September 29 2011
In the long drawn-out tussle between the National Stock Exchange (NSE), India's largest bourse, and its younger rival MCX-SX, the Competition Commission's June 23 2011 decision seems likely to set a new precedent. The commission has levied a fine of Rs555 million on the NSE for abusing its dominant market position in currency derivatives trading. The fine was calculated on the basis of 5% of the average group turnover of NSE for the three preceding years.
NSE has also been asked to cease and desist from its alleged abusive conduct of predatory pricing, under which it currently charges no transaction fee from its members for trading in the currency derivatives sector and cross subsidises its losses in that sector from its profits made in other sectors (eg, capital markets, futures, options and bonds). The commission has also directed NSE to modify its zero price policy in the currency derivatives sector and ensure that the appropriate transaction costs are levied within 60 days.
In October 2008 India's leading commodity exchange, MCX, launched a new stock exchange, MCX-SX, with permission to operate in the currency derivatives sector only. The only existing player in that sector was NSE, the country's largest equities and derivatives trading platform, which had started trading in the currency derivatives sector only a few months before.
In November 2009 MCX-SX accused NSE of using its dominant position to prevent competition in the currency derivatives market by not charging any transaction fee for traders in that sector. According to MCX-SX, this amounted to predatory pricing. MCX-SX claimed that such policy was aimed at ousting it from the market, as it could not afford to give similar free services to its traders. It alleged that NSE was cross-subsidising its costs of running the currency derivatives sector from its monopoly profits from other sectors in which it was already a market leader.
After two years of investigation, the commission found NSE guilty of, among other things, abuse of dominant position as a result of indulging in predatory pricing to eliminate competition. The decision was split between a majority and a minority order by a ratio of five votes to two.
The commission had first considered the relevant market in which NSE's dominance should be determined. NSE claimed that the relevant market was currency derivatives and the over-the-counter market. In contrast, MCX-SX claimed that the relevant market was the entire stock exchange market (including equity and derivatives), relying on the determination of the relevant market by the director general.
After a detailed inquiry, the commission preferred a narrower definition, limited to 'stock exchange services in respect of currency derivatives', to which even the dissenting members concurred. However, having partly agreed with the NSE contention on the relevant market, the majority order of the commission found NSE to still be dominant in the said market, not on the basis of market share (interestingly, between the time of filing the complaint and the decision, MCX-SX's market share had already exceeded that of NSE), but on the basis of consideration of other factors mentioned in Section 19(4) of the Competition Act 2002 (eg, the economic strength, resources, size and vertical integration of NSE). Therefore, the commission held that NSE had abused its dominant position by indulging in predatory pricing.
Two members of the commission disagreed and held that once the relevant market had been determined, NSE could not be deemed dominant in such market. They argued that "zero pricing [had] in no way deterred entry or continued operations" and that NSE could therefore not be held guilty of indulging in predatory pricing to eliminate competition. The dissenting members argued that such zero pricing was in the form of introductory pricing for the newly-launched segment. They further held that despite such pricing, MCX-SX's holding had since grown from a 0% market share to a market share of over 60%, leaving NSE in second place. In addition, a new player (the United Stock Exchange) had entered the market in September 2010, further reducing NSE's position.
Implementing the judgment of the commission, NSE has started charging for all currency derivative trades with effect from August 22 2011. However, NSE has also challenged the order by filing an appeal before the Competition Appellate Tribunal. In its appeal, NSE has asserted that "the act did not envisage 'low price', which is not predatory, as an abuse of dominance". NSE has further reportedly told the tribunal that the order from the commission was "antithetical" or contradictory to the principal purpose of the act, which is to protect and promote consumer welfare.
The order has already initiated a debate among experts in India on the correctness of the view of the majority of the commission in comparison with that of the dissenting members. The order articulates the commission's analysis of core competition issues (eg, determination of relevant market, dominant position and abusive conduct, including predatory pricing and cross-subsidisation). The penalty was preceded by the submission of forceful economic analysis from both sides, in the form of reports by a number of different economic consulting firms, as well as the written opinion of a noted competition law expert from the United Kingdom.
For further information on this topic please contact MM Sharma or Vinay Vaish at Vaish Associates by telephone (+91 11 4929 2525), fax (+91 11 2332 0484) or email (firstname.lastname@example.org or email@example.com).
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