MCX Case

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2011 SCC OnLine CCI 52 : [2011] CCI 52 : (2011) 105 CLA 279

Competition Commission of India


Information filed on 16.11.2009
In continuation of order dated 25.05.2011
Date of order under section 27 of the Competition Act, 2002:
Shri A.N. Haksar, Senior Advocate alongwith Shri Anand Pathak, Advocate, Through.
MCX Stock Exchange Ltd., Informant;
1. National Stock Exchange of India Ltd.;
2. DotEx International Ltd. … Opposite Parties.
Dr. Abhishek Manu Singhvi, Senior Advocate along with Ms. Pallavi S. Shroff & Shri
M.M. Sharma, Advocates Through.
Case No. 13/2009
Decided on June 23, 2011
ORDER
1. Background
1.1 The instant case relates to competition concerns arising in the stock markets
services in India, which is an important part of the financial market in the
country. Therefore, it is essential to outline a brief history and nature of this
sector at the start for putting the market dynamics in a perspective.
1.2 Financial market can broadly be divided into money market and capital market.
Securities market is an important, organized capital market where transaction of
capital is facilitated by means of direct financing using securities as a
commodity. Securities market can further be divided into a primary market and
secondary market.
1.3 Primary market is that part of the capital markets that deals with the issuance
of new securities. It is where the initially listed shares are traded first time,
changing hands from the listed company to the investors. It refers to the process
through which the companies acquire capital through the sale of new stock or
bond issue to investors. This is typically done through a syndicate of securities
dealers.
1.4 The secondary market is an on-going market, which is equipped and organized
with its own infrastructure and other resources required for trading securities
subsequent to their initial offering. It refers to a specific place where securities
transaction among several and unspecified persons is carried out through the
medium of the securities firms such as licensed brokers or specialized trading
organizations in accordance with the rules and regulations established by the
exchanges and the extant laws and regulations laid down by the regulators. Such
an institution is called a stock exchange.
1.5 Stock exchanges are enmeshed in the economy of a nation and are the most
important mechanism of transforming savings into investments. Over the ages,
as economies developed, industrialization occurred and markets became more
organized, a need for permanent finance was felt world over. Entrepreneurs
needed money for long term whereas investors also required liquidity. The
answer was development of the institution of stock exchanges.
1.6 A stock exchange is an entity that provides services for stock brokers and
traders to trade stocks, bonds, and other securities or derivatives. Stock
exchanges also provide facilities for issue and redemption of securities and other
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financial instruments, and capital events including the payment of income and
dividends. Securities traded on a stock exchange include shares issued by
companies, unit trusts, derivatives, pooled investment products and bonds. To
be able to trade a security on a certain stock exchange, it must be listed there.
Usually, there is a central location at least for record keeping, but trade is
increasingly less linked to such a physical place, as modern markets are
electronic networks, which gives them advantages of increased speed and
reduced cost of transactions. Trade on an exchange is by members only. There is
usually no compulsion to issue stock via the stock exchange itself, nor must
stock be subsequently traded on the exchange. Such trading is said to be off
exchange or over-the-counter. This is the usual way that derivatives and bonds
are traded. Increasingly, stock exchanges are part of a global market for
securities.
1.7 A stock exchange is any body of individuals, whether incorporated or not,
constituted for the purpose of regulating and carrying out the business of buying,
selling or dealing in securities or derivatives. These securities broadly include:
(i) Shares, scrip, stocks, bonds, debentures stock or other marketable securities
of a like nature in or of any incorporated company or other body corporate;
(ii) Government securities and
(iii) Rights or interest in securities.
1.8 The origin of the stock market in India goes back to the end of the eighteenth
century when long-term negotiable securities were first issued. However, for all
practical purposes, the real beginning occurred in the middle of the nineteenth
century after the enactment of the Companies Act in 1850, which introduced the
features of limited liability and generated investor interest in corporate
securities.
1.9 An important event in the history of the stock market in India was the
formation of the Native Share and Stock Brokers Association at Bombay in 1875,
the precursor of the present day Bombay Stock Exchange. During that time
trading in stock market was just a nascent concept and was limited to merely 12
-15 brokers. The “stock market” was situated under a banyan tree in front of the
Town hall in Bombay (now Mumbai). This was followed by the formation of
associations/exchanges in Ahmadabad (1894), Kolkata (1908), and Chennai
(1937). In addition, a large number of short lived exchanges emerged mainly in
buoyant periods to fade into oblivion during subsequent economic downswings.
After 5 decades of existence, the Bombay Stock Exchange was recognized in May
1927 under the Bombay Security Contracts Control Act, 1925.
1.10 Recognizing the growing importance of stock exchanges and the consequent
need to regulate their affairs, the Government of India passed the Securities
Contract Act In 1956. With the start of the era of economic reforms and
liberalization in the ‘90s, the Government revoked the outdated Capital Issue Act
of 1947 and established The Securities and Exchange Board of India (SEBI) on
April 12, 1992 in accordance with the provisions of the newly framed Securities
and Exchange Board of India Act, 1992. The Preamble of the Securities and
Exchange Board of India describes the basic functions of the Securities and
Exchange Board of India as
“…..to protect the interests of investors in securities and to promote the
development of, and to regulate the securities market and for matters
connected therewith or incidental thereto”
1.11 With time, new technologies and new systems were introduced in the Indian
stock exchange. The decade of ‘90s saw considerable evolution of the stock
exchanges and capital market products traded in India. Simultaneously, there
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was growth in the financial markets as well. Over the Counter (OTC) market was
established in 1992 and National Stock Exchange (NSE) was established in 1994.
The National Security Clearing Corporation (NSCC) and National Securities
Depository Limited (NSDL) were established in 1995 and 1996 respectively. In
1995-96 Options trading service was started. Rolling settlement was introduced
in India in early 1998. By the onset of the new millennium, the derivatives
markets also took off in India with the inclusion of exchange traded and OTC
derivatives in the definition of securities. Future trading was started in June
2000. In February 2000, internet trading was permitted. In August 2008, the
market for stock exchange traded currency derivative was opened on
recommendation of RBI and SEBI. All these events changed picture of stock
markets in India. Numbers of participation in stock exchange rose with new
segments for trading, new products and new technology. Some of these are
discussed in greater detail in the subsequent sections. New players were
attracted to the sector to exploit increased and growing opportunities. The issues
in the instant case have emerged as a result of this change in the dynamics of
stock markets in recent past.
1.12 It is also pertinent at this stage to briefly go into the background of the parties
to this case. The same is given below.
(i) MCX Stock Exchange Ltd. (MCX-SX), the informant
MCX Stock Exchange Ltd. (MCX-SX) is a public limited company incorporated
on August 14, 2008. As per the information, MCX-SX is a Stock Exchange
recognized by the Securities and Exchange Board of India (‘SEBI’) under
section 4 of the Securities Contract (Regulation) Act, 1956 (‘SCRA’). The
initial recognition has been extended from time to time by SEBI vide gazette
notifications. It is now understood that the renewal of recognition has further
been extended for one more year. Further, as per the information, MCX-SX
has regulatory approvals to operate an exchange platform for trades in
currency derivatives (CD segment). The initial approval permitted only
“currency futures” in USD-INR of different tenures up to 12 months for trading
on MCX-SX exchange platform. However, IP has now been granted approvals
for trading in GPB-INR, EUR-INR and JPY-INR pairs. MCX-SX has also got the
necessary authorization from Reserve Bank of India (“RBI”) under section 10
of the Foreign Exchange Management Act, 1999 (“FEMA”) to undertake above
activities. MCS-SX has also applied to SEBI for permission to operate in the
equity/cash (“Equity”) and equity derivatives - Futures and Options (“F&O”)
segments. MCX-SX has also communicated its willingness to SEBI to
commence the SME (small and medium enterprises) segment and also applied
for permission to introduce Interest Rate Futures.
(ii) The promoters of the informant are Financial Technologies of India
Ltd. (“FTIL”) and Multi Commodity Exchange of India Ltd. (“MCX”).
FTIL is engaged in the business of developing and supplying software for
financial and securities market. FTIL is also the principal provider of software
solutions for brokers and other market intermediaries for use in their front
office, middle office and back office for the purpose of dealing in securities
through exchanges. The main software product of FTIL is marketed under the
brand name ‘ODIN’ and is used by many members of NSE, BSE and IP
Company.
MCX is the commodity exchange in India promoted by FTIL.
(iii) National Stock Exchange (NSE) — Opposite Party 1
NSE was incorporated in November, 1992 and was recognized as a stock
exchange in April, 1993 under SCR Act, 1956. NSE commenced operations in
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various segments as per the following details:


Dates of commencement of trading by NSE in various segments
Table No.
Sl. Segment Date of commencement of Trading
No.
1. WDM 30 June, 1994
2. Equity 3 November, 1994
3. F&O-Options/Futures June 2001/November 2001
on Individual
Securities
4. CD segment 29 August, 2008
As per the information, NSE has floated some subsidiaries for clearing and
technology related activities and jointly promoted or acquired significant stake
(s) in certain other companies operating in related fields. These companies
(the “NSE Group”) include:
(a) DotEx International Limited (“DotEx”) — Opposite Party 2 is a
wholly-owned subsidiary of NSE. It handles the data and information
vending products of NSE. It currently provides NSE market data in various
forms namely; on line streaming data level 1, data level 2, intraday
snapshot data feed, end of day data feed & historical feed. It is also
registered with NSE as an application service provider for providing
centrally hosted front office solution (NOW) to the members. It provides
trading members of NSE one of the solutions that allow them to trade on
NSE.
(b) India Index Services & Products Limited (“IISL”) is a joint venture
between NSE and CRISIL LTD. (formerly Credit Rating Information Services
of India Limited) which was set up in May 1998 to provide a variety of
indices and indices related services and products for the Indian capital
markets. It has a consulting and licensing agreement with Standard &
Poor's (S&P) — the world's leading provider of investible equity indices, for
co-branding equity indices. IISL provides a broad range of services,
products and professional index services. It maintains over 80 equity
indices comprising broad-based benchmark indices, sectoral indices and
customized indices. Many investment and risk management products based
on IISL indices have been developed in the recent past, within India and
abroad. These include index based derivatives traded on NSE and
Singapore Exchange and a number of index funds. NSE owns 50.99%
equity in IISL.
(c) National Securities Clearing Corporation Limited (“NSCCL”) is a
wholly owned subsidiary of NSE which was incorporated in August 1995. It
was set up to bring and sustain confidence in clearing and settlement of
securities; to promote and maintain, short and consistent settlement
cycles; to provide counter-party risk guarantee, and to operate a tight risk
containment system. NSCCL commenced clearing operations in April 1996.
NSCCL carries out the clearing and settlement of the trades executed in the
Equities and Derivatives segments and operates Subsidiary General Ledger
(SGL) for settlement of trades in Government securities. It assumes the
counter-party risk of each member and guarantees financial settlement. It
also undertakes settlement of transactions on other stock exchanges like,
the Over The Counter Exchange of India (OTCEI).
(d) National Commodities Clearing Limited (“NCCL”) has been
incorporated jointly between NSE and National Community and Derivatives
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Exchange Limited (NCDEX). Presently, the Company provides IT and


process support in respect of clearing & settlement needs of NCDEX. NSE
holds 64.99% stake in this company.
(e) NSE, IT Limited (“NSEIT”)is a 100% subsidiary of the NSE. NSEIT is the
information technology arm of the NSE.
(f) NSE Info Tech Services Limited (“NSETECH”) is a subsidiary of the
NSE. NSETECH is the exclusive service provider for all the information
technology needs of the NSE and all its group companies. NSE holds
99.98% equity in NSETECH.
In addition to above, NSE has submitted that following companies forms
part of NSE group based on the definition content under explanation (b) to
section 5 of the Act.
(g) Omnesys Technologies Pvt. Ltd. (“OMNESYS”) — provides software
for securities trading and is a leading provider of OMS for multi-asset, multi
venue trading systems. Omnesys software provides market data and
connectivity solutions to both the buy-side and sell-side firms. Omnesys is
head quartered in Bangalore since its inception in 1997 and DotEx has
taken 26% stake in this company. The company is promoted by software
professionals with financial background. As per the information, Omnesys is
a competitor of FTIL and an empanelled front-office solution (software used
by brokers to trade in stock exchange) vendor of NSE.
(h) Power Exchange India Limited
Power Exchange India Limited (PXIL) is India's first institutionally
promoted Power Exchange.
2. Information
2.1 The present information was filed under section 19(1)(a) of the Competition
Act, 2002 by MCX Stock Exchange Ltd. (MCX-SX) on 16 November 2009 against
the National Stock Exchange India Ltd. (NSE), DotEx International Ltd. (DotEx)
and Omnesys Technologies Pvt. Ltd. (Omnesys). The information relates to
anticompetitive behaviour and abuse of dominant position by NSE aimed at (i)
eliminating competition from the CD segment (ii) discouraging potential entrants
from entering the relevant market for stock exchange services and (iii) achieving
foreclosure of all competition in the market for stock exchange services.
2.2 The informant submitted that the informant and NSE are providing currency
futures exchange services. The NSE through its circular dated 26.08.2008
announced a transaction fee waiver in respect of all currency future trades
executed on its platform. NSE has continued to extend its waiver programme
from time to time despite the fact that the Currency Derivatives (CD) segment is
now mature and trading the CD segment has become high volume and
potentially profitable.
2.3 It is alleged that due to transaction fee waiver by the NSE, the MCX was forced
to also waive the transaction fee for the transactions on its platform for CD
segment from the date of its entry into the stock exchange business which
results into losses to the MCX.
2.4 It is also alleged that NSE is charging no admission fee for membership in
its CD segment as compared to charging of membership fee in the equity, F&O
and debt segments. NSE also does not collect the annual subscription
charges and an advance minimum transaction charges in respect of CD
segment. The cash deposits to be maintained by a member in the CD segments
are also kept at a very low level compared to its other segments.
2.5 It is also alleged that NSE is not charging any fee for providing the data
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feed in respect of its CD segment ever since the commencement of the segment.
On account of this waiver by NSE, MCX has also not been in a position to charge
the information vendors for the data feed pertaining to its CD segment, which is
presently its only operational segment. It is alleged that this action of NSE is
aimed at blocking the residual revenue stream of the MCX.
2.6 Omnesys is a software provider for financial and security market. The NSE has
taken 26% stake in Omnesys through DotEx, which is a 100% subsidiary of NSE.
The DotEx/Omnesys has introduced a new software known as “NOW” to
substitute a software called “ODIN” develop by Financial Technologies India Ltd.
(FTIL), which is the promoter of the MCX and the market leader in the brokerage
solution sector.
2.7 After taking the stake in Omnesys, DotEx intentionally wrote individually to the
NSE members offering them “NOW” free of cost for the next year.
Simultaneously, NSE has refused to share its CD segment Application
Programme Interface Code (APIC) with FTIL, thus disabling the ODIN
users from connecting to the NSE CD segment trading platform through their
preferred mode. The product thus thrust upon the consumers desirous of the
NSE CD segment was the product “NOW” developed by DotEx/Omnesys, in place
of ODIN. NSE is using “NOW” on a separate computer terminal for accessing its
CD segment.
2.8 The main advantage of ODIN software was that a trader could view multiple
markets using the same terminal and take appropriate calls. Shifting between
different terminals (NOW and ODIN) severely hampers the traders ability to do
so. Thus the expected response from a common trader will be to confine to one
terminal which connects to the dominant player only i.e. to use the “NOW”
terminal (free of cost) and confine himself to the NSE CD segment, which has
both a first mover advantage in CD segment as well as dominant player
advantage in stock exchange business.
2.9 It is further alleged that the losses suffered by informant in the CD Segment is
much higher than the loss suffered by the NSE because the NSE enjoys the
economies of scale and has the ability to cross-finance the losses from the profits
made in other segments and has the financial strength to fund its predatory
practices based on massive reserves built through accumulation of monopoly
profits over the years. In contrast, Informant is dependent solely on the
revenues from the CD Segment and its losses are mounting in view of its
transaction fee waiver, the continuation of which is compelled by the NSE's
decision to continue with the fee waiver.
2.10 It is also alleged that the continuation of NSE's fee waiver would not only
eliminate the business of the informant in CD segment but also eliminate
potential and efficient competitors from the entire stock exchange services.
Informant has alleged that the fee waiver and other concessions in CD segment
have been adopted by the NSE as an exclusionary device to kill competition and
competitors, and to eliminate the Informant from the market as a supplier of
stock exchange services. NSE has therefore, used its dominant position in the
relevant market to eliminate competition and competitors. Informant has also
alleged that the NSE along with DotEx and Omnesys violated provisions of
section 4 of the Act by denying the integrated market watch facility to the
consumers by denying access of Application Programme Interface Code (APIC) to
the promoter of Informant.
2.11 The Informant further alleged that the NSE enjoyed a super dominant position
and virtual monopoly in the relevant market for stock exchange services in India,
which suffers from barriers to entry in the form of regulatory structural and
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functional barriers. According to the Informant, the NSE is indulging in wrongful


and abusive exercise of market power.
2.12 According to the information, the various fee waivers and the low level of
deposit requirements only with respect to the CD segment of NSE are completely
at a variance with its conduct in other segments and are aimed at eliminating
competition and discouraging potential entrants. It has been alleged that the
NSE has a history of acting vindictively against its competitors in a manner that
publically sends strong signals to other potential competitors or promoters.
2.13 The Information provider has sought the following relief from the Commission:
(a) To investigate infringement of section 4 of the Act by NSE;
(b) To direct the NSE to discontinue transaction fee, data-feed fee and the
admission fee waivers in respect of the CD segment and to impose transaction
fees, data-feed fee and admission fee in the said segment equal to that in the
other segments of NSE;
(c) To order NSE to require its members to maintain deposits for the CD segment
at a level that is consistent with the levels of other segments;
(d) To grant an injunction restraining the NSE from continuing the transaction
fee, data-feed and admission fee in respect of the CD segment in line with
those in other segments; and (iii) mandate NSE to collect deposits from
members at a level on par with those in its other segments, pending final
disposal of the complaint;
(e) To order NSE to pay all of the complainant’ costs and impose the highest
level of penalties on the NSE in accordance with the Act, so as to have
deterrent effect and ensure free and fair competition in the relevant market;
and
(f) To pass such other order as the Commission may deem fit to ensure free and
fair competition in stock exchange services market.
3. Reference to the Office of the Director General (DG):
3.1 The Commission in its meeting held on 30.03.2010 considered the information
and opined that prima facie, a case exists for referring the matter to the Office
of Director General for conducting an investigation into the matter under section
26(1) of the Act. The Commission, therefore, directed the office of Director
General vide Order No. F.No. 1(20) 2009-Sectt. dated 30.03.2010 to investigate
the matter and submit the report to the Commission.
4. Application for interim relief
4.1 The Informant also filed an application for interim relief under section 33 on
6.7.2010. In its application, the Informant stated that the opposite party
continues to offer its services in the CD segment free of cost despite a significant
increase in turn over. Consequently, the Informant claimed to have suffered a
combined loss of around Rs. 100 crores (1 billion).
4.2 The Informant also submitted that the Commission had already formed a prima
-facie opinion in this case and order investigation under section 26 (1) of the
Competition Act, 2002. The predatory conduct of the opposite party had
continued despite initiation of investigation. If the Informant is forced to exit
market, it would result in irreparable injury. Therefore, the Informant pleaded
that the balance of convenience is in favour of grant of interim relief against NSE
and its associates. The informant also argued that unless interim relief was
granted, there was imminent danger of the applicant exiting the market which
may cause irreparable harm to far competition in the sector.
4.3 Opposite parties No. 1 & 2 filed written submissions on 3.8.2010 in response to
the application for interim relief filed by the informant, MCS-SX.
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4.4 In the facts and circumstances of the case and considering that the
investigation by the DG was near completion, the Commission did not deem it fit
to pass any order under section 33 of the Act.
5. Investigation by the DG
5.1 The DG conducted an in depth investigation of various allegations made in the
information. The investigation included examination of financial statements of
NSE, details of all fees and charges and other costs incurred in different
segments. Information regarding its capital formation, main business activities
and shareholding pattern was also obtained from DotEx. Similar details were also
obtained from Omnesys including the details of the software developed by them.
For a more holistic picture, details of fees and charges as well as relevant costs
were also obtained from BSE/NSC. In addition, officials of SBICAP Securities Ltd.
(SSL), Syndicate Bank, Abhipra Capital Limited and Alankit Assignments Ltd.
were also examined to assess the functioning of CD market and the software
used by these broking entities. The DG also studied several reports of regulations
and circulars of expert committees and regulations/circulars issued by SEBI to
understand the mechanics of various charges imposed by the stock exchange
service.
Delineation of relevant market:
5.2 The Informant has argued that though several different products are traded on
different segments of the stock exchanges, the stock exchange business as a
whole constitutes the relevant market as product differentiation is not of
much practical consequence and the demand — supply structure is similar across
the segments and there is an obvious co-relation between the segments which
are limited in number. Further, from the demand side, majority of stock brokers
are members of all the segments and the users are also common. Each product
is used with a common objective of profiteering of investment and trading.
5.3 On the other hand, NSE argued that stock exchange services cannot be a
relevant market in this case. Each segment of the capital market and the debt
market is a distinct market with separate trade at stock exchanges. The
derivative market is of recent origin and not interchangeable or substitutable
from the demand side. Further, the CD segment is essentially for the importers
and exporters who desire to hedge the currency fluctuation risk which is not the
case in equities/debts/F&O segments. Without prejudice to this contention, NSE
argued that if at all the question of interchangeability or substitutability arises,
the CD market may be seen as a substitute of the OTC segment.
5.4 The DG has considered the following segments for arriving at a relevant product
market:—
(i) Equity segment
(ii) Equity F&O segment
(iii) Debt segment
(iv) CD segment; and
(v) OTC market for trades in foreign currency.
5.5 The DG report observes that MCX-SX, NSE and BSE are all recognised
exchanges under the Securities Contracts (Regulation) Act, 1956 (SCRA). After
the issue of regulatory framework, both BSE and NSE could commence trading in
CD segment immediately. This fact indicates that CD segment is part of the
stock exchange market services. According to the DG report, since any exchange
can easily start operations in any of the segments of capital market, there is
supply side substitutability between the segments. Therefore, according to the
DG report, the entire stock exchange market service is a single relevant
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product.
5.6 Additionally, the DG report also looks at demand side substitution and
concluded that it is not possible to ascertain substitutability between CD and
other segments of stock exchange services. The report refers to several cases
from international jurisdictions such as Case Nos. 351 US 377 (1956), ECR 1973
0215, ECR 1980 page 03775, ECR 1983 page 03461, ECR 1991 page I — 03359,
ECR 1994 page II — 00755, ECR 1996 page I — 05951, ECR 1998 page I —
0779 and others. The report observes, “In all the successive judgements, the
courts have relied on the requirement of interchangeability rather than
substitutability. Moreover, the courts have placed greater reliance on the
characteristics of the products for the purpose of satisfying constant needs.”
5.7 With a view to examine the interchangability between CD, OTC and F&O
segments, the DG has relied upon, Report of the Internal Working Group on
Currency Futures by RBI dated April 2008 (Annexure 32 of DG Report). The said
report describes the purpose of futures contracts as “used primarily as a price
setting mechanism rather than for physical exchange of currencies ……. such
contracts do provide options to deliver the underlying asset or settle the
difference in cash……..” The DG report concludes that from the very definition of
futures contract, it is amply clear that the basic characteristics of the product are
similar to the equity futures contract. Therefore CD and equity derivative
segments have common characteristics. The DG further concludes that “equity
segment including equity F&O and CD segment/mainly which mainly comprise
the stock exchange services market are substitutable on the product
characteristics basis.”
5.8 In context of users/participants, the DG report observes that F&O market and
CD market are used by similar type of participant, viz. speculators and hedgers.
5.9 The DG report also compares the CD segment with the OTC market. After
considering relevant provisions of SCRA, RBI Internal Working Group Report, RBI
— SEBI report on CD Market, FEMA etc., the DG has concluded that the CD
market and OTC market cannot be considered as substitutable or
interchangeable products based on the characteristics of its products and
intended use.
5.10 The DG report further observes that the “end to end operation and control
mechanism for all the segments of stock exchanges is identical and indicate
towards product substitutability.” Thus, the DG report takes the position that
similarity of operations of stock exchange services in relation to different
segments traded in exchanges indicates that the products and indeed the
segments are substitutable.
5.11 The DG report has also examined the membership patterns of MCX-SX and
NSE and concluded that “a very high commonality of members at NSE as well as
IP (MCX SX) with the membership of other segments clearly establish that the
existing members of other segments are primary traders in the CD segment……..
This further implies that actual hedgers of foreign exchange do not see any
substitutability or interchangeability in the CD market as against OTC market.”
5.12 During the course of the discussion on delineation of the relevant market, the
DG report has examined the efficacy of using the SSNIP test for determining
market definition. The report observes that “demand substitution can only be
found by considering a speculative experiment, postulating a hypothetical small,
lasting change in relative prices and evaluating the likely reactions of consumers
to that increase. This test is known as SSNIP test………even the European
Commission advises caution on the applicability of SSNIP test for determining
market definition.” The DG report further observed, “In the present case, NSE
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has completely waived transaction charges, admission fee and data feed fee in
the CD segment……… in fact, there is no pricing in the CD segment. Therefore,
the question of conducting any test based on pricing for determining demand
substitutability is not possible in the present case ………in these circumstances,
SSNIP test is not being considered in the present case for carrying out the test of
demand substitution”.
5.13 In conclusion, the DG report takes stock exchange services in India including
equity F&O, WDM and CD but excluding OTC market, as relevant market for the
purpose of section 19 (6) & (7) read with section 2(f) and (t).
Assessment of dominant position
5.14 The report of the DG analyses the dominant position of the OP 1 with reference
to explanation (a) to section 4 of the Competition Act, 2002. Having already
identified the relevant market, the DG report examines the status of the OP 1
along with the following parameters:—
(a) Position of strength
(b) Ability to operate independently or competitive forces prevailing in the
relevant market; and
(c) Ability to affect its competitors or consumers or the relevant market in its
favour.
5.15 The report first assesses market power of the opposite parties along the lines
indicated in section 19(4) of the Act. The assessment can be summarised as
below:—
(i) Market share of the enterprise:—
Though the market share itself may not indicate dominance, however, it is
one of the most important factors in determining dominance of an enterprise.
Placing reliance on the Handbook of Statistics on the Indian Securities Market,
2009, it can be seen that when NSE commenced trading in November, 1994,
there were 21 stock exchanges in India with BSE commanding a market share
of 41.5% in the equity segment. By 2008-09, NSE had acquired 71.43% of
the equity segment as against the vastly reduced share of 28.55% of BSE. In
the F&O segment, NSE commenced trading in June, 2000 and has risen to
over 99% market share since then. In the WDM segment, NSE commenced
trading in June, 1984 while BSE started in June 2001. However, since 2001-
02, NSE has consistently maintained market share of over 90% with a slight
dip to 88.91% during 2009-10. As per the information available at the time of
investigation, NSE had a market share of 47 — 48% in the CD segment as
against 52 — 53% of MCX SX.
The combined market share of NSE for equity, F&O, WDM and CD segment
rose to 92.53% in 2008-09 as compared to 5.01% in 1993-94. In view of this
statistics, NSE is a dominant player.
(ii) Size and resources of the enterprise:—
Financial statements of NSE were examined for the financial years 2008-09
and 2009-10. As at 31.3.2009, equity capital of NSE stood at Rs. 45 crores
(450 million); reserves and surplus of Rs. 1,864 crores (18.64 million) and
deposits from trading members of Rs. 917 crores (9.17 billion). During the
year, NSE earned a total income of Rs. 1042 crores (10.24 billion) with profit
before tax of Rs. 689 crores (6.89 billion). These figures indicate a very sound
financial position and consequent market power of NSE.
(iii) Size and importance of the competitors:—
After commencement of trading by NSE in November, 1994, the remaining
19 original exchanges started collapsing due to intense competition from NSE.
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Even the incumbent market leader, BSE rapidly started losing out. As on
31.3.2009, BSE had a total income of Rs. 421 crores (4.21 billion) only.
Although MCX-SX started operations only on 14.8.2008 with a paid up capital
of Rs. 135 crores (1.35 billion), it ended the first year with a carry forward loss
of Rs. 29.87 crores (298.7 million). From these figures, it can be surmised
that in terms of financial resources and profitability, NSE enjoys a dominant
position in the relevant market as compared to its competitors.
(iv) Economic power of the enterprise including commercial advantage
over competitors:—
NSE has presence 1486 cities and towns spread across the country.
Majority of investors, brokers etc. are connected with NSE and it has extensive
infrastructure. During the investigation, NSE had argued that financial status
of MCX, FTIL and MCX-SX should be valued together. However, the DG report
stated that MCX and FTIL are two separate companies who only have less than
5% shareholding in MCX-SX. Moreover MCX is a stock exchange in commodity
segment while FTIL is a developer of software and not competitors of NSE.
Finally, MCX and FTIL cannot infuse further funds in MCX-SX due to
restrictions imposed by Securities Contracts Regulation (manner of increasing
and maintaining public shareholding in recognised stock exchange)
Regulations, 2006) [SCR 2006]
No such limitation exists for NSE for raising both equity and debts to fund
its requirements. The argument of NSE that the promoters of MCX-SX have
the financial, technical and operational capabilities to match NSE is not
acceptable because MCX and FTIL together hold barely 5% of stake in MCX-
SX.
The argument that CD segment is commercially lucrative for existing as
well as future exchanges is also not acceptable considering that the newly
formed United Stock Exchange (USE) has not been able to operationalise its
CD segment despite seeking approval of SEBI in January, 2009.
(v) Vertical integration of enterprises or sale or service net work of such
enterprises:—
NSE has a high degree of vertical integration and has presence in all
segments of stock exchanges related services. The NSE group companies
include NSE-IT, NSE Infotech Services Ltd., DoT-Ex International Limited,
India Index Services and Products Ltd., Power Exchange India Limited and
Omnesys Technologies Pvt. Ltd. (26% equity). These carry out a gamut of
stock exchange related activities such as IT solutions for investors and
brokers, rating and indexing services, trading platforms, market watch etc. In
contrast neither BSE nor MCX-SX have themselves or through group
companies such wide array of activities related to stock exchange services.
MCX SX is in about 450 centres only and operates merely in the CD segment.
BSE is largely concentrated in Maharashtra and Gujarat and that to limited to
the equity segment.
(vi) Dependence of consumers:
Due to its resources, market share, economic power, integrated operations,
NSE dominates the consumers of stock exchange services in India. Stock
exchanges work on the basis of network effect or network externalities. With a
far greater number of buyers and sellers using NSE, it enjoys the benefits of
network effects resulting from higher liquidity and lower transaction costs.
These positive network effects attract even more buyers and sellers to NSE as
a chain reaction. Thus an increasing numbers of consumers are depending on
NSE not only in respect of trading but in respect of a host of related services.
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(vii) Countervailing buying power:


Typically, the users of stock exchange services like stock brokers, sub-
brokers, investors, traders or companies are individually too small to possess
any countervailing buying power. This handicap is worsened in the light of
comparative might of NSE as compared against its competitors.
(vii) Entry barriers:
Stock Exchanges in India are given recognition under the Securities
Contracts (Regulation) Act, 1956 by the Central Government/SEBI. Securities
(Contract) Regulation (manner of increasing and maintaining public
shareholding in recognised stock exchanges) Regulations, 2006 and a host of
other guidelines, policies and regulations have made stock exchange services
and area of high regulatory barriers. Coupled with this, the high capital cost of
entry, financial risk, marketing and technical entry barriers further
strengthens the already dominant position of NSE in the stock exchange
services market in India.
Abuse of dominant position
5.16 The DG has examined the alleged abusive behaviour of the opposite parties
in respect of four measures of NSE as below:
A. Transaction fee waiver;
B. Admission fee and deposit level waivers;
C. Data feed fee waiver; and
D. Exclusionary denial of “integrated market watch” facility.
Transaction fee waiver:
5.17 Informant MCX-SX alleged that NSE through its circular No. NSE/CD/11188
dated August 26, 2008 announced transaction fee waiver in respect of
currency futures trades executed on its platform. Initially, this waiver was
supposed to be for one month but NSE has continued the same.
Consequently, the Informant has been forced to continue zero transaction fee
structure. According to the Informant, transaction fee is the source of funding
for the existing exchanges on the total volume of trade done by the
brokers/trader.
5.18 In response, NSE argued that the waiver was done in the CD segment to
encourage larger participation as the currency futures were at a nascent stage. It
was argued that this policy was influenced by report of the High Powered
Study Group on Establishment of New Stock Exchanges which envisaged
greater opportunities to investors from across the country. Lastly, it was argued
that NSE's Board of Directors had constituted a Pricing Committee to guide and
decide all pricing matters. The transaction fee waiver was the decision of that
Committee.
5.19 The DG examined the transaction charges levied by NSE in various segments.
For the capital market equity segment, it was observed that NSE has charged
transaction fees ranging from Rs. 9/- to Rs. 12.50 per lakh (100,000) in the
past. In F&O segment where both NSE and BSE commenced trading in June,
2000. NSE levied Rs. 2/- per lakh of trading value (0.002% each side) or Rs.
1.00 lakh annually whichever is higher. After two months, NSE waived
transaction charges in this segment through a circular dated July 31, 2000.
Soon, this strategy brought results as NSE turnover outstripped that of BSE by
mid 2001. By March, 2002, NSE turnover was Rs. 1078 crores (10.78 billion)
whereas BSE turnover was meagre Rs. 2.52 crores (20.52 million). NSE did not
extend the waiver. The waiver in options in sub-sections of F&O continued till
2005.
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5.20 In WDM segment, NSE commenced trading in June 1994 and till June, 1995,
levied transaction charges of Rs. 1/- per Rs. 1 lakh (Rs. 1,00,000/-) of order
value of trades. This clearly shows that NSE did not have a historical philosophy
of waiving fee to develop a nascent market.
5.21 Another example to refute the development of nascent market theory of NSE
indicated in the DG report is its conduct relating to Gold ETF. Transaction charges
were levied in the Gold ETF segment from March 2007 till August 2009, when
NSE was the only exchange trading in Gold ETF segment. It was only after
February, 2010 that NSE waived/reduced transaction fee in Gold ETF segment.
There appears to be a string strategy behind it. BSE entered into Gold ETF
segment in September, 2009 and after a month it grabbed a market share of
about 5% which rose to 19% by February, 2010. According to the DG report, this
trend explains why NSE introduced waivers/reductions in this sub segment from
March, 2010 onwards.
5.22 The DG also examined various board minutes and agenda items of NSE and
concluded that the Pricing Committee never went into factors such as cost of
infrastructure, man-power, and risk containment measures etc. while deciding
upon fee structure or waivers. The DG hence concludes that management of
competition was the prime factor that influenced the transaction fee policy.
Admission fee and deposit level waivers:
5.23 The Informant alleged that NSE collects admission fee of Rs. 5,61,800/- from
a corporate member in the equity, F&O and debt segment but charges no
admission fee in its CD segment. NSE does not collect any subscription charges
and advance charges in respect of CD segment.
5.24 In its reply, NSE stated that it is not charging any admission fee for the CD
segment but is charging admission fee for all other segments. The reasons for
not charging admission fee were the same as for not charging transaction
charges for the CD segment. As regards subscription charges, NSE argued that
the same are levied only in the equity segment. As far as the debt segment is
concerned, it has waived only subscription charges from time to time.
5.25 As regards deposit level waivers, NSE argued that the requirement for deposit
levels is made keeping in line the nature of the segment in terms of the risk
associated and other factors. Though deposit requirement for CD segment were
set lower, they cannot be said to be unjustifiably low.
5.26 Further, NSE stated that Informant had set a very low interest-free security
deposit of only Rs. 2 lakhs when it commenced business as against NSE
requirement of Rs. 10 lakhs. This forced NSE to reduce its own deposit fee.
According to NSE, there was no justification for such move by MCX-ST when it
was supposedly suffering losses.
5.27 However, from examination of documents, the DG report observes that NSE
reduced deposit structure w.e.f. November 28, 2008 which was subsequently
followed by MCS-SX from January 13, 2009. Thus, as per DG report, even here it
was NSE that took the first step.
Data Feed Fee waiver:
5.28 The Informant had alleged that NSE is not charging any fee in respect of its
CD segment right from the beginning. Consequently, MCX-SX has also not been
in a position to charge the fee. Data Feed refers to providing prevailing market
prices and data for the segment by the stock exchange for significant
consideration. The vendors display this information on their subscribers’
terminals. The data fee is a significant source of income for the stock exchanges.
5.29 In its response, NSE stated that the reasons for not charging data fee were the
same as those for not charging transaction fee for the CD segment. NSE
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informed that DotEx (a 100% subsidiary) provide the data feed service for NSE
in various forms such as on-line streaming, intraday snap shot, end of day feed
and historical feed. Since DotEx does not charge any fee for the CD segment and,
therefore, NSE does not charge its clients. However, as per its own admission,
NSE is charging a substantial fee for data fee for other segments.
5.30 The DG examined relevant agenda items and minutes of meetings of DotEx in
this matter. Despite deliberations on the fee structure, no data fee was
implemented which indicates that DotEx had waived the fee with the purpose of
capturing the market.
5.31 NSE further contended that it had postponed imposition of data feed fee on
the request of clients. However, according to the DG report, NSE produced only
two such requests from Thomson Reuters and Bloomberg which form a
minuscule part of its client base.
5.32 The DG further observes that from examination of records produced by NSE, it
can be seen that the issue of data feed fee was not discussed during any of the
Board Meetings over the initial 16 months from the date of commencement of
trading in CD segment. First time the Board of DotEx discussed levying of data
feed fee was only after this period, by which time the CD market had developed
considerably but even then the fee were not imposed.
Exclusionary denials of integrated market watch facility:
5.33 The Informant alleged that NSE has acquired a 26% stake in Omnesys which
is a technology vendor providing software for financial and securities market. The
stake was taken through DotEx a 100% subsidiary of NSE. According to the
information, NSE had taken the stake soon after the news of FTIL group floating
MCX-SX became a public. DotEx/Omnesys created a new product known as
“NOW” which is intended to substitute software called “ODIN” developed by FTIL.
NSE simultaneously refused to share its CD segment Application Programme
Interface Code (APIC) with FTIL thus disabling the users of ODIN (who include
about 85% of NSE's own members) from connecting to the market watch of
NSE's CD segment trade. APIC is an essential facility to connect front end
application of NOW with any other application such as ODIN, which constitutes
the electronic trading platform of the stock exchanges. This has allegedly caused
difficulties, as clients had been using ODIN for all other segments in the past. As
a result, FTIL clients have been forced to establish a separate terminal for trading
on CD segment of NSE using the newly developed NOW.
5.34 DotEx offered NOW to all NSE members free of cost for 3 years and placed
ODIN on watch list across all its segments. However, while the essential facility
of APIC is still available to ODIN for other segments, the same has not been
given for the CD segment.
5.35 In its reply, NSE submitted before the DG that it had placed ODIN on watch
list due to complaints of its members and their constituent clients. In support,
NSE submitted 10 complaints against ODIN, the first such instance being dated
10.4.2006.
5.36 Upon examination of correspondence made available by NSE, the Informant
and FTIL, the DG concluded that complaints against ODIN had been few and far
between. On the whole, end users of ODIN appear to be generally satisfied,
which is reflected in the fact that a vast majority of NSE members are still using
ODIN for all other segments. ODIN is also being used by several other exchanges
in the country. The DG also examined several representations of members of NSE
and recorded their statements. Questions regarding the performance of ODIN
and NOW were posed to these people. From the statements recorded, no
evidence was found to justify the claim of NSE that ODIN was put on watch list
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due to performance issues. At the same time, investigation and statement of one
of the Board of Directors of Omnesys revealed that even NOW suffered from
problems. Approximately 200 different types of complaints were received in
respect of the software during 1st to 14th July, 2010 alone.
5.37 Based on the facts gathered, the investigation report concluded that the
actions of NSE are suspect from the point of view of harm to the competition as
it results in exclusionary denial of integrated market watch facility.
Analysis of predatory pricing by NSE:—
5.38 The allegations of the Informant with regard to waiver of transaction charges
in the CD segment, demand fee, deposit level and data feed fee have been
examined by DG as discussed above.
5.39 The DG report has specifically examined allegation of all predatory pricing
made by the Informant in context of explanation (b) of section 4 of the Act read
with Competition Commission of India (determination of cost of production)
Regulations, 2009 (hereinafter referred to as “cost regulations”). Explanation (b)
to section 4 states “predatory price” means the sale of goods or provision of
services, at a price which is below the cost as may be determined by regulations,
of production of the goods or provision of services, with a view to reduce
competition or eliminate the competitors.
5.40 As per Regulation 3(1) of cost regulations, “cost” in the explanation to section
4 shall generally, be taken as average variable cost as a proxy for marginal cost.
5.41 In response to the allegation, NSE argued before the DG that it is not incurring
any “variable cost” for running the CD segment and therefore, it is not indulging
in predatory pricing within the meaning of the section 4 of the Act. The report of
the DG observed that there is no price being charged for any services offered by
NSE to its members for the CD segment. The charges are zero from NSE
perspective as well as the perspective of the users. The DG report posed the
question, whether in a hypothetical situation of NSE not having any other
segment to support its income could it survive? The answer, according to the
investigation report, is definitely no.
5.42 NSE argued that pricing in CD segment was with a view to promote and
expand the segment and are in the nature of “introductory” or “penetration
pricing”. Further, it is argued that, “the objective of predatory pricing is to oust
or reduce competition, whereas the objective of introductory/penetration pricing
is to open up newer market segments. There is no intention on part of NSE to
oust or eliminate or reduce competition therefore the concept of predatory
pricing is not applicable.”
5.43 The DG report contends that even in introductory/penetration pricing, there
has to be an element of pricing. According to the DG, in the submissions of NSE,
“the benchmark for assessing the cost has been taken on the premise that costs
are fixed if they would not change, were output to double from current levels.”
In other words, NSE has argued that if prices do not change even if output is
doubled, then it indicates that the cost structure of the product is wholly fixed in
nature and, therefore, variable cost can be considered to be approximately zero.
NSE contended that for assessing predation, the correct benchmark is average
variable cost and since, in this case, that cost is approximately zero then even
zero cannot be said to be predatory pricing.
5.44 NSE submitted that average variable cost should be taken as a basis for
defining the cost. The cost structure of the CD segment is only fixed in nature
and, therefore, variable costs can be considered to be approximately zero. Hence,
there is no element of predatory pricing.
5.45 The DG report counters this reasoning of NSE by observing that NSE could run
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operations in the CD segment only due to substantial fixed cost it has already
incurred for all the segments. If the pricing of any segment is to be linked only
to the variable cost, NSE should have zero pricing for all the segments because
none of them would have any variable costs. The investigation has already
established that the claim of NSE that waivers were carried out for other
segments in the initial period is not substantiated by facts.
5.46 The DG report refers to the report of RBI — SEBI Standing Technical
Committee on exchange traded currency future where chapter 5 specifically deals
with eligibility criteria for exchanges for obtaining approval to operate in currency
futures segment. The criteria very clearly require investment in fixed assets. The
DG further refers to the statement of Director (Finance & Legal) of NSE who
confirms that additional expenditure was incurred for machinery, manpower, IT
support, disaster recovery etc. in respect of the CD segment system. NSE had
also admitted that surveillance system for the CD segment was also set up. The
DG report observes that there were many dedicated employees for the CD
segment and NSE paid substantial amount to these employees. Under the
circumstances, the DG concludes that the contention of NSE that none of these
costs constitute variable costs cannot be accepted.
5.47 The DG report has also examined the views taken by international jurisdictions
such as US Department of Justice and DG Competition of European Union in
respect of appropriate cost to be considered while determining predatory pricing.
Based on documents such as the 2008 report of US Department of Justice on
Single Firm Conduct under section 2 of the Sherman Act and Review of Article 82
EC and the publication by DG Competition (European Commission) of 2005
Discussion Paper on EC Exclusionary Abuses, the DG report observes that
average variable cost (AVC) is not taken as a reliable method of costing. More
reliance is placed on average avoidable cost (AAC) which represents losses that
could have been avoided by not producing that output which was charged lower
during the referred period.
5.48 As yet, there is no complete unanimity in international jurisdictions over what
may be the best cost measure to evaluation predation claims. The limitations of
AVC and AAC forced an inclination towards long run average incremental cost
(LAIC or LRAIC) as an appropriate cost measure for assessing predation. Unlike
AVC, LAIC includes all products specific fixed costs whether recoverable or sunk.
It also includes costs incurred before predation period.
5.49 The DG report further states that the Indian stock exchange services, which is
the relevant product market in this case works on the basis of high level of
network externalities. Such network effect industries work on very high sunk
costs.
5.50 The DG report refers to the Wanadoo Interactive SA (WIN) case of the
European Commission where the concept of average total cost (ATC) was
applied. The court in first instance rejected the appeal by WIN against the ruling
of the European Commission and ruled,
“If the prices are below average total costs but above average variable costs,
those prices must be regarded as all abuses are determined as a part of the plan
for eliminating a competitor.”
5.51 Based on international practices, the DG report states that there is a strong
justification for following ATC or at least LAIC in the instant case for determining
predatory pricing in the relevant market of stock exchange services which will
affect the industry.
5.52 NSE was asked to provide comprehensive details of allocation of all fixed and
variable costs for the CD segment for the last two years. However, NSE
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submitted that it does not prepare accounts in which separate profit and loss
account statements are provided for either the CD or any of the other four
segments.
5.53 NSE contended that this is because there are many difficulties in allocating
common costs across a multiple products firm. NSE cited the UK Competition
Commission investigation into Northern Ireland personal banking. The UK
Competition Commission concluded that the allocation of common costs down to
product level was impossible and would be misleading.
5.54 The DG has countered these arguments of NSE by examining certain trends in
the balance sheet and profit & loss accounts of NSE. The investigation report
points out that there has been a quantum increase in fixed assets in general and
IT hardware/software, since the CD segment started, in particular, after financial
year 2007-08. During 2006-07, the increase in fixed assets was only Rs. 31.472
crores (314.72 million). In comparison, the increase during 2007-08 was Rs.
133.671 crores (1.33 billion), during 2008-09, it was Rs. 93.475 crores (937.45
million) and during 2009-10, it was Rs. 90.1 crores (901 million).
5.55 Although NSE expressed inability to provide segmented costs, the DG report
has looked at the details of overall capital costs, expenses, segment-wise long
run incremental cost (LAIC) etc. to construct an estimated but reliable indicator
of affect on costs subsequent to start of CD segment. It is observed that the total
cost for 2008-09 works out to Rs. 4.42 crores (44.2 million) and for 2009-10,
which is the first full year of operation, Rs. 37.07 crores (380.7 million). The
report has estimated total cost for CD segment on a percentage based pro rata
system. The total cost for CD segment estimated for 2009-10 is to the tune of
Rs. 37.07 crores (370.7 million) whereas for 2008-09, it is estimated at Rs. 4.42
crores (44.2 million). Based on pro rata assumption, about 72% of the total cost
is allocable to F&O segment, 17% to equity segment, 2% to WDM segment and
about 1% to corporate debt segment and 7% to CD segment for 2009-2010.
5.56 The DG report makes a reference to European Commission notice — 98/C
39/02 wherein it is stated,
“The operators (of postal services) should not use the income from such reserved
areas to cross-subsidise activities in areas open to competition …… the price of
competitive services offered …….should, because of the difficulty of allocating
common cost, in principle be at least equal to the average total cost of provision.
This means covering the direct costs plus the appropriate proportion of the
common and overhead cost of the operator……”
5.57 The DG report, therefore, makes a strong argument for appropriating
proportions of common costs for the CD segment of NSE. Further, the DG has
relied on Kelco Disposal I & C v. Browing-Ferris Indus of Vt. Inc. 845.2d 404, 408
(2(d) Cir. 1988), of the Second Circuit Court (USA) where it was held that “the
general legal rule is for depreciation caused by use is a variable cost, while the
depreciation through obsolescence is a fixed cost.” The DG has, therefore,
estimated depreciation of Rs. 5.63 crores (56.3 million) during 2009-10 increase
from Rs. 0.79 crores (7.9 million) during 2008-09 in relation to the CD segment.
5.58 NSE has conducted several seminars, workshops and road shows across
regions for promoting operations in CD segment. As per details submitted by
NSE, it had conducted 1163 promotional activities in 103 locations across India.
Although NSE has not provided details of expenditure incurred on these
activities, it is understandable that considerable expenses would have been
incurred. The financial statements of NSE reveal that Rs. 4.20 crores (42 million)
was spent on this head during 2009-10 and Rs. 10.22 crores (102 million) was
spent during 2008-09.
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5.59 The DG report examines the pattern of clearing and settlement charges
incurred by NSE. Clearing is the process of determination of obligations after
which the obligations are discharged by settlement. As per RBI/SEBI advisory
these activities should be done by an independent clearing corporation. NSE,
therefore, executes these activities through NSCCL which is a wholly-owned
subsidiary of NSE. Being independent entity, NSCCL or any other clearing agency
would charge for the services. As far as F&O and equity segments are concerned,
the NSCCL is charging NSE at about 15% of transaction charges in equity and
F&O segment, for its services. NSE had submitted complete details of the
charges paid to NSCCL since August, 2008 to the DG. Clearing and settlement
charges vary in direct proportion to transaction charges and the DG has observed
that in percentage terms, clearing and settlement charge has been gradually
declining from about 24% in 2005-06 down to about 10.69% in 2008-09. This
indicates that as transaction volumes increase the related clearing and
settlement charges increase but do not increase at the same pace. However, it
can clearly be seen that transaction charges are a variable cost linked to the
volume of transaction.
5.60 DG also examined copies of resolution passed by the Board of NSE in 2006-
2010 in context of settlement charges to be paid to NSCCL. It was observed that
since 2005-06, as volumes of transaction for F&O and equity segments
increased, the clearing and settlement charges were determined along a
downward trend. This was justified by the NSE Board on factors such as
compulsory D-mat settlement, strengthening of risk containment mechanism,
volumes increase, automation etc.
5.61 The DG report observes that despite there being no adverse change in any of
these factors, the NSE Board passed a resolution in June, 2010 to enhance
clearing and settlement charges in the F&O segment. This was clearly a strategy
for loading settlement charges for the CD segment on to the F&O segment.
5.62 The DG report has considered the nature of clearing and settlement services
involved in CD segment as being identical to those involved in F&O segment and,
therefore, presumes that as an independent entity, NSCCL would notionally be
incurring expenses in relation to CD segment, such as computer stationery,
manpower, computer time, power etc. Accordingly, DG has applied a notional
clearing and settlement charge for the CD segment at 15% of transaction charge
and has notionally taken transaction charge at Rs. 400/- per crore (10 million) of
turnover which is prevailing in respect of F&O segment. Based on this, the DG
report makes a notional estimate of Rs. 13.74 crores (137.4 million) which would
represent charges payable to NSCCL for the periods from August 2008 to April,
2010.
5.63 To get a clearer picture of cost factors involved in running CD segment, the DG
called for financial statements of Bombay Stock Exchange. The report observes
that from 1st October, 2008 to 31st October, 2010, BSE incurred Rs. 2.01 crores
(20.1 million) for 2008-09 and Rs. 4.69 crores (46.9 million) for 2009-10 as
direct and shared cost for running the CD segment.
5.64 The Informant MCX-SE is only operating in the CD segment and examination
of its financial statements of 2008-09 and 2009-10 reveals that it is incurring
variable costs. The operating expenses include advertising, promotional
activities, clearing and settlement, conveyance, communication and insurance
expenses. For 2008-09, MCX-SX has incurred total expenses of Rs. 37.33 crores
(373.3 million) and for 2009-10, it has incurred Rs. 85.78 crores (857.8 million).
5.65 Looking at the costs incurred by BSE and MCX-SX, the DG observes that the
cost structure of NSE cannot be any different. It cannot be accepted, therefore,
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that NSE does not incur any variable cost for running the CD segment.
5.66 DG report makes a reference to judgement of Ontario Supreme Court, Canada
in Regina v. Hoff Mann La Roche Ltd. In the case, the matter went up to
Supreme Court where the court observed distribution of free valium in this case
was a business transaction modified exclusively by the hope of long term profits
and, thus, there was selling going on at zero price.
5.67 Based on the above facts and the circumstances surrounding those facts, the
report of the DG concludes that waiver of transaction charges, data feed charges
and admission fees and reduction of deposit levels by NSE in the CD segment are
actions which violate section 4 (2) (a) (ii) of the Competition Act, 2002.
Applicability of section 4(2)(e) of the Act:
5.68 In addition to the violations mentioned in the foregoing paras, the DG report
has also held that NSE has used its dominant position for leveraging. Section 4
(2)(e) of the Competition Act, 2002, says, “there shall be abuse of dominant
position if the enterprise uses its dominant position in one of the relevant market
to enter into or to product, other relevant market.”
5.69 The investigation report of the DG states that NSE holds 100%, 75% and 90%
of the business in F&O, the equity and WDM segment respectively. In these
segments, NSE is earning monopoly profits and NSE is using this profit to
leverage this position in the CD segment where the Informant, MCX-SX, is
competing with it. By not charging transaction fee, data feed fee etc., NSE is
subsidising activities in CD segment which is open to competition.
5.70 The report of the DG refers to Tetrapak II Case and Deutsche Post AG
(DPAG)/United Parcel Service (UPS) case where the strategy of cross subsidies
from other business activities was found to be anti competitive by the European
Commission.
5.71 According to the DG report, in the instant case, NSE is charging zero fees in
the CD segment but is having substantial earnings from other segments. These
aspects have been discussed in detail in the foregoing paras. NSE is also creating
barriers for users of ODIN software by not providing APIC to its own software
NOW.
5.72 According to the DG report, these conducts of NSE are aimed at leveraging its
near monopolistic dominance in F&O, equity and WDM segment for protecting its
position in the CD segment. Therefore, NSE is in violation of section 4(2) (e) of
the Act.
5.73 The DG has concluded that the aforementioned acts of NSE have harmed
competition in the Indian Capital Market, particularly in the CD segment. The
behaviour of NSE is clearly exclusionary and the facts gathered during
investigation indicate that they have been done with the intent to impede future
market access for potential competitors and to foreclose existing competition.
The harm of this anti competitive conduct is enhanced because the relevant
market of stock exchange services is a network effect of market. Any advantage
gained by NSE would have manifold adverse impact on its competitors due to the
network effect.
6. Forwarding of investigation report:
6.1 The Commission considered the investigation report submitted by the Director
General and passed an order dated 30th September, 2010 to send a copy of the
report to opposite parties No. 1 and 2 for filing their reply/objections. Comments
of the DG on some additional submissions filed by the Informant, received in the
Commission on 7.10.2010 were also forwarded to opposite parties No. 1 & 2 vide
order dated 11.10.2010. The Informant also moved applications dated
24.9.2010, 7.10.2010 and 8.10.2010 for supply of copies of DG report.
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Accordingly, the Commission issued an order dated 15.10.2010 conveying its


decision to provide a copy of the DG's (public version) to the Informant and
directing it to file comments/objections, if any, in the matter.
6.2 The case came up before the Commission for hearing wherein the parties
concerned were given several opportunities to make oral and written submissions
before the Commission. The parties were represented by their Advocates. Shri
A.N. Haksar, Senior Advocate alongwith Shri Anand Pathak, Advocate for the
Informant, Dr. Abhishek Manu Singhvi, Senior Advocate alongwith Ms. Pallavi S.
Shroff & Shri M.M. Sharma for the opposite party no. 1 & 2 and Shri Siddhartha
Jha, Advocate for Omnesys Technologies Pvt. Ltd. appeared before the
Commission from time to time and made oral submissions followed by written
submissions. The opposite parties no. 1 and 2 filed their main reply subsequent
to the DG report on 01st November, 2010 along with annexures. Subsequently,
several letters and submissions were filed by the opposite party nos. 1 & 2
through letters dated 16.11.2010, 23.10.3020, 29.11.2010, 30.11.2010,
8.3.2011 and 9.3.2011. The Informant filed their preliminary submissions to the
DG report vide their letter dated 1.11.2010. This was followed by letters and
submissions. The most important amongst which are letters dated 16.11.2010,
23.11.2010, 26.11.2010 (two letters), 29.11.2010, 14.12.2010, 22/2/2011,
10.3.2011, 14.3.2011 and 24.3.2011. The Informant filed a rebuttal on
21.2.2011 and further submissions on 22.2.2011, 10.3.2011 and 24.3.2011.
6.3 The Informant filed further written submissions on 22.2.2011, 10.3.2011,
14.3.2011 and 24.3.2011. The opposite parties 1 & 2 filed additional written
submissions on 9.3.2011. Omnesys Technologies Pvt. Ltd. filed written
submissions on 28.2.2011.
6.4 In their submissions and arguments, the opposite parties prominently relied on
reports submitted by their economic consultants, Genesis Economics
Consulting Pvt. Ltd. (Genesis) and Prof. Richard Whish, Professor of Law
at King's College, London. Similarly, the informant also relied upon reports of
their economic consultants, LECG Ltd. (LECG). All the major aspects of the
opinions of the above consultants formed an intrinsic part of the arguments of
the respective parties and have been dealt with in this order at the appropriate
place in the following discussions.
6.5 The main points of all the submissions made and oral arguments of the parties
concerned are encapsulated in the following sections.
7. Contentions of opposite parties 1 & 2 and objections to the Director
General's Report dated 20.9.2010:
7.1 At the outset, the opposite parties (OPs) 1 & 2 objected to the findings of the
DG report and contended that the DG had erred on the following counts:
(a) The relevant market
(b) Assessment of dominant position of NSE
(c) Assessment of predatory pricing by NSE
(d) Assessment of leveraging its dominant position by NSE
(e) Assessment of exclusionary conduct by NSE
7.2 The OPs also relied on all previous submissions made to the Commission and
before the DG and vehemently denied the findings of the DG report. In support
of their position, they filed legal opinions and reports from economic consultants.
Essential aspects of these are included in this section.
7.3 The following were the main contentions made by the OPs:
(i) There were methodological inconsistencies and errors made by the DG in the
investigation;
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(ii) As a result of an incomplete investigation, the findings of fact in the DG's


Report, in particular, Chapters 5A to 5D of the Report, are incorrect and lead
to the DG's erroneous conclusions in the Report;
(iii) The possibility of supply-side substitution has wrongly been taken into
account in the market definition;
(iv) The DG has erred in concluding that the SSNIP test should not be considered
on the facts of this particular case;
(v) The relevant market, based on a legal and economic analysis, is the “CD
Segment and OTC currency forwards”;
(vi) The findings of dominance — whether on the wide market of exchange
trading services or the narrow one of the CD Segment — are flawed;
(vii) The DG has adopted an incorrect approach to the appropriate cost standard
in a case such as this. Further, the DG has failed to provide objective basis for
determining that NSE's conduct was with a view to reduce competition or
eliminate competitors;
(viii) The DG has failed to analyze whether the CD Segment is at a nascent stage
and whether NSE was objectively justified in waiving fees in the CD Segment.
Based on legal and economic analysis, and the recent entry of USE, NSE was
and continues to be justified in adopting its pricing policy; and
(ix) The DG's Report has characterized cross-subsidization as amounting to an
abusive act in and of itself, which is wrong in law.
7.4 The above objections were elaborately discussed in the submissions and
arguments of the OPs. Major elements of these discussions are dealt with in
the following paragraphs:
Applicability of SSNIP Test:
7.5 The DG report has erred in rejecting applicability of the SSNIP test for
determining relevant market in this case. It is averred that
“SSNIP test can often is used conceptually, in other words, it is a structured
approach for identifying products and producers that provide a competitive
constraint. This is often done without quantitative analysis. Further, it was
contended “that not the current price, but a non-zero estimate of the
competitive price is to be used. Further, an absolute increase in monitory
terms can be used to carry out the analysis ………..the hypothetical monopolist
test is in fact designed for assessing the competitive interaction between
differentiated products……”
7.6 Finally, it is contended that the transaction fees are only a small part of the
costs incurred by a trader in stock exchanges, hence,
“The necessary implication is that market participants would not switch to
another segment in the face of the modest or even large increase in trading
fees, therefore, the segments do not constraint the trading fees charged in
other segments and hence are not in the same market.”
Market definition:
7.7 It was contended by the OP-I that
“even if the OTC and exchange-traded segments are to be considered in
separate markets, the significant constraint placed by the former or the latter
would need to be recognised.”
7.8 It was further pointed out that “even if we consider the relevant market as the
exchange-traded CD market, NSE is not dominant with a market share of
32.11% as at 22.10.2010.”
7.9 In conclusion, it was contended that the pricing co-relation in respect of the
CD/OTC comparison is very high, hence establishing a large degree of functional
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interchange ability, despite somewhat different, characteristics of the two


markets. In other words, it was contended that the correct relevant market is
the combined market of CD and OTC segments where it can be seen that the
overall market is overwhelmingly dominated by the banks who deal exclusively in
OTC currency forwards. It was argued that considering the slightly different
characteristics of the two markets, if at all, CD segment should be taken as
the relevant market as against the relevant marketdelineated by the DG.
Distortion of facts:
7.10 It was argued that the DG report has attempted to first malign and discredit
NSE so that any assessment of competition law principles that followed becomes
prejudiced against NSE. It was contended that NSE is a reputable Company with
higher standards, ethics and compliance and has made significant contributions
to the development of capital markets of the country.
Transaction fee waiver:
7.11 The conclusion of the DG that waiver of transaction fee was an exclusionary
device only to grab the market share is incorrect and baseless. The DG had found
no evidence that the waiver was with a view to reduce competition or to
eliminate competitors. The DG has ignored the fact that in autumn of 2008
global economy was on a down turn and therefore transaction fee waiver in the
new introduced CD segment was imperative.
7.12 The DG rejected evidence submitted by NSE in the form of agendas and
minutes of the NSE Pricing Committee and the NSE Board as well as other
relevant documents. These documents clearly reveal that the only desire of NSE
was to grow in a market that had just been introduced in India. Failing to find
any evidence from predatory intent in the CD segment, the DG has wrongly
analysed conduct of NSE in other segment.
7.13 When NSE commenced trading in capital market segment (CMS) in November,
1994, there were about 20 other exchanges already in existence in India. The
equity segment products were being traded in these exchanges and the
investing public was fully familiar with it. Therefore, initially no waiver was made
by NSE in this segment. The transaction charges imposed by NSE in the equity
segment initially were higher than those imposed by other exchanges. Therefore,
it cannot be said that NSE uses transaction charges with exclusionary intent.
7.14 NSE commenced trading in the F&O segment in June 2000 and imposed a
transaction charge of Rs. 2/- per lakh of trading value or Rs. 1.00 lakh annually
whichever was higher. But soon thereafter, in order to encourage trading in the
newly introduced segment, NSE waived transaction fee. It was BSE and not NSE
which was the first to reduce transaction fees in the F&O segment. The poor
performance of the BSE in the F&O segment was because of its own
shortcomings and there is no evidence that links waiver of transaction fee by
NSE to decline of BSE in the F&O segment.
7.15 BSE had the same rationale for waiving/reducing transaction charges, as NSE,
viz., to develop that market.
7.16 NSE commenced trading in WDM segment in June 1994. For a period of one
year, NSE imposed transaction charge of Rs. 1/-per lakh of traded value and
thereafter waived the charge with a view to develop the market. This was done
keeping the interest of trading members above NSE's own interests.
7.17 NSE commenced trading in Gold ETF in March, 2007. NSE imposed transaction
charges till February, 2010 and only thereafter waived the charges. The
conclusion of DG that this was with intent to ward off competition is incorrect
and baseless.
7.18 NSE commenced trading in the HangSeng Benchmark in March, 2010. The
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waiver of transaction charges by NSE was to encourage wide market participation


and not to destroy competition from BSE.
Positive role of NSE in capital market:
7.19 The DG has wrongly given a negative portrayal of NSE. It is contended that
NSE is internationally recognized for its compliance etc. It is due to the
professionalism and efficiency of NSE that BSE and other stock exchanges had
started lagging behind. It is further contended that NSE has made sufficient
positive contributions towards development of capital markets in the country. Its
trading terminals are available in more than 1600 towns and it does not charge
transaction fee on trades emanating from terminals in rural and semi urban
areas. About 70% of its investors who have traded on NSE are from Tier II and
III towns. Out of about 3.3 crores (33 million) income-tax payers in India almost
1.2 crores (12 million) are registered as members of NSE. The average trade size
has also grown. All these are indicators that NSE has made significant
contributions to development of stock exchange markets in India.
Decisions of NSE pricing committee with respect to the CD segment:
7.20 The findings of the DG Report that the Pricing Committee never discussed
issues relating to waiver of transaction fee for CD segment is incorrect and
baseless. The agenda and minutes of NSE pricing committee clearly give the
rationale for the transaction fee waiver, viz. to encourage participation in CD
trading. It is also noteworthy that the Informant itself as well as United Stock
Exchange (USE) has also waived transaction fees for the same reason. The DG, is
therefore, not justified in ignoring documents related to the NSE Pricing
Committee and imputing reasons other than encouraging wider participation for
the waiver.
Admission fee and deposit level waiver:
7.21 It is contended that NSE reduced deposit level as a reaction to reduction in the
same by MCS-SX. Further, there was an objective of market development also
involved in its decision.
7.22 MCX-SX waived deposit and admission fees at least up to 6.9.2008. No single
waiver was granted by NSE at that time.
Data fee waiver:
7.23 The decision regarding the timing of imposing data feed fee in the CD segment
was left to the Director-in-Charge who decided to act on the basis of feedback
received from their leading vendors. The decision of the DotEx Board as reflected
in the minutes was not intended to be immediately followed by imposition of
data fee but was intended to be in nature of “in-principle” approval. The two
vendors whose feedback was considered by the Director In-Charge are world
leaders in financial news reporting and together contributed more than 50% of
the revenue of DotEx. That is why their feedback had to be given due weightage.
Exclusionary denial of integrated market watch facility:
7.24 The conclusion of the DG that denial of access to integrated market watch
facility of NOW software was harmful to competition is baseless.
7.25 Issues concerning the ODIN software are currently before the Bombay High
Court. The court has appointed a Commissioner to carry out audit of the software
but MCX-SX is resisting audit. Since the matter is sub judice any investigation
by the DG on this issue is objectionable.
7.26 DotEx had acquired 26% interest in Omnesys on 2.7.2008 which was before
the news of establishments of MCX-SX had reached NSE. It is argued that OPs
do not control Omnesys and merely have the right to appoint one director on the
Omnesys Board.
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7.27 Further by putting FTIL on a watch list, OPs have not committed any abuse of
dominant position. The DG has disregarded details of complaints received from
traders/brokers in relation to FTIL software which had been submitted during the
course of investigation. Since most of the complaints were made telephonically,
documentary evidence of each and every complaint was not available.
7.28 ODIN was put on watch list for very justifiable reasons since there were
several problems with the software. NSE has the right to monitor performance of
products that it empanels or uses.
7.29 DG has concluded that users were satisfied with ODIN on the basis of some
depositions by trading members during the course of investigation. Just because
these trading members did not have a problem with ODIN, it cannot be
concluded that there were no problems with the software. The DG has wrongly
ignored the details of complaints submitted by the OPs.
7.30 The DG has done no analysis which can be said to make technical comparison
of ODIN with other software.
7.31 The DG's observations that providing NOW free of charge places NSE's conduct
under suspicion has no basis in law. It is submitted that NOW was introduced in
2008 but even till now it is not a dominant user interface for trading in stock
exchange in general or NSE in particular. In fact, the Informant itself has
indicated that ODIN has around 85% market share.
7.32 The conclusion of DG that denial of APIC facility for the CD segment in respect
of ODIN has been done with an ulterior motive is not correct. It is submitted that
the OPs have conducted themselves with integrity, in the best interest of their
members and the public at large. It is to be also noted that NSE did not suspend
or cancel FTIL's empanelment in other sectors. The only reason for NSE for
denying APIC for CD segment to the FTIL software ODIN was the complaints
received in relation to the functioning of ODIN.
Legal and economic objections:
7.33 The DG has wrongly concluded that the “relevant product market” is the “stock
exchange services market”. It is reiterated that the CM (equity) segment, F&O,
WDM and CD segments fall into different markets. Also over-the-counter (OTC)
market exercise meaningful constraint on the CD segment and the two could be
considered as part of the same market. The OPs have emphatically submitted
that:
i. Supply side substitutability is not a factor when defining the relevant market.
ii. The rejection of the SSNIP test in this case is incorrect inprinciple.
iii. The concepts of interchangeability and substitutability are one and the same.
7.34 It is contended that the Indian Competition Act requires that the market
should be defined by reference to demand - side considerations, which means
that one should take a conventional approach, based on consumers' uses for the
products in question. Detailed analysis of the relevant market lead to the
conclusion that:
(a) The CD segment is not conventionally interchangeable with the CM & F&O
segment; and
(b) Currency derivatives, equity and equity derivatives neither have the same
characteristics nor the intended use.
7.35 At the same time, it can be concluded that the instruments of the CD segment
and OTC currency forwards are conventionally interchangeable. There is a price
correlation between comparable products in the OTC currency forwards and CD
segments. There is also an overlap of important part of the customer base of
these markets. Further, other segments of the stock exchange are not
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interchangeable from a consumer's perspective with the CD segment or the OTC


market. CD segment was introduced with the object of providing hedgers
alternative to the OTC market. Considering these factors, the relevant market in
this case should be taken as “CD segment and OTC currency forwards.”
Assessment of dominance:
7.36 At the outset, it is contended that since DG's determination of the relevant
market as stock exchange services market is incorrect, its conclusion on
dominance is consequently flawed.
7.37 The DG has stated that there are various entry barriers in the market of stock
exchange services in India. This is taken as an important factor for determining
dominance of NSE. This assessment of DG is incorrect and flawed. The OPs have
drawn attention to the recent entry of USE in the CD segment and the proposal
by Standard Chartered Bank (Mauritius) to set up a stock exchange in India.
Looking at data between 20.9.10 and 29.10.10, USE was the market leader for
14 out of 29 days, NSE occupied the third spot for 17 days and 2nd spot for the
balance 12 days. Thus after commencement of trading by USE, it emerged as the
market leader in the CD segment in its first month of operation.
7.38 The above facts indicate that NSE is not dominant in the CD segment in terms
of market share and the entry barriers suggested by the DG are not
insurmountable since USE was able to enter and attract market share with ease.
7.39 The USE is backed by 37 banks and FIs (including BSE) and had obtained
more than 500 members within a few days.
7.40 The OPs vehemently oppose the conclusion of the DG report that the
overwhelming supremacy of NSE in the F&O, CN and WDM segment seen with
around 45% share in the CD segment makes NSE dominant even in the CD
segment. It is strongly contended that market shares do not support NSE's
dominance in the CD segment. Further, DG has erred in concluding that network
affects, economies of scale, and leverage from the broader exchange market
creates dominance of NSE in the CD segment. The additional resources available
to NSE by virtue of its larger size do not result in any additional advantages nor
does the higher degree of vertical integration confer any market power.
Abuse of dominance:
7.41 Without prejudice to the contention that NSE is not dominant in the CD
segment, the OPs have submitted that —
(a) NSE has not provided service at a price which is below cost;
(b) NSE's intention to follow a zero pricing policy was not with a view to reduce
competition or eliminate competitors.
7.42 It is contended that the DG has erred in concluding that there is a strong case
for following average total cost (ATC) or at least long run average incremental
cost (LAIC). It is argued that average variable cost (AVC) is the appropriate cost
measure.
7.43 It is contended that AVC or average avoidable cost (AAC) is the standard
measure for assessing predation. ATC cannot be the standard for determining
predation, particularly in absence of strong evidence of predatory intent as in the
instant case.
7.44 The DG has wrongly tried to allocate costs in the CD segment. It is argued that
using turnover value of trades to allocate cost is an arbitrary method. Allocation
of shared common costs in estimation of LAIC is contrary to the definition of
incremental costing. Further, estimation of LAIC and total costs by DG are
overstated since it appears that depreciation costs have been included twice.
7.45 It is argued that no anti competitive effects have flowed from the zero pricing
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approach of NSE which was essentially done with a view to promote and develop
the market. There are no grounds for inferring that the “intent” was to reduce
competition or eliminate competitors. Neither any legal evidence nor any
analytical process which would establish anti competitive intent of NSE in
following a zero pricing approach has been extended by the DG.
7.46 It is argued that CD segment is in its nascent phase. The monthly average
growth has remained around 30% which is an indicator of developing markets.
Again, compared to the OTC market, hedging in the CD segment is only 2.7% of
that in the OTC market. These facts establish that the CD segment is a miniscule
fraction of the total currency market and is, therefore, in its infancy.
7.47 The rationale for fee waivers by NSE is to attract hedgers from OTC to the CD
segments. It is further argued that below cost pricing is penetration pricing
which is generally accepted in a new market.
7.48 It is also argued that there is no imminent sign of exit of MCX-SX, that USE
which has entered the CD segment recently has done well and that Standard
Chartered Bank may be starting a new exchange. These facts all indicate a
healthy market.
7.49 It has been strongly contended that applying competition law test to the facts
of this case would lead to the following conclusions:
(i) Fee waivers are justified in terms of market expanding efficiencies defence.
(ii) The test for examining objective efficiencies as per EC guidelines on
exclusionary conduct has been met. The guidelines seek to assess whether
any efficiencies are realised by the conduct; whether the conduct is
indispensable for realising those efficiencies; whether the efficiencies
outweigh any likely negative effects on competition and consumer welfare;
and whether the conduct does not eliminate effective competition.
7.50 The conclusion of exclusionary abuses by NSE arrived at in the DG report is
incorrect. This conclusion is proved wrong due to facts such as consistent growth
of MCX-SX; fee waivers by MCX SX and USE; indication that USE will continue
with fee waivers and potential entry of a new exchange of Standard Chartered in
the CD segment. These facts clearly reveal that no anti competitive effect/result
has flowed from zero pricing approach.
7.51 The OPs have also argued that any conduct has to be examined so as to
demonstrate actual exclusionary foreclosure or a strong likelihood of it. This
approach is gaining increasing recognition in the European Commission. The
successful entry of USE in the market indicates that NSE's behaviour does not
have exclusionary effect.
Leveraging dominance:
7.52 The OPs have vigorously objected to the finding of the DG report that NSE has
abused its dominant position in the equity, F&O and WDM segments to protect
its dominant position in the CD segment.
7.53 It is contended that analysis of leveraging requires delineation of two markets
that are closely associated with each other. The DG has not defined two such
separate markets, but has consistently considered the entire market for stock
exchange services as the relevant market for this case. It is contended that NSE
is not dominant in any market relevant to this case, therefore, it cannot be held
guilty of leveraging its dominant position in context of section 4(2) (e) of the
Act.
7.54 It is further argued that cross subsidisation cannot constitute an abuse of
dominant position. Neither in the Deutsche Post case nor in the Tetrapak II case
of the European Market referred to by the DG was cross subsidy considered to be
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an abuse in itself.
7.55 It is also argued that NSE gained no special advantage in the CD segment by
virtue of having additional resources in the F&O, CM or WDM segments.
8. Counter submissions of the Informant on the DG report and the
submissions of NSE on the DG Report:
8.1 The Informant made extensive submissions before the Commission as well as
oral arguments to support the findings of the DG report and to counter the
arguments and submissions of the OPs. Essential elements of the submission of
the Informant are briefly dealt with in this section.
Preliminary submissions:
8.2 The Informant contended that submissions of NSE are riddled with
contradictions, biased opinions and misleading analysis. Further, any legal
opinion of foreign lawyers or experts relied upon by the OPs should be completely
ignored in accordance with the Advocate's Act, 1961 and Indian Evidence Act,
1872.
8.3 In its submissions before the Commission, the OP has given misleading
econometric analysis. While examining whether there is switching between the
CD market and the equity/equity derivatives market on NSE, it uses volumes in
the analysis. However, while examining whether CD and OTC forward contracts
are in the same market, data relating to price movements of contract rather than
volumes have been used. This is a deliberate ploy to delineate the relevant
market wrongly.
8.4 In the context of applicability of SNIPP test to determine the CD segment as a
separate market, MCX-SX contended that the test can only be applied if
sufficient data is available regarding prices over a period of time. The Informant
also contended that the test is only applied in merger cases. It is further
contended that SNIPP test cannot be applied because the products in different
segments are not homogenous. Finally, it was argued that since transaction fees
are only a small part of the cost incurred by traders, a small change in the fees
would not influence the decision of participants to switch and hence the test
would be useless in the instant case.
8.5 The informant also submitted extensive analysis reports by professional
consultants and opinions of experts in support of their contentions.
Findings of fact in the DG's investigation report:
8.6 The Informant asserted that the DG has correctly determined all disputed facts
first before going on to comprehensive competition law and economic analysis.
The Informant strongly supported these findings of fact and objected to NSE's
allegation that DG had tried to first malign and discredit NSE. The Informant
considers the investigation report to be the result of meticulous and unbiased
investigation.
Transaction fee waivers:
8.7 The informant contended that the DG's analysis of NSE's conduct in the matter
of transaction fee waiver not only in the CD segment but also in other segments
is based on incontrovertible data. NSE's rebuttal is nothing more than
afterthought and diversionary tactics.
8.8 Initially NSE implemented the fee waivers through circulars but later
apprehending legal action from the Informant against predatory pricing, the OPs
obscured all paper trails and continued the waiver without circulars.
8.9 To explain transaction fee waivers for more than two years now, NSE has
consistently and conveniently shifted stands before the DG and the Commission
in its submissions. An important example of this strategy was the original
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argument taken by NSE that imposition of fee in the CD segment would alienate
participants who would switch to trade on OTC segment. After the Informant
demonstrated before the Commission with authentic documents of SEBI that
85% of trades that happened in the CD segment are legally incapable of shifting
to OTC market in view of FEMA Prohibitions, NSE abandoned this argument.
8.10 Similarly, initially NSE had justified claims by stating that it had considerable
sum of money on account of interest-free (refundable) deposits and margin
money from participating members in the CD segment to cover costs. When the
informant pointed out that these amounts were lying with an independent entity,
viz. NSE's Clearing Corporation and that the remaining amount available would
never be sufficient to run the CD segment, then NSE gave up its argument.
Instead, if shifted its stand to argue variable costs involved are zero and,
therefore, not charging fees is justifiable.
8.11 NSE had earlier argued that CD segment is meant for hedgers who would shift
to OTC sector if transaction fees were imposed. However, the informant has
submitted SEBI documents that indicate that at least 85% of participants in CD
segment were proprietary stock brokers.
8.12 NSE has argued that CD segment was introduced in India in autumn of 2008
during global down turn which justified fee waivers. This explanation was never
given by NSE during or before DG's investigation. Further, they have failed to
explain why zero pricing is justified even two years later and after the end of
global recession. The DG has extensively examined and relied upon documents
such as minutes and circulars of NSE to comment on the pricing history of NSE.
The report then concludes, “transaction charges have been imposed whenever
competition was absent and waived/reduced in any new segment at the first site
of competition.”The contention of NSE that the DG has not taken its minutes,
agenda papers, circulars etc. on face value is not acceptable. The DG has drawn
his conclusions based on historical trends and incontrovertible facts.
8.13 The DG has compared NSE's pricing history in equity segment and clearly
stated that no waiver of transaction fee was done because NSE was meeting the
competition rather than beating the competition. Similarly, in F&O segments, the
DG logically establishes how NSE succeeded over BSE on account of zero pricing
and after vanquishing BSE, it proceeded to impose transaction charges. NSE's
argument that it waived transaction fee in F&O segment only after BSE reduced
their fee from Rs. 2.65 to Rs. 0.56 is nothing but a convenient afterthought. This
contradicts NSE's argument that it waives transaction fee whenever it launches a
new segment/product. Clearly, this philosophy was not adopted in F&O segment.
The Informant further contends that complete waiver of transaction fee as a
response to reduction by BSE clearly indicates NSE easily resorts to predatory
(zero) pricing when faced with competition pressure.
8.14 The Informant supports the observation of the DG that NSE followed a similar
strategy in the Gold ETF trading. NSE has not been able to offer any open
defence for its conduct. The Informant has also made similar observations in
respect of the DG's findings regarding NSE's conduct in HangSeng Index.
Admission and deposit level waivers:
8.15 The Informant has strongly pointed out that waiver of admission fee and
deposit level by NSE has found no proper justification. The argument of aligning
prices on those of its competitors is not acceptable in the context of a super
dominant player like NSE.
Data feed fee waivers:
8.16 The Informant contended that NSE has not been able to convincingly explain
why the decision to impose data feed fee was never implemented by NSE.
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Further, the excuse that the waiver was granted on request by its customers is
not tenable in view of DG's finding that only two such requests were produced by
NSE/DotEx. The explanations of NSE are vague and unsubstantiated.
Exclusionary denials of integrated market watch facility:
8.17 The Informant contended that the conduct of NSE against FTIL (Informant's
promoter) is a blatant example of retributive actions and harmful intent of NSE.
8.18 It is submitted that the free distribution of NOW is clearly predatory and
aimed at foreclosing the preferred product — ODIN of FTIL. Further, free
distribution of NOW is also a variable cost element that NSE incurs for the
running CD segment. It shows that in no case can the cost be zero.
Market definition:
8.19 The Informant has refuted NSE's contention that services offered by stock
exchanges on equity and other segments are not to be included within the
relevant market. It is argued that from a market definition perspective if every
product offered on a stock exchange is different then the relevant market would
become so fragmented that it would be impossible to determine actual economic
power enjoyed by any player.
8.20 The Informant disagrees with the contention of OPs that the terms
“substitutable” and “interchangeable” are one and the same. It is argued that
the average speculative consumer is a person who shifts between different
securities or currency contracts on stock exchange to seek out opportunity for
gain. For him, all securities/products offered by the stock exchange in the
relevant market are interchangeable. The DG has shown a high degree of
commonality of participants in different segments and this is not disputed by
NSE. Therefore, it is argued that the market definition given by the DG is the
correct delineation.
8.21 The Informant also argued that exchange-traded currency derivatives and OTC
currency contracts form different markets. The RBI Internal Working Group
Report on Exchange Traded Currency Derivatives, which is the basis for
introduction of CD segment has itself differentiated the OTC market. Further,
OTC products market itself is not homogenous and is segmented into the
merchant bank market and the interbank market. The CD segment involves
standardised contracts for small lot size (USD 1000) bought and sold by hedgers,
speculators, arbitrageurs etc. CD contracts are markedly different from OTC
contracts in terms of characteristics, intended use and class of consumers. Most
of the CD segment consumers regard OTC contracts as different and a majority
even lack the legal capacity to enter into OTC contracts. CD segment is regulated
by SEBI whereas OTC segment is regulated exclusively under FEMA.
8.22 CD futures is not very liquid and excludes long maturities beyond a couple of
months. The OTC market allows only hedging of contractual exposures as
opposed to that of economic exposures. All these factors indicate that CD
segment and OTC are different markets.
Dominant position:
8.23 The Informant has vehemently challenged the averment of NSE that it is not
in dominant position in any market. The Informant has reiterated its contentions
made in the allegation and stated that NSE has maintained very high market
share of over 85% in the combined segments of stock exchange services since
2003-04. It is argued that even if the relevant market is more narrowly defined,
NSE would still be found to be super dominant in stock exchange services minus
CD segment. The Informant has pointed to advertisements by NSE which claim
that they have been market leaders since 1995 and that approximately 94% of
capital market volumes in India are routed through NSE. The Informant refers to
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AKZO and BBI/Boosey cases of EC where self-admission was taken as a evidence


of dominant position.
8.24 The potential argument of NSE that MCX-SX has bigger market share in the
CD segment (based on volumes and not value) would have little substance. It is
contended that MCX SX has only managed to retain the current market position
after being forced to match NSE's zero pricing. This will not be viable for the long
run whereas NSE will be able to sustain zero pricing due to its policy to cross
subsidise. There is no such capability with the Informant.
8.25 The Informant submitted arguments that examined the various factors given
in section 19 (4) of the Act to determine dominance. By and large, these
resonate the analysis of dominance made by the DG in his report and, therefore,
are not repeated in detail at this place.
8.26 The Informant further emphasised network effects as discussed by the DG. It
was claimed that stock exchange is a network industry where liquidity plays a
prominent role. Due to the acknowledged network externalities, the stock
exchange services market has considerable barriers to enter. This renders the
dominance of NSE even more unshakable.
Abuse of dominant position:
8.27 In the first instance, the Informant submits that NSE has not cooperated with
DG in sharing its costs towards the CD segment. Further, NSE attempted to
mislead the investigation by providing false financial analysis on the costs. These
facts are borne out by the DG report.
8.28 It is vehemently argued that there is no need to enter any complicated
exercise for determining appropriate cost pricing because in the present case,
the OP is charging zero price. Thus, little would turn on whether AVC, ATC,
LRAIC, AAC or any other cost measure is used for establishing guilt.
8.29 It is argued that a particular feature of network markets is consumer lock-in
and ex-post hold ups. In such markets, once competition is substantially reduced
or eliminated, the incumbent player starts charging super normal profits.
8.30 The second limb of definition of predatory price requires below cost pricing
with a view to reduce competition or eliminate competitors. The Informant
argued that the findings of fact in the DG report clearly establishes the harmful
intent of NSE by looking at past conduct, circulars, minutes and agendas of
Board meetings etc. The Informant contended that there was considerable direct
and indirect evidence from which the intent of NSE becomes apparent.
8.31 The Informant has completely rejected NSE's objections to the finding of DG
regarding leverage of dominant position and contravention of section 4(2)(e).
The OPs have wrongly brought in extraneous concepts such as “associative
links”, “close relation” or “inter relation” to interpret the section. In addition, it is
trongly contended that the CD segment is actively and closely associated and
inter-connected with the other segments, particularly F&O segment.
8.32 The Informant contended that majority of its customers as well as NSE's
customers in CD segment are also potential customers if not actual customers in
cash derivatives, equities and equity derivatives. It cannot be concluded from
the evidence that the markets are not related and leverage is not possible. As
such the conclusion would lead to a perverse outcome under competition laws.
The standards of relationship advocated by NSE between markets are such that
section 4 (2) (e) of the Act can never be applied.
8.33 The Informant argued that the DG has never concluded that cross
subsidisation is an abuse in itself as interpreted by NSE. The actual issue
examined by DG is whether zero price charge by NSE for stock exchange services
in the CD segment is predatory. This conduct is further vitiated by the fact that
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NSE has special advantages by virtue of its strong presence in other segments
which enables it to sustain losses in the CD segment. Had the NSE been
operating only in CD segment, it would have suffered considerable losses similar
to that of the Informant and the USE and would not have continued with zero
pricing for long duration.
8.34 The Informant has reiterated arguments dismissing the nascent market
defence, economies and learning effects and indispensability of waivers
arguments extended by NSE.
Remedy:
8.35 The Informant has pleaded the Commission to provide structural remedies
since it contends that behavioural remedies may not be effective or long lasting.
8.36 The Informant has pleaded imposition of appropriate penalties, awarding of
costs and any other remedies as the Commission deems fit in the circumstances
of the case and nature of the violation.
9. Rebuttals and counter arguments:
9.1 The OPs made detailed submissions rebutting all arguments of the Informant.
The main thrust of all these arguments were that:
(a) The “relevant market” should be defined as the CD segment and OTC market
in India.
(b) NSE is not in a dominant position in the relevant market.
(c) Consequently no claims under section 4 (2) (a) — (d) of the Act will exist;
and
(d) Without prejudice to the above, there can be no contravention of section 4
(2) (e) since the markets are not closely associated and no special
circumstances exist which would justify a leverage claim.
10. Issues:
10.1 The Commission has given due consideration to facts given in the information,
the investigation report of the DG, the detailed written and oral submissions
made by the concerned parties along with opinions and analysis of experts relied
upon by the Informant and the OPs. The relevant material available on record
and the facts and circumstances of the case throw up the following issues for
determination in this case:
(a)What is the relevant market, in the context of section 4 read with section 2 (r)
and section 19 (5) of the Competition Act, 2002?
(b)Is any of the OPs dominant in the above relevant market, in the context of
section 4 read with section 19 (4) of the Competition Act?
(c)If so, is there any abuse of its dominant position in the relevant market by the
above party?
Issue no. 1
10.2 The edifice of competition law rests upon dynamics of competition in one
particular market. Benefits or harm to competition has to be assessed with
respect to that market. In the Competition Act, 2002, the term used for such a
market where the status of competition has to be evaluated is “relevant market”.
This term has been defined in section 2(r) of the Act read with sub sections (s)
and (t) of section 2. Furthermore, while examining facts of a particular case, the
Commission must give due regard to any or all factors mention in section 19 (6)
with respect to “relevant geographic market” and section 19(7) with respect to
“relevant product market”.
10.3 Unlike in some other international jurisdictions, the Indian Competition Act not
only gives a formula definition of “relevant market” but also specifies factors
which have to be considered while determining that market. There is little scope
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for any arbitrariness or discretion under the Indian Act. Before we go into in-
depth evaluation of all the facts pertinent to delineation of the relevant market in
this case, it is useful to look at a few facts that in themselves may not be
determinative but are strongly indicative.
10.4 The first of these indicators is the RBI-SEBI Standing Technical Committee
Exchange Trade Currency Futures report (RBI - SEBI report) of 2008. This was
one of the most important documents on which the policy decision was taken to
start a new segment of capital market in India viz. exchange traded currency
derivatives segment. The report pinpoints the origin of the policy considerations
on the Report of the Internal Working Group of RBI submitted in April, 2008
recommending the introduction of exchange traded currency futures. Further RBI
-SEBI report states,
“Exchange traded futures as compared to OTC forwards serve the same economic
purpose, yet differ in fundamental ways………. The counter party risk in a future
contract is further eliminated by the presence of Clearing Corporation. Further in
an exchange traded scenario where the market lot is fixed at a much lesser size
than the OTC market, equitable opportunity is provided to all classes of investors
whether large or small to participate in the futures market………”
10.5 The same report in its para 5.2 of Chapter 5 advocated a clear separation of
CD segment from other segments in any recognized stock exchange where other
securities are also been traded. It stipulated that the trading and the order
driven platform of the CD segment must be separate; membership of the
segment must also be separate and the CD segment must have a separate
governing council. The demarcation was so rigid as to stipulate that no
trading/clearing member should be allowed simultaneously to be on the
governing council of the CD segment and the cash/equity derivatives segment.
10.6 Chapter 7 of the report dealing with regulatory and legal aspects stipulates
that before the start of the CD segment, the exchange shall obtain prior approval
of SEBI. Para 7.4 also stated, “To begin with, FIIs and NRIs would not be
permitted to participate in currency futures markets.”
10.7 The second indicator to be kept in mind is the fact that the Informant, MCX-SX
was incorporated on 14.8.2008 and was initially authorised by SEBI to operate
an exchange platform in trades in CD segment for currency futures in USD — INR
of different tenures upto 12 months. NSE was an existing exchange and got
permission to commence trading in CD segment on 29.8.2008. The latest entrant
into the segment, USE got approval of SEBI in January, 2009.
10.8 The Information in this case has been filed by MCX-SX which is only permitted
to operate in the CD segment. The competition concerns which may arise for any
enterprise would be in respect of the market in which it is operating and not in
context of a market that does not concern its operation.
10.9 The above indicators establish three things: first, in the minds of
policymakers, the CD segment was not only completely different from other
segments but also differed from OTC in “fundamental ways”. The policy,
therefore, recommended strict segregation of the CD segment. Second, till
2008, the exchange traded capital market in India did not have exchange traded
currency forwards segments. Third, competition concerns, if any, have to be
examined in the segregated and new market where the Informant is operating.
10.10 The above indicators seem to firmly point out that the exchange traded CD
market is fundamentally distinct from other segments of the capital market. In
fact, it did not exist prior to August, 2008. A market that earlier did not exist and
which was consciously created by the policy makers as a new and distinct market
cannot be said to be part of a market that existed.
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10.11 Moving on from indicators to evaluation of facts, it is essential to look at the


specific framework for delineation of “relevant market” given under the Act.
According to Section 2(t), “relevant product market” means a market comprising
of those products or services which are regarded as interchangeable or
substitutable by the consumers, by reason of characteristics of the production or
services, their prices and intended use.
10.12 This Commission notes that the information in this case has been filed due to
competition concerns perceived by MCX-SX which is operating only in the CD
segment. As noted above, the RBI/SEBI report holds the market of exchange
traded currency forwards as a distinct, distinguishable and separate market from
other markets such as equity, F&O, WDM or even OTC forwards. The stock
exchange services provided in the CD segment is, therefore, a separate platform,
i.e. both functionally and statutorily segregated and distinct from stock exchange
services provided for other segments.
10.13 In terms of the products traded in the exchanges, there is a clear
differentiation from the equity, F&O and WDM segments in terms of underlying
assets. This observation is further elaborated below:
i. Equity market:
The equity market in the context of the information is the secondary market
which allows trading in the equities of various companies at the stock
exchanges. The underlying asset in this market is equity. Typically, the stock
brokers/traders trading on this market follow trends in the shares of various
companies and seek to gain from movement in share prices. Largely,
investment in the stock of companies performing well is a major consideration
for picking up equity in that company.
ii. F&O market:
Futures and options of the derivative market is the F&O contracts have
equities or equity indices as underlying securities. Futures are contracts to
buy or sell an asset on or before a future date at a price specified today.
Options are contracts that give the honour the right but not the obligation to
buy (in the case of call option) or sell (in the case of a put option) an asset.
The considerations for trading in this market are largely the same as those in
the equity market and consequently, the participants are basically the same.
iii. WDM market:
RBI has permitted banks, primary dealers and financial institutions in India
to undertake transactions in debt instruments among themselves or with non-
bank clients through the members and stock exchanges. Accordingly, stock
exchanges commenced trading in Government Securities and other fixed
income instruments. The WDM segment generally deals with Centre and State
Govt. securities and treasury bills, which are the underlying asset in this
market. Stock exchange service in WDM market is only a reporting mechanism
whereby trades executed outside the exchange are reported on the exchange's
system. The reporting is done through the member broker of the exigencies
and settlement of trades is done by participants directly on delivery verses on
payment basis. The responsibility of settlement lies with the participants in
the settlement and is granted by the clearing Corporation. The participation is
highly restricted by the RBI and earning of mid to long term interest on
specified debt instruments is the major consideration of the participants.
iv. CD market and OTC market:
The CD market is a futures derivative market where underlying securities
are currencies. OTC market, on the other hand, includes various products such
as forwards, swaps and options for hedging the currency risks. Functionally
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the products may be considered as similar but they are quite different in
terms of characteristics as well as participants. There is a differentiation from
the OTC segment in terms of settlement on maturity, settlement period,
counter party risk, size of market lot and participation, amongst other things.
It is also noteworthy that the CD segment products have maximum maturity
of only 12 months whereas OTC forwards can be for much longer durations.
10.14 In terms of participation, equity and equity derivative segments or WDM
segment are essentially for the investors or speculators who seek to gain from
price movements of equities. In contrast, OTC segment is basically for importers
and exporters having contractual exposures and who try to hedge their risks
emanating from fluctuations of exchange rates. The CD segment is primarily for
speculators of currency values and short term hedgers who want to cover their
economic exposure but require greater liquidity.
10.15 Most importantly, OTC products are not traded on exchanges and only
specified entities can participate in this market. Since we are looking at a case
where the Informant and OPs are both providing stock exchange services, a
product that neither is trading in cannot be said to be part of any market the two
are operating in.
10.16 This Commission finds it rather unnecessary to dive into technical tests such
as SSNIP, particularly in the absence of historic data of prices. The SSNIP test is
a tool of econometric analysis to evaluate competitive constraints between two
products. It is used for assessing competitive interaction between different or
differentiated products. Ideally, time - series price data or trend should be
examined to see whether a small but significant non-transitional increase in price
has led to switching of consumers from one product to another. However,
international jurisdictions have not reposed excessive faith in this test. The US
Horizontal Merger Guidelines, 2010 considers SNIPP test as solely a
methodological tool for performing hypothetical monopolist test for the analysis
of mergers. Similarly, in its notice published in the Official Journal C 372,
09/12/1997 P, 005 — 0013, the European Commission advises action on the
applicability of SSNIP test for determining market definition in terms of Article
82 of the European Union Treaty. In the instant case, firstly, the CD segment did
not exist prior to August, 2008 and secondly, right since inception, transaction
fees, data feed fees etc., which may be said to constitute price, have not been
charged by any market player. In such a scenario, an attempt to determine even
hypothetical competitive prices would be nothing more than pure indulgence of
intellect and unwarranted misuse of an econometric tool, which in itself, is not
error-proof. Such an attempt is bound to attract the criticism drawn in the United
States v. El du Pont de Nemour & Company (Case No. 351 US 377 — 1956),
notorious in the competition lexicon as the “Cellophane Fallacy” case where the
SNIPP test exaggerated the breadth of the market by the inclusion of the false
substitutes.
10.17 Moreover, the proportion of transaction value that a broker/trader pays as
transaction fees and other fees is so small and insignificant that it would have
practically no bearing on substitutability effect. Therefore, SSNIP would be
irrelevant in such a case.
10.18 Similarly, there is little point in going into any extended debate to distinguish
the words “interchangeable” from “substitutable”, given the facts of the case and
different aspects of capital market in India. Such an exercise in the instant case
may be of some intellectual value within rarefied groves of academe but are
neither necessary nor useful for a competition authority mandated to bear the
responsibility of enforcing the law keeping in view the economic development of
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the country and to prevent practices having adverse effect on competition, to


promote and sustain competitions in markets, to protect the interests of
consumers and to ensure freedom of trade carried on by other participants in
markets, in India.
10.19 It is undisputed fact that as underlying assets, equities and currencies are
entirely different. Consequently, related derivatives are also different. Trading
platforms of stock exchanges for the two categories of products (assets or
derivatives) are, therefore, also in different market. From any practical point of
view, a product over CD segment exchange cannot be said to be either
interchangeable or substitutable by a product in segments like equity and F&O
for the purchaser.
10.20 While it may be possible for any existing stock exchange to start operations
in any or all segments of capital markets, the fact remains that regulations
require a complete segregation of and separate approval for the CD segment. The
technical, infrastructural or financial capability of any stock exchange operating
in some segment, to start operating in another, has no relation to determination
of supply substitutability between the segments. As an analogy, the capability of
a grain mandi (wholesale market) to also start a wholesale spice mandi does not
mean that grain and spices are interchangeable and substitutable nor does it
mean that the platforms of the two mandis is interchangeable or substitutable.
10.21 As briefly discussed in the background section of this order, the stock
exchange provides platform or service for stock broker and traders to trade in
securities and derivatives. Essentially a stock exchange is a composite of certain
manpower, technologies, facilities and infrastructure which constitute a platform
on which the trading is done. Both, MCX-SX the Informant, and NSE, OP I are
providing such services for which there is a market. In this case, the stock
exchange services in respect of the CD segment in India is clearly an
independent and distinct relevant market.
10.22 In view of the above discussion and looking at factors such as regulatory
trading barriers mentioned in Section 19 (6) and characteristics, consumer
preferences and existence of specialised services providers as mentioned in
Section 19(7), this Commission does not have to resort to arcane reasoning, or
esoteric logic to delineate the relevant market. It is an accepted principle of law
that where a plain reading of the provisions suffices, there is no need to take
recourse to interpretations or surmises.
10.23 For the purpose of Section 4, the boundaries of relevant market freeze the
moment the products cease being practically interchangeable or substitutable. In
the instant case, the stock exchange services provided for CD segment may be
similar to those provided for other segments, but they cannot be said to be
“interchangeable or substitutable”.
10.24 The DG has found a fairly high degree of commonality amongst members of
the Informant and those of the OP I. In itself, this fact has no bearing on
interchangeability or substitutability between various segments of stock
exchange services. Simply because many wholesale traders of grains also do
wholesale trading of vegetables does not imply that grains and vegetables are
substitutable or that grains and vegetable mandis are interchangeable.
10.25 In view of the foregoing discussions in this case, the stock exchange
services in respect of CD segment in India is clearly an independent and
distinct relevant market.
Issue No. 2
10.26 Having delineated the relevant market in consideration for the instant case, it
is now possible to examine facts to determine whether OP I, NSE has “dominant
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position” in the relevant market. “Dominant position” is defined under


explanation (a) of Section 4 of the Competition Act, 2002. The same is
reproduced below for ready reference.
“Dominant position” means a position of strength, enjoyed by an enterprise, in
the relevant market, in India, which enables it to…………………..
(i) operate independently of competitive forces prevailing in the relevant market;
or (ii) affect …………….. or consumers or the relevant market in its favour.”
10.27 In the context of the Indian law, dominant position is a “position of
strength”; such strength should enable it to operate independently of
competitive forces; or to affect its competitors or consumers or the relevant
market itself in its favour.
10.28 Unlike in some international jurisdictions, the evaluation of this “strength” is
to be done not merely on the basis of the market share of the enterprise but on
the basis of a host of stipulated factors such as size and importance of
competitors, economic power of the enterprise, entry barriers etc. as mentioned
in Section 19 (4) of the Act. This wide spectrum of factors provided in the section
indicates that the Commission is required to take a very holistic and pragmatic
approach while inquiring whether an enterprise enjoys a dominant position
before arriving at a conclusion based upon such inquiry.
10.29 The investigation by the DG followed by the inquiry by the Commission
during the course of the proceedings before it has thrown up several facts which,
when viewed holistically, project a clear image. Some of the most important facts
are mentioned below:
a. In the equity segment of stock exchange services in India, NSE has
continuously held high market share for the past 8 years going beyond 71% in
2008-09.
b. In the F&O segment, NSE has almost 100% market share.
c. In WDM segment, NSE has maintained more than 90% market share for the
past 6 — 7 years.
d. Putting together equity, F&O, WDM and CD segments, NSE have garnered
92% market share as of 2008-09.
e. In CD segment itself, NSE has a market share of 48% according to the DG
report.
f. NSE has been in existence since 1994 as against incorporation of MCX-SX IN
August, 2008.
g. As at 31.3.2009, reserves and surplus of NSE stood at Rs. 18.64 million,
deposits at Rs. 9.17 billion and profit before tax at Rs. 6.89 billion.
h. In comparison, BSE had a net profit of Rs. 2.6 billion only and MCX-SX carried
forward net loss of Rs. 298.7 million for the period ending 31.3.2009.
i. NSE has presence in 1486 cities and towns across India. BSE has presence
mainly in Maharashtra and Gujarat and is now reduced to mostly operating in
equity segment. MCX-SX has only about 450 centres and operates only in CD
segment.
j. NSE has high degree of vertical integration ranging from trading platform,
front-end information technology, data information products, index services
etc.
k. Stock exchange services in India are highly regulated and require approvals of
SEBI to start a new exchange.
10.30 The above facts are not disputed on any substantive ground. Triangulation of
the above facts creates a hologram picture of the players in the capital market in
general and in the relevant market of exchange traded currency derivatives
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forwards in particular.
10.31 It can be seen that the first half century of independent India had BSE as the
sole stock exchange, way ahead of all regional stock exchanges in terms of
transactions as well as value. With the entry of NSE on the scene, the picture
started changing rapidly and drastically. Several regional exchanges disappeared
and BSE was soon reduced to a distant second position. As new sections of
capital market were opened by the regulator, NSE consolidated its position and
acquired near monopolistic position in those markets.
10.32 The explosive rate of growth of the Indian economy in the new millennium
and the dramatic improvements in the variety of products and technology
encouraged some new players to start stock exchanges in limited segments.
Despite the presence of an undisputed giant like NSE in the exchange services
sector, optimism about the Indian economy and overall size of the growing pie
led to MCX-SX and later USE venturing into the arena. The CD segment market
was the latest market opened by the regulators and every one hoped to get a fair
piece of this pie. By then, NSE had acquired an overall position of strength in the
capital markets and substantial financial might, arguably due to better planning,
strategy and management. Every new player would have been aware of this
position of strength of NSE but would have hoped that this strength would not be
misused to throttle competition.
10.33 The facts and conduct of NSE has to be viewed in the perspective of the
picture that has been outlined above.
10.34 An important point in consideration of this issue is the current market
structure. As of now, the relevant market has only three players, viz. NSE, MCX-
SX and USE. According to some recent figures published in the public domain,
this market is currently divided almost equally with about 34% share with MCX-
SX, 30% with NSE and 36% with the latest entrant USE, as of October, 2010.
Incidentally, this is a very dynamic market and market shares could vary with
time. But the important thing is that in a market with just three players, each
would have at least some ability to affect its competitors or the relevant market
in its favour even if it is not capable of operating completely independent of
competitive forces or affecting consumers in the relevant market.
10.35 However, this is a very limited ability which comes from the relevant market
being a triopoly. This is not the “strength” which would come not just from
market share (which is fairly evenly distributed at the moment) but from several
other factors mentioned in section 19 (4) referred to above.
10.36 In terms of explanation (a) of Section 4 of the Competition Act, “the position
of strength” is not some objective attribute that can be measured along a
prescribed mathematical index or equation. Rather, it has to be a rational
consideration of relevant facts, holistic interpretation of (at times) seemingly
unconnected statistics or information and application of several aspects of the
Indian economy. What has to be seen is whether a particular player in a relevant
market has clear comparative advantages in terms of financial resources,
technical capabilities, brand value, historical legacy etc. to be able to do things
which would affect its competitors who, in turn, would be unable to do or would
find it extremely difficult to do so on a sustained basis. The reason is that such
an enterprise can force its competitors into taking a certain position in the
market which would make the market and consumers respond or react in a
certain manner which is beneficial to the dominant enterprise but detrimental to
the competitors.
10.37 From the few facts enumerated above, it would be wrong to conclude that
NSE does not enjoy such a position of strength as one of the only three players in
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the relevant market delineated as above.


10.38 In the context of the Competition Act, what has to be ascertained is whether
an enterprise has “strength” and whether it has the ability to use that strength in
its favour. Explanation (a) to Section 4 raises many possible ways in which such
strength could be used. These possibilities can be examined individually or in a
combined manner, depending upon the facts of a case. In the instant case, we
can first ascertain whether NSE has a position of strength which enables it to
affect MCX-SX as a competitor in its favour. The question is not whether NSE is
doing so but whether all the indicative facts point out that it has the ability to do
so. This assessment can be done by posing a few questions.
10.39 Firstly, can NSE sustain zero pricing policy in the relevant market
long enough to outlive effective competition?
10.40 To answer this, it must be kept in mind that the rationale for doing any
business is to earn some profit out of it. Although there could be slightly diverse
strategies such as output optimisation, turnover maximisation, profit
maximisation, positioning etc., the fact remains that earning of zero profit or
accumulating losses for indeterminate period would never be the goal of any
commercial enterprise. Even the desire to develop a nascent market would have
the foresight behind it, that it can eventually see profit generating within
reasonable and relatively short time frame. No enterprise would spend an
eternity on selfless development of any market without any prospects of making
profit. The greater the financial and commercial strength of an enterprise, the
longer it can wait and the greater risks it can take. Looking at the financial
statements of NSE, its reserves and surplus or its profits after tax, it cannot be
argued that the capacity of NSE to defer profits or to bear long-term risk of
possible market failure is lesser than that of MCX-SX in the relevant market. This
clearly is a position of strength.
10.41 Secondly, is there any indication that the conduct of NSE shows that
it is aware of its capability?
10.42 Modern business strategy and accounting standards are geared to keep a
hawk eye on the bottom lines in any business. Financial strategies treat each and
every segment of business, particularly in multi product enterprise, as
independent cost centres. This enables the enterprise to monitor every activity in
terms of cost overruns and take timely, corrective measures to keep the bottom
lines intact. This philosophy is also reflected in Account Standard 17 (AS 17),
which stipulates segment reporting.
10.43 In the instant case, not only has NSE not followed AS 17 but appears to have
a rather cavalier approach towards any costs it may be incurring to operate in the
relevant market. The facile explanation, that this detachment from profit motive
is with the desire to develop the CD segment for the larger good of the capital
market in India, is unpalatable, looking at the aggressive competitiveness of NSE
in the past.
10.44 This Commission has not found any acceptable justification for why a
professionally managed enterprise like NSE would not want to keep any track of
the commercial viability of its operations or does not have any concerns about
the desire of its shareholders to earn higher dividends. It is unthinkable that a
professionally managed modern enterprise can afford such financial complacency
in the face of competition unless it is part of a bigger strategy of waiting for the
competition to die out. This complacence can only point to awareness of its own
strength and the realisation that sooner or later, it would be possible to start
generating profits from the business, once the competition is sufficiently
reduced.
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10.45 Thirdly, in absence of the above strengths, would NSE be able to or


want to continue with zero pricing indefinitely?
10.46 It is a historical fact that post independence several stock exchanges have
gone out of business. Had NSE not got the undeniable advantages arising out of
its operations in other markets, it would not have been able to or wanted to
charge nothing for providing stock exchange services for the cash derivative
forwards market. In this regard, MCX-SX, or indeed any other current or future
competitor that does not have similar advantages is clearly in a weaker position.
10.47 The above discussion leads to the only rational conclusion possible that NSE
enjoys a position of strength in the relevant market which enables it to affect its
competitors in its favour. To conclude otherwise would not only be turning a
blind eye to the facts available but also to the provisions of the Competition Act
and to the intent and spirit of this economic legislation.
10.48 In arriving at this conclusion, the Commission has taken into account
relevant aspects of the financial statements of the parties concerned, HHI index
of more than 5000 in the CD segment (2009-10), ICR 3 of more than 99 and
other key indicators. The Commission has also interpreted all facts in the context
of typical features of regulations in the Indian capital market as well as historical
perspective of stock exchange services in India. The Commission has also given
due consideration to some important cases from international jurisdictions such
as AKZO, United Brands, Du Pont amongst others as also guidance papers of
some other jurisdictions. A perusal of these indicates that authorities have taken
a very wide and varied range of market shares as indicators of dominance, going
down to 40% in some jurisdiction. In context of the Indian law, this indicator
does not have to be pegged at any point but has to be considered in conjunction
with numerous factors given in section 19(4) of the Act.
10.49 In view of the discussion above, the Commission is of the firm
opinion that NSE has a position of strength and, therefore, enjoys
dominant position in the relevant market in context of Section 4 read
with section 19(4) of the Act.
Issue No. 3
10.50 Having delineated the relevant market and established that NSE is in a
dominant position in the relevant market, it is only left to be determined whether
NSE has abused its dominant position in context of Section 4 of the Competition
Act, 2002.
10.51 The Informant, MCX-SX had made allegations of abusive conduct of NSE in
respect of the following four conducts:
A. Transaction fee waiver
B. Admission and deposit level waivers
C. Data feed fee waiver and
D. Exclusionary denials of integrated market watch facility.
10.52 The DG has done in-depth analysis and investigation in respect of these
allegations as detailed earlier in this order. The fact that the above conducts took
place is not in dispute.
10.53 The defence that the OPs took to justify the above conduct has also been
given in detail in earlier part of this order. These can be broadly recapitulated as
below:
i. NSE is not dominant in either the CD segment market or any other broader
market of stock exchange services.
ii. The various fee waivers were done to develop the nascent market and were
examples of competition-neutral penetrative pricing.
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iii. NSE had historical philosophy of waiving fee in nascent market.


iv. Data feed fee were not charged because DotEx did not charge for it and
because clients requested postponement of the fee.
v. Interface Code (APIC) was denied to ODIN for the CD segment because user
complaints against ODIN.
vi. There was no element of predatory pricing because there was no variable cost.
vii. The charge of leveraging would not apply because NSE is not dominant in
any market. Moreover, the DG has not identified two relevant markets and
there is not enough associational link between the CD segment and remaining
segments.
10.54 The Commission has considered every aspect of the investigation report;
arguments and contentions made by the Informant as well as the OPs and has
applied its mind to the facts, circumstances and nuances of the arguments. Many
of these have been already detailed in their respective place earlier in this order
and it is not necessary to repeat them here.
10.55 While discussing the issue of dominance in the previous section, this
Commission has established the position of strength and therefore, dominant
position that NSE enjoys in the market of stock exchange services for currency
derivatives in India, which has been ascertained as relevant market for this case.
A point in order is that the OPs have themselves broadly contended that this is
the correct relevant market. The Commission has only differed to the extent that
it has not considered the OTC segment as part of the relevant market. Detailed
reasoning for this has already been given at the appropriate place above.
Therefore, the defence of the OPs in respect of the dominant position is
no longer sustainable.
10.56 As regards the defence relating to development of nascent market, the
Commission has already touched upon the existence of profit motive behind any
business enterprise in the previous section while evaluating dominance. It is
undisputed that since commencement of operations in August, 2008 till the time
of passing this order in half way down 2011, NSE has continued with fee waivers.
Nascence must be differentiated from immaturity or even infancy and it cannot
be anyone's case that until a particular market has matured, it should continue
to be treated as nascent. The word “nascence” denotes the state of existence at
the time of or immediately after birth. Infancy denotes a state after the nascent
stage. Immaturity is the remaining time before maturity. For any market, the
first few months can be said to be nascent stage, where players are faced with
day to day developments and discovering new dynamics each operational hour.
Thereafter, there may be a period of infancy, where almost all market situations
have played out but the players are facing teething troubles. This may last even
another year. After that would come the process of maturity, when the market
cannot be said to be fully developed but it also cannot be taken as “nascent”
anymore. The extraordinary measures required to keep the new-born market
alive are no longer necessary in this stage. Excuses for “promotional” or
“penetrative” pricing will lose their innocence of intent and start veering towards
suspicious, if not mala fide conduct and have to be assessed accordingly.
10.57 The zeal or foresight for development of a new product market can definitely
lead to initiatives such as promotional or penetrative pricing. However, this can
be understandable for a period of a few months or even a year. To continue such
pricing well into the third year of existence of a market can only be seen as an
instance of astute strategy for market capture or extreme commercial self-
interest. Nothing in the history of the dramatic rise and success of NSE indicates
strategic naivety or commercial altruism. On the contrary, timing of fee waivers
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or fee impositions in the past as well as in this case indicate a level of strategic
management that can only be termed as far from naive. Further, as
demonstrated in the previous section, sacrifice of all earnings from a new
business for several years at a stretch can only be possible for an enterprise of
redoubtable strength and deep pockets.
10.58 In context of the defence of nascent market development, the Commission
has taken cognisance of certain incontrovertible investigative findings of the DG
which have a strong bearing on the acceptability of the defence. Some of these
main findings are mentioned below:
i. NSE issued a circular dated 26.8.2008 waiving transaction charges in the CD
segment “in order to encourage active participation in the currency derivation
segment” till 30.9.2008. The waiver was again extended from time to time till
30.6.2009. Thereafter, the waiver has continued without any circulars. Thus,
right from the start, the Informant faced the restraint of zero fees.
ii. At no point did NSE waive transaction fee in the equity segment since 1994
because it was a case of meeting the competition rather than beating the
competition.
iii. NSE commenced trading in the F&O segment in June, 2000. It started with
charging transaction fees. This does not support the claim that NSE
historically waives fees to develop nascent market. NSE started fee waiver
from August, 2000 which continued in varying degrees up to August, 2001.
The effect could be seen in BSE turnover which consistently fell in comparison
with NSE turnover till their positions were completely reversed by July, 2001
with NSE turnover at Rs. 92 crores (920 million) as against BSE turnover of
Rs. 1.76 crores (17 million). Having consolidated its position, NSE re-imposed
transaction charges w.e.f. 27.9.2001. All other kinds of waivers for F&O
segment were completely removed after March, 2002 by which time BSE had
been completely marginalised.
iv. In WDM segment, NSE commenced trading on 30.6.94. It levied transaction
charges for a full year till June, 1995. This conduct again contradicts the claim
of consistent policy of fee waivers to develop nascent markets.
v. The DG examined relevant agenda items and minutes of meetings of DotEx in
this matter. Despite deliberations on the fee structure and in principle
acceptance of imposition of fees, no data fee was implemented which
indicates that DotEx had waived the fee with the purpose of capturing the
market.
Therefore, the defence of development of nascent market is not tenable.
10.59 As regards the shield of benign historical philosophy towards charging of fee
is concerned, the Commission has noted the pattern of behaviour of NSE in
respect of F&O segment and WDM segment. It has also been observed that fees
were not waived in the equity segment. The conduct of NSE with regard to
transaction charges in the Gold ETF segment and HangSeng Benchmark
Exchange traded scheme has also been noted. Without making any specific
comments, this Commission can conclude that historical conduct of NSE suffers
from inconsistency and nothing can be reliably derived from these behaviour
patterns that would reasonably lead to the conclusion that they have consistently
followed a philosophy of fee waivers in nascent market. The investigation report
of the DG has commented upon these behaviour patterns in great detail and
nothing substantive has been offered by the OPs that would make this
Commission disagree with the DG report.
10.60 This Commission duly notes that DotEx is a wholly-owned subsidiary of NSE.
The fact that DotEx has 26% stake in Omnesys which had developed the NOW
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software has also been noted.


10.61 Section 2(h) of the Act defines enterprise as “…… a person……….. engaged in
any activity……… either directly or through one or more of its units or divisions or
subsidiaries………” section 4 applies to “enterprise or group” and explanation (c)
gives a definition for “group”. Reading both together, non-charging of data feed
fee is a conduct that is attributable to NSE and DotEx jointly. The defence of
nascent market development and historical philosophy by DotEx is not
tenable on this count for the same reasons as discussed above.
10.62 As regards waiver of data feed fee on the basis of customer requests, this
Commission notes that the same magnanimity is not evidenced in respect of
other segments where data feed has not been waived. Generation of data,
creation of backend and front-end software and live data feed involves
considerable technical and commercial investment and costs, not to speak of
investment of billable man hours. No profit making enterprises delivering such
costly services would deliver it free of cost for years merely on customer
requests. Even with regard to customer requests not sufficient evidence was
produced by the OPs to show that there was overwhelming demand for free
services. Even this magnanimity would not have been felt had the only source of
earning for the data feed services been the CD segment. For these reasons,
this Commission finds no merit in the justification given by the OPs
regarding data feed fee waiver.
10.63 Regarding denial of access interface code (APIC) for ODIN supposedly done
due to programme vulnerabilities and client complaints, this Commission notes
that the denial has only been with respect to data feed for CD segment trading
on NSE. No denial of APIC has been done in respect of data feed for any other
segment. It is also noted that ODIN is a software developed by FTIL, which is
one of the promoters of MCX-SX. Vulnerability or defects, if any, in ODIN would
be a matter of concern for other segments also. Normally, APIC should have been
denied for all segments but this was not the case. Moreover, the investigation
has revealed that even NOW, which is the application being used by NSE, had
generated many complaints. At the same time, sundry users of ODIN that were
examined did not express any grave concerns.
10.64 All these facts put together take the wind out of the sails of the justification
given by the OPs for denial of APIC for CD segment operations or for putting FTIL
on its watch list. This conduct of NSE/DotEx smacks of dubious anti competitive
intent when all the facts are viewed together.
10.65 In today's world, trading on stock exchanges is being done extensively on
internet through electronic applications such as ODIN and NOW. In that sense,
these software applications whether backend or frontend are essential facilities.
In fact, for any segment, there can be said to exist an aftermarket for market
watch and data feed services. Whereas in the aftermarket of data feed services of
other segments, ODIN and NOW (and a few other less prominent ones) are
competing, denial of APIC for CD segment not only forecloses competition in the
aftermarket of electronic trading platform for the CD segment for NSE traded
derivatives but is also tantamount to exclusionary conduct in the main relevant
market. In a way, this is imposing supplementary obligation on anyone wanting
to trade on the CD segment of the NSE exchange to use only NOW, in complete
exclusion of ODIN or any other software.
10.66 NSE has denied charges of predatory pricing. The basic ground taken was
that no fixed costs were incurred on CD segment. The findings of the DG as well
as arguments of the OPs in respect of whether AVC, ATC, LAIC or AAC is the best
benchmark for evaluating predation; estimated costing based on allocation of
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various costs etc. have been mentioned in earlier portions of this order. However,
it has been elsewhere noted in this order that since NSE does not follow segment
accounting and since it has not given any segment figures to the DG, any
exercise to arrive at a costing benchmark would be an exercise in futility in this
case.
10.67 A very important finding of the investigation of the DG is that from 1st
October, 2008 to 31st October, 2010, BSE incurred Rs. 2.01 crores (20.1 million)
for 2008-09 and Rs. 4.69 crores (46.9 million) for 2009-10 as direct and shared
cost for running the CD segment.
10.68 The investigation also revealed that the Informant MCX-SE is only operating
in the CD segment and examination of its financial statements of 2008-09 and
2009-10 reveals that it is incurring variable costs. The operating expenses
include advertising, promotional activities, clearing and settlement, conveyance,
communication and insurance expenses. For 2008-09, MCX-SX has incurred total
expenses of Rs. 37.33 crores (373.3million) and for 2009-10, it has incurred Rs.
85.78 crores (857.8 million). When these findings of facts are considered, it
gives every reason to believe that operations in the CD segment do require some
variable costs to be incurred by the stock exchange. These cannot be zero as
claimed by NSE. It is also noteworthy that NSE has not been able to provide any
figures of segment account to substantiate their claim.
10.69 The DG report makes an attempt to work out an estimation of costs that
should have been incurred by the NSE. It indicated that the total cost for 2008-
09 works out to Rs. 4.42 crores (44.2 million) and for 2009-10, which is the first
full year of operation, Rs. 37.07 crores (380.7 million). The report has estimated
total cost for CD segment on a percentage based pro rata system. The total cost
for CD segment estimated for 2009-10 is to the tune of Rs. 37.07 crores (370.7
million) whereas for 2008-09, it is estimated at Rs. 4.42 crores (44.2 million).
Based on pro rata assumption, about 72% of the total cost is allocable to F&O
segment, 17% to equity segment, 2% to WDM segment and about 1% to
corporate debt segment and 7% to CD segment for 2009-2010. Admittedly, this
may be just estimation, and like all estimations, open to debate, but the exercise
indicates logically that the costs of operations for NSE for the CD segment cannot
be absolute zero.
10.70 More importantly, it is worth pointing out that the issue under investigation
was allegation of zero pricing. The fact of zero pricing has remained undisputed.
Section 4(2)(a) (ii) deals with “unfair or discriminatory…………..price in purchase
or sale (including predatory price) of goods or service”. From the wordings of the
provisions, it can be concluded clearly that “predatory price” is considered as a
subset of “unfair price”.
10.71 The term “unfair” in relation to pricing in the context of the Indian
Competition Act has not been dealt with in any case so far. Had NSE been
charging some price for its services in the CD segment, there would perhaps
have been a need to examine that price as “predatory price” or otherwise and
consequently, to arrive at the appropriate benchmark for predation for this
particular case. Explanation (b) to Section 4 specifically defines predatory price
as a “price which is below the cost…. of production ……with a view to reduce
competition or eliminate the competitors”. However, “unfair” price has not been
defined anywhere. This unfairness has to be determined on the basis of facts of a
case.
10.72 It has been amply demonstrated in the DG report that there are manpower,
hardware, infrastructure and other resources dedicated to CD segment operations
by NSE. Several of these heads of expenditure are variable in nature. The
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operation of CD segment cannot be run without employing those resources and


none of those resources including manpower and electricity etc. come for free.
Even though it may not be easy to make cost allocations as claimed by NSE, it is
certainly desirable and not impossible. Had NSE been operating in no other
segment, it would certainly have ascertained its own cost of operations. As
mentioned elsewhere while discussing dominance, this cavalier attitude of not
allocating cost of operation for a clearly segregated operation can come only from
a position of strength and the intent to wait for competition to die out.
10.73 The term “unfair” mentioned in section 4(2) of the Act has to be examined
either in the context of unfairness in relation to customer or in relation to a
competitor. For unfairness of any act to be judged, all the surrounding facts have
to be considered. It cannot be judged on the basis of some formula or accounting
process. In the present context, unfairness of pricing (as distinct from the
concept of the predatory pricing) cannot be determined by selecting ATC, AVC,
LRAIC, AAC or any other costing calculation used in accounting. It has to be seen
whether, in this case, zero pricing by NSE can be perceived as unfair as far as
MCX-SX is concerned.
10.74 As discussed above, NSE has a position of strength which has enabled it to
resort to zero pricing since August, 2008. MCX-SX does not have such strength
or deep pockets. There is practically no justifiable reason for NSE to continue
offering its services free of charge for such a long duration when it is paying for
manpower and other resources for running the business. It is also a fact that no
enterprise would have the intention to engage in a profit-less venture for
eternity.
10.75 MCS-SX, which operates only in the CD segment, has no other source of
income. This is a major constraint. In these circumstances, the zero price policy
of NSE cannot be termed as anything but unfair. If this Commission were to treat
it as fair, it would go against the grain of the Competition Act and betray the
economic philosophy behind it. If even zero pricing by dominant player cannot
be interpreted as unfair, while its competitor is slowly bleeding to death, then
this Commission would never be able to prevent any form of unfair pricing
including predatory pricing in future.
10.76 Had NSE and MCX-SX been on equal footing in terms of resources directly
available, spectrum and scale of operation, nationwide presence, length of
existence etc. perhaps perception of unfairness would not have been so blatant
and impossible to ignore, but in this case, the sense of the two being equal or
even almost equal does not exist. Therefore, this Commission concludes that
the zero price policy of NSE in the relevant market is unfair.
10.77 In this case, the conduct of zero pricing by the NSE is beyond the parameters
of promotional or penetrative pricing. It can, in fact, be termed as
annihilating or destructive pricing.
10.78 It is to be noted that the Commission has already delineated the relevant
market in this case as the market of stock exchange services for exchange traded
currency derivatives in India. It has been argued that for a charge of leveraging
to be established, there is a requirement of identifying two distinct “relevant
markets”, as per the provisions of section 4(2)(e) of the Act and for these two
relevant markets to have associational link.
10.79 Coming now to the issue of leveraging in this case, it is pertinent to observe
that there is a subtle difference in the concept of “leveraging” as applied in some
international jurisdictions (particularly the European Commission) and the
wordings of the related provision in the Indian Competition Act, viz. section 4(2)
(e). In the Indian context, Competition regime is a very new tool for regulating
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market forces. Due to historical developments, several enterprises have been


incumbent and entrenched in trade and commerce in India without any
regulations to keep their anticompetitive conducts in check. This position is in
sharp contrast with that in some mature jurisdictions like the US or EU where
competition laws have been in force for a century.
10.80 The Indian Competition Act recognizes leveraging as an act by an enterprise
or group that “uses by its dominant position in one relevant market to enter into,
or protect, other relevant market.” Nowhere does the Act indicate that there has
to be a high degree of associational link between the two markets being
considered for this sub section. This is so because competition concerns are
much higher in India than in more mature jurisdictions because of the historical
lack of competition laws. In India, if an enterprise dominant in the market of
audio-visual (AV) equipment enters into the market of say, computers, it is
possible for it to use its strength in terms of finances, technological expertise,
sales network etc. in the AV market to muscle its way into and protect its
position in the computer market, even though the two markets are not at all
connected. That is why the Act does not indicate any requirement of
associational link.
10.81 At this stage, the Commission would like to clarify the intent as well as the
import of section 4(2)(e) of the Competition Act, 2002. It is incorrect to argue
that the whole of section 4 pivots around determination of only one “relevant
market” or that determination of a second “relevant market” is not possible or
that having treated a particular market as the “relevant market” for the purpose
of explanation (a) to section 4, that market cannot be treated as the “other
market” for the purpose of section 4(2)(e) as per the wordings of the provision.
10.82 Explanation (a) is for defining what dominant position means for any market
being examined under section 4 while section 4(2)(e) deals with a situation
where an enterprise in dominant position in (any) delineable relevant market
uses its strength therein to enter or protect any other (delineable) relevant
market.
10.83 Section 4(2)(e) uses the terms, “one relevant market” and “other relevant
market”. The section recognizes the fact that an enterprise may be multi-product
and may be operating in two (or more) markets. It may be possible for such
enterprise to use its position of strength derived in one market to leverage its
position and gain unfair advantage in the other market. While its conduct in the
second market has to be separately examined for abuse if and after it acquires a
dominant position there, the fact that it has used the strengths from the first
market to wrongfully enter into or to protect the second market is independently
considered harmful to competition under the Act. The “relevant market” of the
explanation (a) applies equally in intent for sections 4(1) and (2) but the
relevant market in respect of clauses (a) to (d) of section 4(2) can be different
than the relevant market for the purpose of clause (e).
10.84 In the instant case, the relevant market in respect of clauses (a) to (d) of
section 4 (2) has been taken as stock exchange services for currency derivatives
in India. It must be emphasized that this Commission has considered NSE as
being in dominant position in this market based on factors given in section 19
(4). But it must be kept in mind that NSE is also operating in other markets,
such as equity, F&O and WDM. It is not the place to go into a discussion whether
each of these is independent relevant market or some are
interchangeable/substitutable for the consumer and therefore constitute a single
market. What is important is that this Commission has clearly differentiated the
CD segment as an independent relevant market. For the sake of convenience, we
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shall refer to the rest of the market (or markets) as the “market of stock
exchange services for the non CD segment”. In this discussion, we shall call the
relevant market as the “X market” and the market of stock exchange services for
the non CD segment as the “Y market”. The complexity in this case arises from
the fact that NSE has been considered as dominant in the X market due to its
strengths in the Y market (amongst other things). A question can then be posed
as to how, once determined as dominant in the X market, can the charge of
leveraging the position in the X market to enter or protect the same X market
itself be made? But this question is assuming that once X has been taken as the
“relevant market” then wherever the word “relevant market” occurs in clauses
(a) to (e), it should automatically refer to X market.
10.85 This is distortion of the provisions. As explained earlier, the “relevant market”
for clause (e) can be different from the “relevant market” for clause (a) to (d)
but the aspects of dominance given in explanation (a) would apply equally to
both. In fact, the scheme of the section, particularly when read with section 19
(4), is such that it is possible to take one market as the “relevant market” for
sub sections (a) to (d) of section 4(2) and the same market as the “other
market” for section 4(2)(e).
10.86 In the Indian Competition Act, under section 19(4), the ability to leverage, in
itself, is taken as one of the factors of dominance. This revalidates our
observation above that both “position of strength” as well as the concept of
leveraging has slightly different nuances in the Indian Act. Phrases like “size and
importance of competitors”, “vertical integration”, “relative advantage” etc. are
concepts that indicate the strength to leverage based on strengths in other
markets. It is this strength that would render an enterprise dominant in the
relevant market itself and would expose its conduct therein to evaluation of any
other abuse of dominance separately. At the same time, the wrongful exercise of
that strength by itself is also held as abusive conduct in its own right, under
section 4(2)(e).
10.87 To further clarify, if an enterprise merely uses its dominant position in any
“relevant market” to enter or protect some other “relevant market” wrongfully, it
can only be held guilty of contravening section 4(2)(e). But if the enterprise,
after entering the other relevant market through such leveraging and acquiring
dominant position there, commits further acts of abuse (such as unfair pricing)
in that relevant market, then there would be a separate violation of section 4(2)
(a).
10.88 In the previous paras, the conduct of NSE has been examined within the
relevant market delineated for this case (X market). However, the cumulative
impact of those conducts also translates into the act of protecting its position in
the X market by the dint of its strengths in the Y market where also NSE is
dominant. Whereas X market is the “relevant market” for sub sections (a) to (d),
the Y market is the “relevant market” for sub section (e).
10.89 It is worthwhile to observe here that the language of section 4(2)(e) does not
exclude the possibility that the enterprise is dominant in both, the “relevant
market” as well as the “other relevant market”. An enterprise can be dominant in
one market and can enter another market, acquire position of strength there and
then commit acts to protect its position. This is the situation in this case. The
acts of abuse in the market of stock exchange services in CD segment have to be
examined in terms of sub sections (a) to (d) of section 4(2), whereas, the anti-
competitive use of might arising from the market of stock exchange services in
non CD segment is to be examined under section 4(2)(e).
10.90 Having clarified the existence of two market necessary for examining section
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4(2)(e) and without prejudice to our view on the requirement of associational


links under the Indian law, we now examine if the two markets have
associational link. This can be done by considering the following questions:
(a) Whether NSE holds a position of strength on the CD segment market
comparable to its position in the CD and non CD segment markets as a whole?
(b) Whether the NSE enjoys advantages in the CD segment market by virtue of
its dominance in the non CD segment market?
(c) Whether the NSE customers in one market are potential customers in the
other?
(d) Whether the NSE and its competitors can become competitors in both
markets?
10.91 As evident from our discussion in the section on dominance, the NSE
possesses almost the same strengths in the CD segment as it does in the
combined stock exchange market. This fact gives it definitive advantages in the
CD segment. There is high commonality of brokers and traders in other segments
and CD segment. As indicated in the introductory section of this order, MCX-SX
has already applied for permission to operate in the equity/cash (“Equity”) and
equity derivatives - Futures and Options (“F&O”) segments and has also
communicated its willingness to SEBI to commence the SME (small and medium
enterprises) segment. At this point in time, the necessary regulatory approvals
have not been given and the matter is sub judice. However, potentially, NSE and
MCX-SX can be competitors in those segments. Indeed, MCX-SX is desirous to
compete with NSE in other segments. Therefore, all the above four questions can
be answered in the positive. Consequently, it can be said that the two
relevant markets have associational links. Therefore, it is concluded that
NSE has used its position of strength in the non CD segment to protect
its position in the CD segment.
10.92 In the instant case, the acts of NSE such as fee waivers, denial of APIC for
ODIN and distribution of NOW for free are clear acts of protecting its position in
the CD segment and are possible due to its position of strength in the non CD
segment.
10.93 The Commission has earlier touched upon aftermarket of software for trading
on stock exchanges. The client desirous of trading on stock exchange would first
choose some exchange. After that, for trading, he has to rely upon trading
software such as data feed, market watch etc. ODIN and NOW are both such
softwares. In a technical sense, they are competing products. Also, the trading
software is an essential facility without which trading cannot be done today.
10.94 NSE has placed FTIL, the developer of ODIN (and one of the promoters of
MCX-SX) on its watch list and has denied APIC for interface between its own
software NOW (the marketer DotEx is a 100% subsidiary) and ODIN for the CD
segment. This prevents clients of NSE, most of who use ODIN for all other
segments, from choosing ODIN for the CD segment trade on NSE. In the
aftermarket of trading software for CD segment of NSE, it has denied access to
ODIN. Had the APIC been provided to ODIN, the two software, viz. ODIN and
NOW would have competed for clients. This in fact, would lead to improvements
in the technical development of all such softwares due to competitive forces in
the aftermarket.
10.95 This situation is similar to the US v. Microsoft case where the allegation was
that Microsoft had manipulated its application interface code to put third party
browsers at a disadvantage for users who were working on Microsoft's Windows
operating system. There are also similarities with the European Commission's
case against Microsoft where there was allegation that Windows Media Player was
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bundled with the operating system and third party players had difficulties in
running on it.
10.96 In view of the discussion above, this Commission concludes that the
conduct of NSE/DotEx in denying APIC to ODIN and putting FTIL on
watch list is an exclusionary conduct both, in the aftermarket for
software for trading on NSE as well as in the relevant market delineated
in this case.
11. Conclusion
11.1 In the previous section, the Commission framed three issues for determination
and has discussed them in great detail. The findings of the Commission, based
on the above discussions are summarized as below.
11.2 The stock exchange services in respect of CD segment in India is clearly an
independent and distinct relevant market. In this delineated relevant market,
NSE has a position of strength and, therefore, enjoys dominant position in the
relevant market in context of Section 4 of the Act.
11.3 In the facts and circumstances of the case, the defence of nascent market
development and historical philosophy of fee waivers by NSE and DotEx is not
tenable.
11.4 This Commission finds no merit in the justifications given by the OPs regarding
waivers of transaction fees, admission fees or data feed fee waiver. Therefore, the
zero price policy of NSE in the relevant market is unfair. It can, in fact, be
termed as annihilating or destructive pricing. This is contravention of section 4
(2)(a)(ii).
11.5 The conduct of NSE/DotEx in denying APIC to ODIN and putting FTIL on watch
list is an exclusionary conduct both, in the aftermarket for software for trading on
NSE as well as in the relevant market delineated in this case. This is
contravention of sections 4(2)(b)(i) and (ii); 4(2)(c) and 4(2)(d).
11.6 Lastly, NSE has used its position of strength in the non CD segment to protect
its position in the CD segment. This is contravention of section 4(2)(e).
12. Order under section 27
12.1 Consequent to finding NSE and DotEx in contravention of the provisions of the
Section 4 of the Act the Commission issued a show cause notice on 29.4. 2011 to
NSE for imposition of penalty under Section 27 of the Act. The Commission also
issued a reasoned order dated 25.5.2011 wherein the contraventions were
elaborately dealt with. Copies of the order were conveyed to NSE and DotEx
granting time for submission of replies and an opportunity to appear before the
Commission. Copy of the minority order dated 3.6.2011 was also sent to parties.
Accordingly, NSE filed a detailed reply to the aforementioned show cause notice
on 10.6.2011. This was followed by oral hearing on 13.6.2011. Shri Soli Cooper,
Counsel, Ms. Pallavi S. Shroff & Shri M.M. Sharma, Advocates made oral
submissions on behalf of NSE. DotEx did not file any reply or made any oral
submissions.
12.2 The instant order under Section 27 of the Competition Act, 2002, is to be read
in continuation of this Commission's reasoned order dated 25.5.2011
establishing the contraventions of Section 4 by Opposite Parties 1 & 2. The said
order shall be considered an inherent part of and conjoined with this order.
13. Contentions of NSE in response to show cause
13.1 The essential ingredients of the detailed written submissions and oral
arguments of the Opposite Party 1, NSE are summarized in the following
paragraphs.
13.2 In its written submissions, NSE summarized the findings of the order of this
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Commission dated 25.5.2011 as also of the dissenting order of the dissenting


Members of this Commission dated 3.6.11.
14. Submissions against imposition of penalty:
(a) Novelty:
It was submitted that “given that the alleged violations are based on novel
concepts and principles, they are incapable of having been anticipated for the
purpose of compliance. Further it is the established practice of other
competition law regulators that where a concept is novel, no penalties are
levied or remedies be ordered.”
(b) Uncertainty on application of law:
It was contended that in the absence of guidance papers or a case law from
the Commission dealing with concepts like dominance, unfair pricing etc.,
there is a large element of uncertainty in the application of the Act and
regulations framed there under. It was argued that in such circumstances, no
penalties should be levied or remedies be ordered.
(c) Lack of cogent or convincing evidence:
It was argued that there is no evidence to suggest that NSE's pricing policies
were intended to reduce competition or eliminate competitors. The
Commission's order is not based on any cogent or convincing evidence to
establish violation of Section 4. It was argued that in such circumstances, no
penalties should be levied or remedies be ordered.
(d) Lack of intention or negligence:
It was forcefully contended that in competition law it is the settled principle
“that the fines should only be imposed where the defendant has either
intentionally or negligently infringe competition law.” It was further argued
that NSE did not act “with the intent to restrict competition……….” It was
averred that when NSE commenced trading in the CD segment on 29.8.2008,
the Competition Act had not yet come into force. NSE did not levy any charge
when it commenced trading in the CD segment even when there were no
competitors. It was argued that “given that there were no competitors, NSE
could have entered the market with a charge and thereafter could have
reduced the charge to zero when MCX-SX entered, if it was NSE's intent to
ward off competition, which is not the case.” Accordingly, in the absence of
intent or negligence on the part of NSE, no penalties should be levied or
remedies be ordered.
(e) No foreclosure:
NSE contended that the main reason for prohibiting an abuse of dominance is
to prevent competitive foreclosure. It was argued that since there has been no
foreclosure in the CD segment, there cannot be any abuse of dominance. It
was further contended that the Commission's mandate is “to protect
competition and not competitors.” Further, it was stated that “the losses
incurred by MCS SX as a result of the zero pricing policy of NSE are small
relative to MCS SX's excess capital and MCS SX is not harmed that it will be
unable to survive in the immediate future. Accordingly, no serious anti
competitive harm has been caused …….” It was pleaded that in such
circumstances, no penalties should be levied or remedies be ordered.
(f) Benefit to ultimate consumers:
It was argued that the Commission's order had made no observation on
whether the consumers are being harmed. It was submitted that “The Act
mandates the Hon'ble Commission to protect competition and consumers and
not competitors.” It was contended that the consumers have benefitted from
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NSE's pricing policy and in fact “Competition has increased” and “the
competitors of NSE have benefited.” It was argued that no penalty or remedy
may be imposed on this ground.
(g) Expansion of the market:
It was submitted that NSE's pricing policy have assisted in expanding the
market and consequently, the turnover or business in CD segment on all
exchanges has increased from Rs. 291 crores (2.91 billion) in August, 2008 to
Rs. 41,982 crores (419 billion) in May, 2011. It was submitted that such
circumstances demand that no penalties be levied or remedies be ordered.
(h) Contribution to economic development:
It was contended that NSE had contributed to economic development through
innovations made in the operation of the stock exchanges, over the years,
since its inception.
(i) Meeting the competition:
It was argued that since inception of the CD segment, the competitors of NSE
have imposed charges identical to that of NSE. Therefore, NSE was left with
no option but to continue charging zero fees to meet the competition.
Charging fees “will cause serious damage to NSE's market position in the CD
segment.” Therefore, no penalty or remedies should be ordered.
(j) Full support and cooperation:
It was submitted that NSE had extended full support and cooperation during
the proceedings before the Commission and had submitted legal opinion of
Prof. Richard Whish and various reports from Genesis Consulting Private Ltd.
“at a great cost.” Keeping this in view, no penalty or remedies may be
ordered.
(k) Principle of proportionality:
It was submitted that penalties should not be imposed given that the
Commission in its order has “nowhere stated that consumers have been
harmed by the pricing policy adopted by NSE………..” It was further submitted
that any assessment of conduct can only begin from when Section 4 of the Act
came into force i.e. 20.5.2009. NSE also pleaded that “penalty imposed must
be commensurate with the gravity of misconduct.”
(I) Order contrary to foreign precedents:
It was contended that the Commission's findings on aspects such as SSNIP,
dominance, unfair pricing, leveraging etc. “are contrary to foreign precedents
and established principles of competition law.” In view of this, no penalty or
remedies may be prescribed.
(m) No intent to deny FTIL the API for the CD segment:
It was submitted that the issue concerning ODIN is currently the subject
matter of litigation before the Bombay High Court. Further, ODIN was put on a
watch list for justifiable reasons. It was stated that when NSE sought to
conduct an audit of ODIN, it resulted in a dispute with FTIL and the audit is
still pending. It was suggested that this issue should be referred to SEBI. It
was further submitted that there are instances of major exchanges not sharing
the APIs with competing exchanges. It is stated as an example that despite
having completed all formalities, Omnesys was not granted API by MCX-SX for
more than two years and the same was granted for the commodity segment
by MCX after more than one year and on intervention of FMC. It was argued
that it is not ideal for an exchange to share its APIs with vendors affiliated to
other exchanges and hence there was business justification in denying API.
Lastly, it was submitted that SEBI has already seized of the matter and if at
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all the remedy is sought to be provided, it should be referred to SEBI.


15. Miscellaneous arguments
15.1 NSE referred to some laws of European Commission such as Italian Flat Glass
Case, National Grid plc v. gas and Electricity Markets Authority etc. to support its
contention that penalties should not be imposed when there is a novel concept
involved. Reference was also made to Federal Trade Commission (FTC) policy
statement on monitoring equitable remedies in competition cases wherein
monetary penalties are to be levied if the violation is clear, there is reasonable
basis for calculating the amount and after considering impact of other remedies
including private actions and criminal proceedings.
15.2 NSE has also referred to OECD document titled “Remedies and Sanctions in
Abuse of Dominance cases” where it is recommended that using lighter
measures does not appear to be controversial when a conduct has never been
dealt with by the jurisdiction's court before and there could have been
reasonable doubt ex-ante about whether the conduct would be found unlawful.
15.3 It has been further argued that Section 53N of the Act enables MCX-SX to
seek compensation from the Competition Appellate Tribunal (CAT). Therefore,
“the harm caused, if any, to MCX-SX can be remedied and the requirement for
the Commission to levy any penalties or impose remedies does not exist.” NSE
has also contended that in prior decisions of the Commission, viz. Case No.
1/2009, (FICCI v. United Producers/Distributors Forum), Case No. 5/2009
(Neeraj Malhotra v. Banks) and case No. 7/2010 (Vijay Gupta v. Paper Merchant
Association), the Commission has either imposed no penalties or symbolic
penalties. Accordingly, it is submitted that no penalty be imposed on NSE.
15.4 NSE made detailed submissions that if there exists an effective behavioral
remedy then no structural remedy be ordered. NSE relied on European Union
Council Regulation 1/2003 United Shoe Case, Microsoft Case and OECD
document preferred supra.
15.5 In respect of the behavioral remedy, it was contended that “competition
authorities should not regulate prices as they are ill suited to carry out price
controls”. It was submitted that NSE should not be ordered to charge a price
similar to those charged by it in other segments. However, it was submitted that
Commission has not provided any guidance on what would be a fair price and
stated “that the predation benchmarks would present a safe harbor for NSE in
working to comply with the majority orders as long as NSE prices above the
predation benchmark, it can be considered to be pricing fairly.”
15.6 NSE further contended that the cost estimates provided by the DG are flawed
and cannot be relied upon and therefore, the DG's estimates should be ignored in
arriving at a fair price.
15.7 It was prayed that if at all a cease and desist order is passed by the
Commission, NSE should be allowed to decide the fair price. Further, NSE should
also be allowed to decide to take any such actions as may be required to meet
competition as covered under explanation to Section 4 (a) of the Act.
16. Turnover and profit calculation
16.1 It was submitted that while calculating penalties under Section 27 of the Act
only the turnover of the “relevant market or “affected market” i.e. stock
exchange services in respect of CD segment in India should be considered and
turnover of other segments should be disregarded.
16.2 It was further argued that it would be irrational for a penalty to be levied with
reference to total turnover rather than turnover derived from relevant market. As
an example, it was submitted that if two enterprises were found in contravention
of Section 3 of the Act and if one of the enterprises also happens to be trading in
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some other products, it should not mean that that enterprise pays a higher
penalty. Such an outcome would penalize diversified enterprises. NSE placed
reliance on EU guidelines on the method of setting fines (Regulation No.
1/2003). It also referred to UK OFT's guidance on penalty (December, 2004)
wherein the relevant turnover is taken as the turnover in the relevant product
market and relevant geographic market affected by the infringement.
16.3 It was submitted that Section 27 (b) read with Section 2 (y) creates an
ambiguity in respect of “turnover”. It was stated that “it is unclear whether the
definition of turnover includes the value of items that are non-operational and do
not form part of normal trading activities of the enterprise.” Further, it was
argued that the term turnover usually connotes principal revenue generating
activities of an enterprise and cannot include receipt which are not relatable to
business but may be regarded as income from other sources. Similarly, income
from turnover of other segments should also be excluded.
16.4 Detailed references were made to the penalty regimes in other jurisdictions
such as Australia, Germany, European Community, Netherlands, United
Kingdom, United States and South Africa.
16.5 NSE referred again to OFT guidelines where in exceptional circumstances, if
the turnover is zero, an appropriate proxy to reflect the economic importance of
the infringement should be applied. It was contended that such proxy turnover
would have to be based on assumption of a fair price which is above the
predation benchmark set by the Commission.
16.6 As far as profit is concerned, it was contended that the figure is only relevant
when there is a contravention of Section 3 with specific infringement by a cartel.
17. Prayer:
17.1 In conclusion, it was prayed that no penalties or remedies be imposed on NSE
under Section 27 or Section 28 of the Act except cease and desist order only
limited to the finding in relation to Section 4(2)(a)(ii) of the Act. Further this
should be subject to the condition that NSE would be allowed to decide the fair
price and it would be permitted to take any action to meet competition as
available under explanation to Section 4(a) of the Act.
18. Decision under Section 27 of the Competition Act, 2002:
18.1 The Commission has taken into consideration the written submissions and oral
arguments made by NSE as a consequence of show cause notice issued by the
Commission on 29.4.2011.
18.3 Some of the contentions of NSE pertain to aspects of the substantive issues
and facts which have already been elaborately discussed and determined in the
Commission's order dated 25.5.2011 which clearly establishes contravention of
Section 4 of the Competition Act, 2002. It is not necessary to revisit those
discussions or issues in the instant order which is limited to prescribing remedies
or imposing penalty in the context of clauses (a) to (g) of Section 27 of the Act.
The following part of this order specifically deals with this aspect of the case.
19. Reference to the “Majority Order” and “Dissenting Order”
In its written submissions, NSE has made references to the Commission's Order
dated 25.5.2011 as the “Majority Order” and also reproduced highlights of the
Dissenting Order dated 3.6.2011. Both these orders dealt with the various
substantive issues in this case and gave the respective decisions of the
Commission and that of the Hon'ble Dissenting Members. Therefore, it is not
necessary to comment on this part of the submissions of NSE.
20. Novelty
20.1 The Commission has considered the submissions of NSE in this regard. It is a
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matter of record that section 4 of the Competition Act, 2002 came into force on
20 May 2009. However, it is equally true that this Act had received the assent of
the Hon'ble President of India on 13 January 2003.
20.2 It is noteworthy that the Commission has undertaken extensive advocacy
exercise over a period of nearly half a decade to spread awareness about the new
legislation particularly in the spheres of business, commerce and legal profession
in India.
20.3 The conduct of NSE examined in the Commission's Order dated 25.5.2011 can
be said to have started on 26.8.2008 with a circular waiving transaction fee for
the CD Segment of its stock exchange services. This was after many years of
formal existence of the Competition Act as a law of the land. Under the
circumstances, this Commission is of the view that neither the embedded
concepts behind provisions of the Act nor the provisions themselves could be
said to be so alien as to render them “incapable of being anticipated for the
purpose of compliance” as contended by NSE. Perhaps the only factor making
enterprises complacent about compliance was the fact that the deterrent tools of
section 3 and 4 were not made operational.
20.4 As more cases are decided by the Commission more and more concepts
embodied in the Act will get covered in the orders. It can be no one's case that
no remedies or penalties under section 27 or 28 be ordered whenever a new
phrase or clause or concept is decided upon for the first time. As mentioned by
NSE itself, in the past, this Commission has passed orders invoking provisions of
section 27 in cases where some concepts mentioned in section 3 have been
discussed at length for the first time. Those orders have duly considered relevant
facts and circumstances peculiar to those cases and given remedies and imposed
monetary penalty deemed appropriate to meet the ends of justice.
20.5 It would be an abdication of the duty placed upon the Commission under
section 18 of the Act if it refrains from using tools provided by law under sections
27 and 28 to eliminate practices having adverse effect on competition, promote
and sustain competition, protect the interests of consumers and ensure freedom
of trade carried on by other participants, in markets in India — merely on the
ground that a concept was being decided for the first time in a particular case.
Furthermore, it is settled law that an authority charged with imposing a penalty
within a prescribed discretionary parameter is entitled to do so after considering
all the facts and circumstances in a logical and fair manner.
21. Uncertainty on application of law
21.1 NSE had argued the “absence of guidance papers or case law from the
Commission” dealing with different concepts. The Commission does not find force
in this argument because not only has it freely made available advocacy material
on various aspects of the Competition Act, including a guidance booklet on
competition compliance, but has also made considerable efforts to reach out to a
large cross section of stake holders through seminars and conferences. Even
more importantly, since 2009, the Commission has also published its final orders
on its web portal which is in public domain, including orders under section 26(2).
21.2 While it may not be possible for any competition authority to clarify each and
every concept that has been or could be adjudicated upon, this Commission has
made considerable efforts to propagate the broader concepts pertaining to
competition law in India. Though such efforts are desirable on part of any
authority charged with administering a law, it is expected that all entities
governed by that law would do their best to comply with the provisions or take
corrective measures when required, regardless of any outreach by the authority.
In fact after 20th May 2009, when the enforcement of section 3 and 4 was
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notified, NSE could have changed its policy of zero pricing. Further, such
corrective measures could have been taken at least after initiation of these
proceedings.
21.3 In the context of dilemma over “predatory price” being hard to distinguish
from vigorous competition, it is pertinent to emphasize that this Commission, in
its order, has elaborately discussed how the Indian Competition Act intrinsically
distinguishes the narrower concept of predatory price from the broader concept
of unfair price that is intended to harm competition either through adversely
affecting competitors or consumers or a relevant market. It is the immediate and
demonstrable harm to competition as described above that constitutes the fabric
of unfair price. As against that, it is the specific conduct of “below the cost”
pricing “with a view to reduce competition or eliminate competitors” that is the
necessary ingredient that qualifies and distinguishes predatory price in terms of
the Indian Act. As discussed in this order, Section 4 (2)(a)(ii) uses the
parenthesized words “including predatory price” in relation to “unfair” price. As
per the scheme of the Act, there exists an area between the inclusive and
exhaustive where the pricing may not necessarily be “below” cost or may be with
a view to harm the consumer or the market in addition to reducing competition
or eliminating competitors. The commission must acknowledge this legislative
intent built into the provisions of section 4.
22. Lack of cogent or convincing evidence
22.1 The Commission does not agree that “no evidence has been produced nor any
exists to suggest that NSE's pricing policies were intended to reduce competition
or eliminate competitors”. The Commission has categorically held in the order
dated 25.5.2011 that circumstantial evidence shows that zero pricing was done
with a view to eliminate competition. Hence there is no need to revisit this issue.
23. Lack of intention or negligence
23.1 It has been argued that “fines should only be imposed where the defendant
has either intentionally or negligently infringed competition law.” This
Commission is of the firm view that section 27 of the Act imposes no additional
burden to establish intentionality or negligence. To offer such shield to an
enterprise held in contravention would be granting protection to the very
perpetrators this Commission is duty bound to punish.
23.2 Moreover, the order of this Commission dated 25.05.2011 elaborates on how
the timings, manner and denouement of strategy leaves little doubt for a
reasonable mind as to the intent of NSE behind its conduct of fee waivers, denial
of APIC etc. In this regard, the Commission has examined the historical conduct
of NSE in context to other segments of stock exchange services and its impact on
other exchanges like BSE. It has also been shown how zero pricing policy in CD
segment not only affects MCX-SX adversely but would also impact other existing
or future competitors and competition. The Commission has also elaborately
examined and rejected the “nascent market” defense taken. It has also shown
the anti-competitive aspects of the conduct of NSE with regard to market watch
facility of NOW. These issues do not require a relook at this stage. The mala fide
intent is clearly manifested in the abusive conduct found to have been
established by the Commission.
24. No foreclosure
24.1 It is rather presumptuous for NSE to contend that “the principle reason for
prohibiting an abuse of dominance is to prevent anti-competitive foreclosure”and
to argue that since there has been no foreclosure in the CD Segment, there is
nothing anti-competitive in its conduct.
24.2 Even international jurisdictions do not limit evaluation of abuse of dominance
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to foreclosure effect. There is a larger picture of competitive environment that


has to be considered in every case, which is a philosophy that this Commission
completely endorses.
24.3 NSE has also contended that the mandate of the Commission is to protect
competition and not competitors. While this may be an interesting and oft-used
phrase, it is shorn of the practicality of competition regulation. Similarly, it is not
possible to protect competition without in some way protecting the weaker
competitor. Harm to competition may not be synonymous with or congruent to
harm to competitor but it is impossible to assess the former without considering
the latter. Even in international jurisdictions anti-competitive conduct is
evaluated by examining intended, actual or potential affect on competitors.
24.4 Competition in a market is afforded by competitors and harm to competition
has to be assessed by evaluating harm to competitors or its consequential
impact on consumers. The harm cannot be assessed as an independent,
conceptual construct that is devoid of any association with a competing
enterprise. But this position does not translate to adopting an adversarial
approach. It is worth re-emphasizing here that the order of the Commission
shows how competition has been harmed and competitive environment has been
adversely affected by NSE.
24.5 NSE has made another assertion that “the losses incurred by MCS-SX as a
result of the zero pricing policy of NSE are small relative to MCS-SX's excess
capital and MCS-SX is not harmed that it will be able to survive in the immediate
future. Accordingly, no serious anti-competitive harm has been caused …….” This
Commission fails to understand the thrust of this argument. How big a loss do
competitors have to suffer for a conduct to be considered anti-competitive?
Further, how are the provisions of the Act equipped to distinguish “serious” anti-
competitive harm from the less serious? Would the harm be cognizable only
when the competitor's “excess capital” is wiped out? Can that harm be ignored if
it does not kill competition in “immediate future”? Lastly, does the Act provide
different treatment for less serious anti-competitive conduct that cause less
losses to competitors? These are imponderable questions to which no straight-
jacket formula can be applied in all cases. These have to be determined
considering the facts of each case.
25. Benefit to ultimate consumers
25.1 The contention that there is no observation on harm to consumers in the
Commission's order dated 25.05.2011 and hence there is no element of abuse
deserves to be dismissed because section 4 does not require it to be established.
The section first and foremost requires that it be established that an enterprise
or group is in dominant position in the relevant market. Thereafter, it is required
to establish that it has engaged in a conduct as specified in clauses (a) to (e) of
the section. Once both are established, there is no statutory requirement to
examine any other additional impact on competitors or consumers or the market.
The Commission, in its order has amply established the aforementioned two
questions. Section 4 of the Act, unlike section 3 does not require evaluation of
appreciable adverse effect on competition (AAEC) or evaluation of the factors
mentioned in section 19(3), which include “accrual of benefits to consumers”.
25.2 If an enterprise or group in a dominant position indulges in conducts
enumerated in clauses (a) to (e) of section 4, it is resultantly bound to cause
harm to the consumer by destroying competition. That is why the section does
not require consumer benefit to be evaluated separately. It will not be out of
context to mention that even under MRTP Act the monopolistic trade practice was
deemed per se violation of public interest except in the circumstances stated in
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section 32 and defenses relating to its redeeming features like being beneficial to
the consumers or users of goods or services not made tenable.
25.3 Further, the contention that “in fact, the competitors have benefitted” has to
be viewed in context of the accumulating losses of the competitors, which is not
in dispute. Such accumulating losses cannot be interpreted as benefits in any
economic or commercial sense.
26. Expansion of the market
26.1 It has been argued by NSE that its pricing policies have assisted in expanding
the market. As has been observed in the order dated 25.05.2011, “…the
proportion of transaction value that a broker/trader pays as transaction fees and
other fees is so small and insignificant that it would have practically no
bearing…” The market for CD Segment is not a function of transaction fee or
other fee but the market of stock exchange services for CD Segment only pivots
around these fees as that is the “price” in relation to the services provided.
Rather than the pricing policy of NSE, the CD Segment trading has grown due to
factors such as the rapid growth of the Indian economy and the government's
progressive and liberal economic policies.
27. Contribution of NSE toward economic development through innovations
made in the operation of stock exchanges
27.1 This Commission finds no reason to disagree with this averment of NSE and it
is given due consideration while prescribing remedies or imposing monetary
penalty in this case.
28. Meeting the competition
28.1 The argument that zero fee policy was a result of meeting the competition
because the competitors have imposed zero fee would amount to turning the
facts of the case on its head. It is not MCX-SX or any other competitor in the
relevant market who initiated zero fee but NSE. NSE's admission that charging
fee “will cause serious damage to NSE's market position in the CD Segment”
ought to be confronted by their own argument about what is “serious” harm.
Following NSE's own contentions, if the damage is “small” and it is not harmed
to the extent that it will not be able to “survive in the immediate future”, NSE
should not have any cause to worry.
28.2 International courts have also prescribed an “As-efficient competitor test”. In
AKZO v. Commission of the European Communities (C-62/86) [1991] E.C.R. I-
3359; [1993] 5 C.M.L.R. 215; and France Télécom SA v. Commission of the
European Communities (C-202/07 P) [2009] E.C.R. I-2369; [2009] 4 C.M.L.R.
25, it was held that in order to assess whether the pricing practices of a
dominant undertaking were likely to eliminate a competitor contrary to art. 82
EC, it was necessary to adopt a test based on the costs and the strategy of the
dominant undertaking itself. In that regard, a dominant undertaking was not
permitted to drive from the market undertakings that were perhaps as efficient
as the dominant undertaking but which, because of their smaller financial
resources, were incapable of withstanding the competition waged against them.
29. Principle of proportionality
29.1 NSE has pleaded that “penalty imposed must becommensurate with the
gravity of misconduct.” The Commission has kept this valid plea in mind while
framing this order.
30. No intent to deny FTIL the API for CD Segment
30.1 The question of intent is already covered by our observations supra. As regards
the matter pending in Bombay High Court concerning ODIN, the dispute pertains
to audit of ODIN. The matter before the Commission is not the inherent
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vulnerabilities of ODIN or its audit but the restricted issue of grant of APIC for
interface with NSE platform.
31. Turnover and profit calculation
31.1 The Commission has carefully applied its mind on the contentions made in this
regard by NSE. It agrees that in the instant case monetary penalty should not be
based on calculation of profit, which is specific to a cartel.
31.2 Section 2(y) defines turnover as including value of sale of goods or services.
Section 27(b) stipulates penalty based on an average of turnover for the last
three preceding financial years. Neither gives a leeway for the Commission to
interpret that turnover means turnover in the context of only the relevant
product or geographic market.
31.3 In fact, the Commission is of the firm belief that such an interpretation would
not be in consonance with the underlying intent of the provisions of the Act,
particularly in instances of contravention of section 4(e) where the market
entered or protected may have a very small turnover but the market from where
the market power was transposed has a much larger turnover. The imposition of
monetary penalty under section 27(b) of the Act must serve the dual purpose of
deterrence as well as punishment. In the Indian context, if an enterprise or
group is held in contravention of the Act, the law does not stipulate or allow the
Commission to restrict the monetary penalty by artificially truncating the
turnover of the enterprise or group and confining it to relevant market. As long
as the entity that is guilty of contravention is a single entity, its entire turnover
is the relevant turnover for the purpose of section 27(b). The only fetter which
has been placed by section 27(b) of the Act on the power of the Commission to
impose penalty in cases of infringement of section 4, is the cap of 10% of the
average of turnover for the last three preceding financial years.
32. Contravention by DotEx
32.1 The Commission's order dated 25.05.2011 has elaborately discussed the role
of DotEx in the exclusionary conduct of NSE, both as a subsidiary in terms of
section 2(h) as well as a group company in terms of explanation (c) to section 4.
However, it is felt that being a wholly owned subsidiary of NSE, DotEx had little
independence of action. This has been kept in mind while prescribing remedies
or penalties under section 27.
33. Orders by the Commission after inquiry into the abuse of dominance
position
33.1 The Commission has duly considered the contentions and arguments made by
NSE in the matter. Mitigating factors wherever justifiable have been
acknowledged at the appropriate place. Aggravating factors have been similarly
pointed out, both with the reference to the Indian case laws as well as those of
other jurisdiction, wherever applicable. To sum up NSE has abused its dominant
position in terms of Section 4(2)(a)(ii) and 4(2)(e) of the Competition Act. The
discussion made above show that the intention of NSE was to acquire a dominant
position in the C.D. segment by cross subsidizing this segment of business from
the other segments where it enjoyed virtual monopoly. It also camouflaged its
intentions by not maintaining separate accounts for the C.D. segments. NSE
created a façade of the nascency of market for not charging any fees on account
of transactions in the C.D. segment. The competitors with small pockets would
be thrown out of the market as they follow the zero transaction cost method
adopted by the NSE and therefore in the long run they will incur huge losses. The
past conduct of NSE and the conduct in the C.D segment shows a longing for
dominance in any segments in which the NSE operated by dominating its
competitors. Accordingly, in respect of this case, the following orders are passed:
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(a) In exercise of powers under section 27(a) of the Competition Act, NSE is
directed to cease and desist from unfair pricing, exclusionary conduct and
unfairly using its dominant position in other market/s to protect the relevant
C.D. market with immediate effect.
(b) Further, in exercise of the powers under section 27(g) of the Act, NSE is
directed to maintain separate accounts for each segment with effect from
01.04.2012.
(c) In exercise of powers under section 27(g) of the Act, NSE is directed to
modify its zero price policy in the relevant market and ensure that the
appropriate transaction costs are levied. This should be implemented within
60 days of the date of this order.
(d) In exercise of the power under section 27(g) NSE is directed to put in place
system that would allow NSE members free choice to select NOW, ODIN or
any other market watch software for trading on the C.D. segment of NSE. If
necessary, this may be done under the overall supervision of SEBI. NSE shall
ensure all cooperation from DotEx or Omnesys in this regard.
33.2 Considering the fact that there was a clear intention on the part of NSE to
eliminate competitors in the relevant market and also considering the fact that
Competition Act is a new Act, it would suffice if penalty at the rate of 5% of the
average turnover is levied. Therefore, in exercise of powers, under section 27(b)
NSE is directed to pay penalty of Rs. 55.5 crores within 30 days of the date of
receipt of the order which is 5% of the average of its 3 years’ annual turnover
Financial Year Turnover (In Rs. Crore)
2007-08 1038.70
2008-09 1024.28
2009-10 1266.00
Total Turnover 3328.98
for three years
as indicated
below:
Average turnover of three years Rs. 1109.66 crores is rounded to Rs. 1110 crore.
Penalty levied @5% of the average turnover of Rs. 1110 crores is Rs. 55.50 crore.
33.3 NSE is directed to comply with the directions issued and submit a report of
compliance within the time frame as specified above.
33.4 Copy of the minority order is appended.
33.5 The Secretary is directed to convey the orders to the concerned party along
with the demand notice.
Member (R)
Member (P)
Member (T)
Chairperson
———
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