interface as a bank account is required get on this interface. There is no doubt about the fact that there is a competitive disadvantage for the non-banking e-wallet companies in terms of regulatory barriers. NPCI has, by its design restricted access for the non-banking e-wallets of the extended facilities that it offers to banking e-wallets. Section 2(h) of the Competition Act, 2002 excludes ‘activities of the government’ that are relatable to ‘sovereign functions’ from the ambit of the Act. So unless the act of NPCI form a part of ‘sovereign functions’ it can be scrutinized by the CCI. Last year, the fee charged for IMPS (a payment system developed by NPCI that allows person to person or transfers to bank account 24x7) transactions were removed.[27] This will allow the banks and e-wallets operated by the banks to gain a substantial leverage in wallet to bank deposits and the fee charged in case of non-banking wallets are comparatively higher. This move bears resemblance to the MCX – NSE case[28] where NSE’s zero prizing policy was held as unfair it was fined by the competition regulators for its anti-competitive practices under section 4(2)(a) of the Act.    

The Financial Sector Legislative Commission in its report on payments regulation[29] recommends leveling of the playing field between the public sector and the private sector, and between bank and non-bank players.

Safeguarding the interests of small player by the Government

The government in an effort to include the bottom feeders of the digital economy has planned and launched various initiatives such as a common app based taxi service.[30] The question remains as to whether these initiative will be separate anti-trust persons or it will also be saved by the provisions of section 2(h) of the Competition Act.

Regulating Competition in a rapidly evolving Digital Economy

Hayek viewed competition as an evolutionary process which is based on trial and error.[31] Starting with an assumption that the best solutions are not yet know competition regulators should seek help from educational and policy research organizations and user power vested on it under section 19(1)(a) of the Competition Act to constitute expert panels to aid in regulating competition in the growing Digital Economy.

As a suggestion, one of the way in which compliance can be ensured by the players in the Digital Economy is by incorporation of competition regulating terms by competent authorities at the time of incorporation of the companies rather than carrying out investigations on a case to case basis.

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random draft notes on legal cobwebs in the Indian startup ecosystem and off-hand comments on certain judgments

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