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NSE failed but did CCI pass?

Published on Sat, Jul 02,2011 | 11:43, Updated at Sat, Jul 02 at 16:09Source : Moneycontrol.com |   Watch Video :

A battle involving the country's largest stock exchange, complex competition concepts, a dissenting judgment and a Rs 55.5 crore penalty - it has everything a landmark order can have. Last week, in the MCX-SX Vs. NSE case, the CCI held that NSE has abused its dominant position in the currency derivates segment to oust competitors. The order articulates CCI's analysis of core competition concepts - relevant market, dominance, predatory pricing and appropriate penalty.

CNBC-TV18's Payaswini Upadhyay gets experts to examine if the CCI lived up to the tenets of competition law in its first landmark judgment.

In 2008, MCX launched a stock exchange with permission to operate only in the currency derivatives segment. The only other player in that segment at the time was the National Stock Exchange – the country’s largest equities and derivatives trading platform. A year later, in November 2009, MCX-SX accused NSE of using its dominant position to prevent competition in the currency derivatives market. After two years of investigation, the Competition Commission of India has found NSE guilty. But that’s the majority order; a minority of two dissented.

To arrive at this order, the CCI first looks at what the relevant market is to determine NSE’s dominance. NSE claimed the relevant market is currency derivatives and the OTC market. MCX-SX claimed the relevant market was the entire stock exchange market including equity and derivatives. A definition that CCI’s Director General of Investigations agreed with. But the majority order prefers a narrower definition limited to ‘stock exchange services in respect of currency derivatives’. The dissent order concurs.

Rahul Singh
Senior Associate, Trilegal
“Interestingly, I do not agree with either the majority or the minority because, I believe, in a case of such significance, CCI should have adopted more rigorous analysis. For instance while finding out what is the relevant market in this case, they have not really lived up to a rigorous standard. They have said that they are not going to apply the SNIPP test in the India context. SNIP test is small but significant non-transitory increase in prices. It’s a test used by other jurisdictions like the US and the EU. To my mind, the Indian enactment also has a similar sort of test which is embedded in the law. However, CCI has said that they are going to depart from it. I would have expected a more compelling justification from Competition Commission.”

Ted Henneberry
Partner-Antitrust and Competition, Orrick
Former Senior Competition Enforcement Official, EU
“I would disagree with their conclusion that it only applies in the merger context. Most other jurisdictions look at the SNIP test as a particular methodology to determine market definition. Having said that, I think, they took a very pragmatic approach and did look at the kind of evidence that should be taken into account in any event under a SNIP approach."

Amitabh Kumar
Senior Advisor, JSA
Former DG, Competition Commission of India
I think the market definition arrived or done by the DG** is probably the one I would lean on heavily because the DG looks into the two major elements that should go into market definition i.e. the competitive constraints being provided and the demand side substitutability. Stock market provides competitive constraint to another stock market and demand side can be explained by a customer going into the stock exchange and looking at all the segments – all the derivatives available- and may be placing an order for all or even some of them."

Bernard Nigro Jr.
Partner- Antitrust and Competition, Fried Frank
“It’s not clear to me why those other markets should be considered in evaluating the issues that were presented in the more narrow currency derivative market.”

Having established the relevant market, CCI then examined dominance.  MCX SX alleged that NSE enjoyed a super dominant position and a virtual monopoly in the relevant market for stock exchange services in India. The majority order does find dominance based on NSE’s dominant position in other segments like equity, futures and options, its early start in the business, its reserves and surpluses. The minority disagrees – pointing out that in the period under scrutiny NSE was the number 3 player by market share in the currency derivative segment – behind USE and MCX SX.

Rahul Singh
Senior Associate, Trilegal
“Majority order cites the kind of revenue NSE has. It also cites the figures for the USE as well as the MCX. Minority should have dealt with this argument head on and said these are the different revenue numbers but however this is how it actually operates in the market and therefore they are not dominant.”

Amitabh Kumar
Senior Advisor, JSA
Former DG, Competition Commission of India
“I may not agree completely with their market definition but at least the way they have approached establishing the dominance in the relevant market seems to be fairly alright to me.”

GR Bhatia
Former Additional Director General, CCI
Partner, Luthra & Luthra
“Dominance, per se, is not to be frowned upon. Dominance could be on account of several factors. For e.g – if you take any manufacturing sector or any other sector, it could be on account of innovation, it could be on account of superlative services provided by that service provider. So dominance, globally and also in Indian Competition Act, dominance is not bad. It’s only the abusive part, the conduct part which is objectionable.”

And the CCI’s majority order does find NSE’s conduct objectionable- most importantly the way the exchange has priced its services. MCX claimed that NSE has waived off the principal source of revenue in the currency derivatives segment i.e. transaction fee. There was no admission fee and membership deposits were unjustifiably low. And all this was done to price MCX out of the market. NSE claimed it ran the currency derivative segment without incurring any variable cost; hence no fee and the low membership deposits were to encourage larger participation in a nascent market. But CCI’s majority order finds NSE guilty of unfair, destructive pricing and holds that ‘zero’ pricing is undoubtedly below cost. The minority order says the players were competing on non-price parameters- pointing out that neither of the 3 charged fees and yet USE and MCX SX overtook NSE’s market share.

Rahul Singh
Senior Associate, Trilegal
“If you look at the majority order, they don’t even want to get into predatory pricing because if they would have got into predatory pricing, they would have to go into what is the notion of cost- should that be average variable cost, should that be average fixed cost, should it be marginal cost- and therefore in order to avoid dealing with rigorous analysis, what they say is, in this context, we are not looking at predatory pricing, we are looking at unfair pricing which is a larger set just then mere predatory pricing. And in think this is an exercise in avoidance which to me seems both the majority and minority agree in the exercise in avoidance by not dealing with the enactment in the rigorous manner that it is supposed to be dealt with.”

Bernard Nigro Jr.
Partner- Antitrust and Competition, Fried Frank
“I think there needs to be a strong nexus between the conduct in the relevant markets that’s of concern and any conduct that may be occurring outside that market. So if NSE was engaged in bundling the services that it offers or tying them together in some way- then it would be appropriate to look more broadly. But if the focus is just on the pricing and the discounting that was present in the CD market, those are things that benefits consumers and therefore the CCI should be careful not to discourage this kind of pro-competitive beneficial behavior.”

GR Bhatia
Former Additional Director General, CCI
Partner, Luthra & Luthra
“During the course of the proceedings, the Commission has not been able to find any direct evidence that there has been any association between one segment and the other. If there is not linkage between one segment of the market, so question of leveraging and attempting protect or enter into another segment because of dominant position- it’s not a correct assessment as I see it.”

Ted Henneberry
Partner-Antitrust and Competition, Orrick
Former Senior Competition Enforcement Official, EU
“The US would look to what extent it was being used to foreclose other competitors from the market. European Union would look probably much more towards actual use of it as opposed to its effects.”

In contrast to the majority position - the minority decision agrees with NSE's argument that cross subsidization cannot constitute an abuse of dominant position. 

Rahul Singh
Senior Associate, Trilegal
“If you look at minority judgment, once they had actually found a relevant market and once they did not find a dominant position, they should not have analyzed any abuse of dominant position. If you are not dominant, you cannot be abusing your dominant position. Similarly if you define the market clearly and in an appropriate manner, the question of leveraging will not arise.”

CCI’s majority order also notes exclusionary conduct displayed by NSE. It says NSE denied MCX SX software users the access interface code and put software developed by FTIL- the promoter of MCX- on its watch list, only in the currency derivative segment.

Amitabh Kumar
Senior Advisor, JSA
Former DG, Competition Commission of India
“The moment that access is denied, you’re excluding the customers of one particular exchange- which happens to be the informant here. Now just imagine, this would not make any difference to the customers if NSE were not a dominant player or it did not have significant market power because they could have simply avoided the particular software that they were using and used a software of the rival. But the very fact that they need to go to the software being used by NSE proves that NSE has significant market power and whatever they have done to exclude the customers of the rival is definitely an exclusionary conduct.”

On its part, NSE had claimed, it put FTIL’s software on watchlist because of client complaints. The dissent order noted that exclusion should be tested within the parameters of relevant market of the software and since that market was not defined, any finding on exclusionary conduct would be incorrect in law.

So is if it comes down to exclusionary conduct vs. business strategy, which line should enterprises toe? 

Ted Henneberry
Partner-Antitrust and Competition, Orrick
Former Senior Competition Enforcement Official, EU
“With respect to exclusionary conduct, as expressed in your question, is one that would be in line with US jurisprudence i.e. companies should be allowed to develop their business in their own way, to grow it and to reap the benefits from that. However, under the European model which I believe is the Indian one, if you have a position of dominance in a market, then you must be very careful with some of your conduct to the extent that it may exclude other from being able to participate in adjacent markets. So there is a tension there.”

At the end of a 170 page order, the CCI finds NSE guilty of abuse of dominant position and orders it to take corrective action. The Commission has also levied a penalty of

Rs 55.5 crores on the stock exchange

Rahul Singh
Senior Associate, Trilegal
“My problem with the judgment is that at the first stage, they have not been able to find clear infraction of Competition Act. And so the question of penalty is something which should not arise at all.”

Amitabh Kumar
Senior Advisor, JSA
Former DG, Competition Commission of India
“I don’t think one can comment on the quantum of penalty in the absence of any penalty guidelines, which I am sure in the times to come, the CCI, like other mature jurisdictions, will come out with clear cut guidelines on how penalties would be calculated.”

Bernard Nigro Jr.
Partner- Antitrust and Competition, Fried Frank
“In the US, the typical remedy for abuse of dominance cases is injunctive relief and by that I mean relief that prohibits the defendant from continuing to engage in certain conduct. Penalties, particularly large penalties, do present a risk of chilling companies from possibly competing aggressively and so the size of the penalty needs to be looked at very carefully.”

This order, the dissent and the penalty will offer several companies guidance on the Commission’s approach to key competition concepts. And landmark though it may be, it marks only the first round in this battle. This case will most likely be appealed in the Competition Appellate Tribunal and thereafter the Apex court – each judgment setting precedents of its own. The competition over competition law has only just begun.

In Mumbai Payaswini Upadhyay.

 
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