India introduced rules on Monday to prevent Internet service providers from having different pricing policies for accessing different parts of the Web, in a setback to Facebook Inc's plan to roll out a pared-back free Internet service to the masses.
The new rules came after a two-month long consultation process that saw Facebook launching a big advertisement campaign in support of its Free Basics program, which runs in more than 35 developing countries.
The program offers pared-down Internet services on mobile phones, along with access to the company's own social network and messaging services, without charge.
The service, earlier known as internet.org, has also run into trouble in other countries that have accused Facebook of infringing the principle of net neutrality - the concept that all websites and data on the Internet are treated equally.
Critics and Internet activists argue that allowing access to a select few apps and Web services for free would put small content providers and start-ups that don't participate at a disadvantage.
"While disappointed with the outcome, we will continue our efforts to eliminate barriers and give the unconnected an easier path to the Internet and the opportunities it brings," Facebook said in an emailed statement.
On Monday, the Telecom Regulatory Authority of India (TRAI), which had suspended the free Facebook service pending a policy decision, said Internet service providers would not be allowed to discriminate on pricing for different Web services.
"Essentially everything on the Internet is agnostic in the sense that it cannot be priced differently," TRAI chairman Ram Sevak Sharma said at a news conference.
Although the new rules will also have implications for plans by Indian telecom operators to make money from rapidly surging Web traffic through differential pricing, Facebook's campaign turned the spotlight on the social networking giant.
Free Basics is part Facebook's ambition to expand in its largest market outside the United States. Only 252 million out of India's 1.3 billion people have Internet access.
"We are delighted by the regulator's recognition of the irreversible damage that stands to be done to the open Internet by allowing differential pricing," said Mishi Choudhary, a New York-based lawyer who led an online campaign against Facebook.
Facebook shares were down 2.7 percent at $101.30 in early trading on the Nasdaq amid broad weakness in U.S. markets.
(Reporting by Sankalp Phartiyal; Writing by Himank Sharma; Editing by Sumeet Chatterjee, Mark Potter and Ted Kerr)