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COMPAT: NSE Guilty Of Abuse Of Dominance!

Published on Mon, Aug 11,2014 | 01:22, Updated at Mon, Aug 11 at 01:30Source : CNBC-TV18 |   Watch Video :

This week the Competition Appellate Tribunal or COMPAT upheld CCI’s 2011 order that had found the National Stock Exchange guilty of abuse of dominance. While the Tribunal agreed with CCI’s conclusion, it differed on how CCI got there. Will this order change the way dominant entities look at pricing and has the Tribunal decision imposed a new burden on company boards regarding pricing policies? Payaswini Upadhyay gets you the story

3 years ago, the Competition Commission of India found NSE guilty of abusing its dominant position in the currency derivatives segment. This week COMPAT also ruled guilty but on a slightly differing rationale.

CCI had held the relevant market as the currency derivatives market. COMPAT held that the relevant market should be services offered by NSE independent of the product being traded because a stock exchange does not sell a product. Here the Tribunal relied upon the delineation of the relevant market in the Director General’s report.

NSE’s argument that the relevant market should be currency derivatives and the OTC market was also struck down. To support its argument, NSE had pointed to several global mergers in the Exchange space where the Competition regulators had held different product markets as distinct. The Tribunal concluded that those were cases of merger; quite different from an abuse of dominance case. In doing so, COMPAT widened the relevant market definition to stock exchange services.

Suhail Nathani
Partner, ELP
“These observations were made by the COMPAT on the facts of this case. It cannot be read as brightline test. Two, how will this pan out? It is obvious that a monopoly or abuse of dominance case will never come up at the same time as a merger control case. SO you will always define the , market based on the case before you. So there will be small nuances that will be different in a merger analysis because remember in a merger, you’re looking at the market post the merger but in a abuse of dominance case, you’re looking at the market on the day of the behavior of the monopolist. So there will be nuances which will pan out differently but I don’t think it can be read as a brightline test.”

The Tribunal may have disagreed with the CCI on the relevant market definition but it agreed with the regulator’s conclusion that NSE was a dominant entity. The Tribunal went to say that NSE remained a dominant entity in the currency derivatives segment with short periods of fluctuations in its market share.

Manas Chaudhuri
Partner, Khaitan & Co
“It an undisputed fact from the judgment that the market share of the parties has fluctuated between 2008-2010. And in fact, the market share of MCX-SX at one time was much higher than of NSE in the CD segment. So can we really conclude that NSE was dominant in the CD segment? So if NSE was not dominant in the relevant market of CD segment, can we really conclude that NSE was dominant in the first place? There are 3 filters to determine abuse of dominance- first it has to be a dominant enterprise, then it has to be dominant in the relevant market and then the third question is of abuse. In my view, the first two filters appear controversial- whether NSE was dominant in the CD segment- and so the abuse in the relevant market may not arise at all.”

Suhail Nathani
Partner, ELP
The question that begs consideration over here is that MCX-SX actually captured market share very rapidly and was able to withstand a lot of pressure because they had deep pockets of their own, Now may be on the facts of this case, the conclusion would be the same but should it have been considered in terms of the analysis and jurisprudence, to my mind certainly. The power of the competitors in the market is an essential factor that needs to be considered.

COMPAT then went on to examine abuse of dominance by NSE. CCI had concluded abuse by NSE on 4 grounds- One, predatory pricing i.e. unfair, destructive pricing in the currency derivatives segment; two, past conduct of reducing prices in the F&O segment to oust competition; three, ability to leverage from other businesses through fee waivers, denial of access interface code and distribution of software for free and four, exclusionary conduct of denying access interface code to its competitor.

Out of these four, the Tribunal focused on NSE’s zero price policy for transactions in the currency derivatives segment. It pointed out that NSE intended to oust competition by continuing with zero price policy, waivers of admission and deposit fee. The Tribunal also noted the absence of any justification of such pricing in the minutes of NSE’s Pricing Committee meetings.

Amitabh Kumar
Partner, JSA
“If I remember correctly, this is the second case where it has been expressed very clearly that what is doable by a non-dominant players will not be acceptable in the case of a dominant player. Once you know that you have a very high market share and I do not expect that the management of every enterprise would get into a competition assessment by itself even before a case has been brought before the Commission to determine whether it is dominant but a rule of thumb would be if you have a very high market share that has been sustained over a couple of years, then you are more likely to be called a dominant player and once you figure you are, you need to be a lot more careful in what your market conduct is going to be especially in terms of price or in term sof output or both.”
Suhail Nathani
Partner, ELP
“The COMPAT has read a duty and has used the words that they are perplexed, the price should have been considered, the minutes should have been recorded- now this is a code of conduct for director’s duties emanating from the COMPAT. There is larger problem to this. If you read the yet to be notified Section 245(1)(e) of the Companies Act which pertains to class action suits, there is a direct onus on the directors and management of the company to be in compliance with law. Arguably, this order seems to suggest that the practices of the Committee were not in compliance with the law. So does that open the Committee up to a class action suit as well? Here’s a judicial body actually making a finding of fact that the Committee acted in a manner that it should not have acted under the law.

COMPAT has also upheld the 55 crore rupee penalty CCI had imposed on NSE. But now it seems, that might not be all that NSE has to pay in the event of losing this case at the Supreme Court. Sources tell us that MCX-SX is contemplating a compensation claim before COMPAT. Will the Tribunal be willing to hear the compensation claim parallel to Supreme Court proceedings? The fate of NSE and perhaps what’s expected of Boards of dominant entities will soon play out in the apex court.

In Mumbai, Payaswini Upadhyay


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