compat order vs nse for mcx
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COMPETITION APPELLATE TRIBUNAL
Appeal No. 15 of 2011 withIA NoS. 25/2011, 26/2011, 27/2011, 10/2012,27/2012
[Under Section 53B of the Competition Act, 2002 against the order dated 23.6.2011
passed by the Competition Commission of India in case no. 13/2009]
CORAM
Honble Justice V.S. Sirpurkar
Chairman
Honble Shri Rahul Sarin
Member
In the matter of:
The National Stock Exchange of India Ltd.Through its DirectorExchange Plaze, Plot C-1, G-Block,Bandra Kurla Complex, Bandra (East),Mumbai 400 051. Appellant
Vs.
1. Competition Commission of India,
Through its Secretary,
Hindustan Times House,
18-20, Kasturba Gandhi Marg,
New Delhi 110 001. Respondent No. 1
2. MCX Stock Exchange Limited
Through its Director,
Exchange Square, Suren Road,
Andheri (E), Mumbai 400 093. Respondent No. 2
Appearances: Shri Amit Sibal, Sr. Advocate with Shri Naval Satarawala
Chopra, Shri Prateek Bhattacharya and Shri Aman Singh Sethi,
Advocates for Appellant
Shri A. N. Haksar, Sr. Advocate with Shri Anand S. Pathak, Shri
Udayan Jain, Shri Abhijeet Sinha, Ms. Chitra Parande and Shri
Akshay Nanda, Advocates for R-2Shri Balbir Singh, Advocate with Shri Abhishek Singh Baghel,
Ms. Monica Benjamin, Advocates with Ms. Shabistan Aquil,
DD(Law) for CCI
ORDER
PER MR. JUSTICE V.S. SIRPURKAR, CHAIRMAN
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Section 19(1)(a) of the Act was also against the Omnesys Technologies
Pvt. Ltd. (OMNESYS). It was urged that MCX-SX and NSE were
providing currency futures exchange services. It was pointed out that
NSE through its circular dated 26.8.2008 announced a transaction fee
waiver in respect of all currency future trade (Currency Derivatives)
executed on its platform and then it continued to extend its waiver
programme from time to time and even on that date when Section 4 of
the Act came on the anvil on 20.5.2009. Further information was
provided that due to this transaction fee waiver by the NSE, MCX-SX
which was the only other player in the field in respect of currency
derivatives had also to waive transaction fee on its platform for CD
Segment from the date of its entry into the stock exchange business and
which was somewhere in the month of October, 2009 and thus MCX-SX
was suffering huge losses as it had no income through its CD Segment
and the MCX SX had the license only for dealing in the CD Segment. This
CD Segment seems to have been introduced by the recommendations of
RBI and SEBI in August, 2008 the date from which the NSE started its
operation in CD Segment. It must be noted that the MCX-SX got the
license for operating only in the CD segment. It did not have the license
to operate in any other segments like Stocks Future and Options (F&O),
W.D.M. etc. It was pointed out in the information that NSE was charging
no admission fee for membership in the CD Segment though it was so
charging in the equity, F&O and debt segments. It also did not collect
the annual subscription charges and an advance minimum transaction
charges only in respect of CD Segment. It was urged that the cash
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deposits to be maintained by a member in the CD segments were also
kept at a very low level as compared to the other segments.
4. It was further urged that NSE was not charging any fee for
providing the data feed only in respect of CD segment ever since its
commencement the segment on 26.8.2008 and continued not to charge
any fees in respect of the CD Segment. It was, therefore, urged that
MCX-SX was unable to charge anything on account of the transaction
fees, admission fees for membership, annual subscription charges,
advance minimum transaction charges and also fee for providing data fee
and thus it had no income from the CD segment whatsoever and further
CD segment was only segment in which the MCX SX was given.
5. A complaint was also made in respect of OMNESYS which was a
software provider for financial and security market in which the NSE had
taken 26% stake through DotEx, which is a 100% subsidiary of NSE. It
was urged that the DotEx/OMNESYS had introduced a new software
known as "NOW" to substitute a software called "ODIN" developed by
Financial Technologies India Ltd. (FTIL), which was the promoter of the
MCX-SX and the market leader in the brokerage solution sector.
6. It was further urged that after taking stake in OMNESYS, DotEx
which was 100% subsidiary of NSE had written individually to the NSE
members offering them the technology of "NOW" free of cost for the next
year. Simultaneously, NSE had refused to share its CD Segment
Application Programme Interface Code (APIC) with FTIL and thus
disabling the ODIN users from connecting to the NSE CD segment trading
platform through their preferred mode. The product was thus thrust upon
the consumers desirous of the NSE CD Segment, was the product "NOW"
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developed by DotEx and OMNESYS, in place of ODIN. It was urged that
NSE was using "NOW" on a separate computer terminal for accessing its
CD Segment. It was further urged that the main advantage of the ODIN
software was that a trader could view multiple markets using same
terminal and take appropriate calls. The shifting between different
terminals (NOW and ODIN) severely hampered the traders ability to do
so, thus the expected response from a common trader was to confine to
one terminal which connected to the dominant player only i.e. to use the
"NOW" terminal (free of cost) and confine itself to the NSE CD Segment.
It was therefore urged that on this count also the NSE had abused its
dominance and so had OMNESYS.
7. It was further urged that the losses suffered by informant in the CD
Segment were much higher than the loss suffered by the NSE (due to the
waiver of the transaction fees and other fees) as the NSE enjoyed the
economies of scale and has the ability to cross-finance the losses from
the profits made in other segments wherein it was dealing and thus it
has the financial strength to fund its predatory practices based on
massive reserves built through accumulation of monopoly profits over the
years. In contrast, MCX-SX was dependent solely on the revenues from
the CD Segment and its losses were mounting in view of its transaction
fee waiver, the continuation of which was compelled by the NSE's
decision to continue with the total fee waiver.
8. It was also urged that NSE's fee waiver would not only eliminate
the business of the MCX-SX in CD segment but also eliminate the
potential and efficient competitors from the entire stock exchange
services. It was urged that the policy of fee waiver was adopted by NSE
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as an exclusionary device to kill competition and competitors, and to
eliminate MCX-SX from the market as a supplier of stock exchange
services (CD Segment) and thus NSE had, therefore, used its dominant
position in the relevant market to eliminate competition and competitors.
It was also urged that NSE along with DotEx and OMNESYS had violated
provisions of Section 4of 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 MCX-SX.
9. It was further urged that the various fee waivers and the low level
of deposit requirements only with respect to the CD segment of NSE were
completely at a variance with its conduct in other segments and were
aimed at eliminating competition and discouraging potential entrants and
amounted to the tactics for excluding the other competitors from entering
into the field. On this basis number of reliefs were prayed :
(a) To investigate infringement of Section 4of the Act byNSE;
(b) To direct the NSE to discontinue transaction fee, data-feed fee and the admission fee waivers in respect of theCD segment and to impose transaction fees, data-feedfee and admission fee in the said segment equal to thatin the other segments of NSE;
(c) To order NSE to require its members to maintaindeposits for the CD segment at a level that is consistentwith the levels of other segments;
(d) To grant an injunction restraining the NSE from
continuing the transaction fee, data-feed and admissionfee in respect of the CD segment in line with those inother segments; and (iii) mandate NSE to collectdeposits from members at a level on par with those inits other segments, pending final disposal of thecomplaint;
(e) To order NSE to pay all of the complainant' costs andimpose the highest level of penalties on the NSE inaccordance with the Act, so as to have deterrent effectand ensure free and fair competition in the relevantmarket; and
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(f) To pass such other order as the Commission may deemfit to ensure free and fair competition in stock exchangeservices market.
10. On this basis the CCI entertained this information and took a prima
facie view that this information deserves to be investigated by the
Director General (D.G.for short) and ordered accordingly.
11. MCX-SX had also filed an application dated 6.7.2010 for interim relief
under Section 33, According to which it was complained that if NSE
continued to offer its services in the CD segment free of cost despite a
significant increase in the turn over, the MCX-XS couldsuffer combined
loss of around Rs. 100 crores. It was urged that since the CCI
had already formed a prima-facieopinion in this matter and had sent the
matter for investigation to the Director General, MCX-XS would be
required to exit the market. The CCI, however, refused to pass any order
under Section 33 particularly in view of the fact that the investigation by
the D.G. ordered by it, was near completion.
We need not go on that issue whether the CCI was right in refusing
the interim relief.
We also need not consider the question about the APIC and the
alleged tactics played by DotEx and OMNESYS in respect of ODIN and
NOW for the reasons which we would elaborate at the end of this
judgment. The parties also did not address us on that issue for the
obvious reasons that that question was already closed between the parties
by a compromise affected before the Bombay High Court.
12. The matter was investigated by the DG which investigation included
examination of the financial statement of NSE, details of fees and charges,
and other costs incurred in different segments.
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13. In addition, the D.G. also studied several reports of regulators and
circulars of Expert Committee as also regulations/circulars issued by SEBI
to understand the mechanics of various charges imposed by the stock
exchange services.
14. The D.G. while considering the relevant market came to the
conclusion that the stock exchange business as a whole constituted the
relevant market. He took this view as according to him the product
differentiation was not of much practical consequence and the demands -
supply structure was similar across all the segments and there was
obvious co-relation between the segments which were limited in number.
It was also noted by him that from the demand side, majority of the
stock brokers are the members of all the segments and the users were
also almost common. He deduced that each product was used with a
common objective of profiteering of investment and trading.
16. This view was obviously opposed by the NSE according to which the
stock exchange services could not be a relevant market in this case. It
argued before the D.G. that each segment of the capital market and the
debt market is a distinct market by itself as there were separate trades at
stock exchange in respect of different segments. It was argued by the
NSE before the DG that the CD market was of recent origin and could not
be said to be interchangeable or substitutable from the demand side.
Further, it pointed out that the CD segment was essentially for the
importers and exporters who desired to hedge the currency fluctuation
risk which was not in case of equities/debts/F&O segments. Without
prejudice to this contention, NSE further argued that if at all there was
the question of interchangeability or substitutability arose the CD market
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could be seen as a substitute of OTC segments. Thus according to the
NSE the CD market and the OTC market was the relevant market. This
position was taken by the NSE also before us also. The DG, however,
held the related market to be the stock exchange business as a whole.
In that he considered the following five segments to arrive at a relevant
product. They were :-
(i) Equity segment
(ii) Equity F&O segment(iii) Debt segment(iv) CD segment; and(v) OTC market for trades in foreign currency.
The D.G. noted the provisions of the Securities Contracts (Regulation)
Act, 1956 (SCRA) and after the issue of regulatory framework, both
Bombay Stock Exchange and NSE could commence the trading in CD
segment immediately, which fact indicated that CD segment was a part of
the stock exchange market services. According to the DG report, since
any exchange could easily start operations in any of the segments of
capital market, there was supply side substitutability between the
segments. Therefore, according to the DG report, the entire stock
exchange market service was a single relevant product.
17. The D.G. also came to the conclusion that it was not possible to
ascertain substitutability between CD and the other segments of stock
exchange services. The D.G. relied on 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. Hence he held that in all these judgments, the courts have
relied on the requirement of interchangeability in contrast with
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substitutability. It was also noted that the courts had placed greater
reliance on the characteristics of the product for the purpose of satisfying
constant needs.
18. He concluded that from the very definition of futures contract, it
was clear that the basic characteristics of the product were similar to the
equity futures contract and therefore CD and equity derivative segments
had common characteristics. He held that "equity segment including
equity F&O and CD segment which mainly comprise the stock exchange
services market are substitutable on the product characteristics basis."
He also observed that F&O market and CD market are used by similar
type of participant, namely speculators and hedgers. He, however, came
to the conclusion that this could not be said about the OTC market for
which he firstly relied on the provisions of SCRA, RBI Internal Working
Group Report, RBI - SEBI report on CD Market, FEMA etc. He thus
concluded on the similarity of operations of stock exchange services in
relation to different segments traded in exchanges, that they were
substitutable.
19. He also took into account the membership patterns of MCX-SX and
NSE and found a very high commonality of members at NSE as well as
MCX-SX with the membership of other segments. According to him, this
clearly established that the existing members of other segments were
primary traders in the CD segment, which further implied that actual
hedgers of foreign exchange did not see substitutability or
interchangeability in the CD market as against the OTC market.
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24. While considering the size and resources of the enterprise also on the
basis of the statistics available, the DG came to the conclusion that NSE
had total income of Rs. 1042 crores with profit before tax of Rs. 689 crores
which indicated a sound financial position of the NSE. While considering
the third factor of size and importance of the competitors, the D.G.
concluded that in comparison with NSE which had commenced the trading
in November, 1994 the remaining 19 original exchanges started collapsing
due to intense competition from NSE. This included even the BSE which
was one sound player found that though MCX-SX entered the arena only
on 14.8.2008, it ended the first year with the carry forward loss of Rs.
298.7 million. The D.G. also took into consideration the economic power of
the enterprise and found that there also NSE had presence in 1486 cities
and towns and majority of investors, brokers etc. were connected with NSE
with its extensive infrastructure and also found that unlike MCX-SX, NSE
could raise equity and debts to funds its requirements. On this count also
the D.G. considered NSE as a dominant player.
25. On the next count of vertical integration of enterprises or sale or
services net work of such enterprises, the D.G. clearly held that the NSE
came clearly as a leader.
26. So also on the other factor of dependence on consumers the D.G.
held that the there was a far greater number of buyers and sellers to NSE
and it enjoyed the benefits of network effects resulting from higher
liquidity and lower transaction costs and thus it emerged as a leader. On
the last two aspects on the countervailing buying power it was held that
the users of the stock exchange services were individually too small to
countervail buying power.
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27. On entry barriers, it was noted by the D.G. that stock exchange
services was an area of high regulatory barriers. He also considered the
high capital cost of entry, financial risk, marketing and technical entry
barriers further strengthens the already dominant position of NSE. Thus
the D.G. concluded that the NSE was a dominant player in the market.
28. On the question of abuse of dominant position, the D.G. examined
the abusive behavior on account of four factors :-
A. Transaction fee waiver;B. Admission fee and deposit level waivers;C. Data feed fee waiver; andD. Exclusionary denial of "integrated market watch" facility.
29. The D.G. noted on the first aspect of transaction fee waiver that the
NSE had issued a Circular No. NSE/CD/11188 dated 26.08.2008 whereby it
announced transaction fee waiver in respect of currency futures trades
executed on its platform. It thereafter issued three circulars (1) on
26.09.2008, which was to be valid upto 30.09.2008; (2) a circular dated
28.11.2008, valid upto 31.03.2009; and (3) a circular dated 30.03.2009,
which was to be valid upto 30.06.2009. It is obvious that out of these four
circulars, three related to the pre 20.05.2009 period. Considering that
section 4 was activated w.e.f. 20.05.2009, it is the last circular dated
30.03.2009, which would be a relevant circular, as it covers the date
20.05.2009. Thereafter, no circulars came to be issued right till the date
when the impugned order of CCI was passed. Thus, right w.e.f.
20.05.2009 the NSE continued not to charge any fees in respect of the CD
segment.
30. The D.G. has referred to the defence of NSE that the waiver was
done to encourage larger participation as the CD segment was at a nascent
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stage. According to the NSE, this policy was influenced by report of the
High Powered Study Group on Establishment of New Stock Exchanges. It
was also stated that the Pricing Committee was constituted by the Board of
NSE to guide and decide all pricing matters and the waiver of transactions
fee was the decision of that Pricing Committee. (We shall have the
occasion to refer to the decisions of this Pricing Committee in the
subsequent part of this judgment)
31. The D.G. then examined the transaction charges levied by NSE in
other segments and noted that turnover of NSE was Rs. 1078 crores in
comparison to the BSE turnover of Rs. 2.52 crores. The D.G. noted that
NSE did not have the historical philosophy of waiving fee to develop a
nascent market for which he based his findings on the transaction fees
levied on WDM segment and the other segments. The D.G. also gave
additional reasons to refute the theory of NSE of nascent market. The D.G.
found that in Gold ETF segment the transaction charges were levied from
March 2007 till August 2009, when it was the only exchange trading in
Gold ETF segment. However, it was only after February, 2010 that NSE
waived/ reduced transaction fee in Gold ETF segment. From this the D.G.
came to the conclusion, after noting the entry of BSE into Gold ETF market,
that the NSE introduced waivers/ reductions in this sub segment from
March, 2010 with the obvious view of maintaining its superiority in the
market. After examining various board minutes and agenda items of NSE,
the D.G. concluded that Pricing Committee never went into the factors
such as cost of infrastructure, man-power, and risk containment measures
etc. while deciding upon the fee structure or waivers.
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(We must here itself note that the Pricing Committee which was deciding
upon the policy of pricing for the CD segment does not seem to have taken
into consideration the advent of the Act. In fact, after 30th
of March, 2009
when it had issued the last circular, when section 4 was promulgated on
20thMay, 2009, it was expected to take into account the effect of the zero
pricing, particularly because it was then not the only player in the market
and the only other player in the market was the MCS-SX, which had no
other business to do excepting the CD segment. Very strangely the Pricing
Committee does not seem to have taken this into consideration).
32. The D.G. also examined the pattern of the fees charged by way of
admission fee and deposit level waivers. It is already noted that for CD
segment there was no admission fee or deposit level waivers or
requirement of making any deposit. The D.G. noted that the NSE was
charging this admission fee for all other segments. As regards the deposit
level waivers, the D.G. noted the arguments by NSE that the requirement
of deposit levels was made keeping in line the nature of the segment in
terms of the risk associated and the other factors. The D.G. noted that
earlier deposit required for CD segment could not be said to be
unjustifiably low. It was found by the D.G. and observed that NSE had
reduced deposit structure w.e.f 28.11.2008, which was of necessity
followed by MCS-SX from January 13, 2009. Thus, it was in this sector also
that the NSE had initiated the lowering down of the deposit levels.
33. As regards data feed fee waiver, the D.G. noted that this was waived
right from the beginning. Consequently, MCX-SX was also not in a position
to charge the fee. The D.G. noted that the same reasons were forwarded
by the NSE in respect of this waiver also. The NSE had tried to justify that
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its subsidiary DotEx was providing data feed service in various forms and
was not charging any fee for the CD segment and therefore NSE did not
charge its clients. The D.G. noted that in respect of other segments, the
NSE was charging a substantial fee for data feed. On this backdrop, the
D.G. concluded that DotEx had waived the fee with the purpose of
capturing the market. It was noted by the D.G. that the DotEx was 100%
subsidiary of NSE. The D.G. also noted that the waiver of data feed was
not discussed during any of the board meetings over the initial 16 months
from the date of commencement of trading in CD segment and it was first
time discussed only later on.
34. The D.G. went on to analyze the predatory pricing by NSE. In this
the D.G. took into consideration the definition of predatory pricing and the
2009 Regulations for determination of cost production, which can be
referred to as cost regulations. After considering the implication of
various terms like costs in Regulation 3(1), the DG took stock of the
argument by the NSE that it was not incurring any variable cost for
running the CD segment and therefore, the zero pricing could not amount
to predatory pricing within the meaning of section 4 of the Act. The D.G.
asked a very relevant question, that being, if NSE was not having any other
segment to support income, could it survive with this zero pricing policy in
respect of the CD segment and noted that answer would be obviously in
the negative. The D.G. also considered the argument from the NSE that
this policy was in the nature of introductory or penetration pricing, which
has no objective of ousting or reducing the competition. The D.G.
however, observed that even in the introductory/ penetration pricing, there
had to be an element of pricing. The NSE argued before the D.G. that the
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variable cost under the circumstances was zero and since this cost was
zero (approximately) therefore, no pricing policy, could not be said to be a
predatory pricing policy. The D.G. observed that the NSE could run
operations in the CD segment only due to substantial fixed cost, which it
has already incurred for all the segments. If the pricing of any segment is
to be linked only to the variable cost, NSE would have zero pricing for all
the segments, because none of them would have any variable costs. The
D.G. held that the investigation had already established that this claim of
NSE was not substantiated by the facts. The D.G. had also referred to the
report of the RBI SEBI. The DG also took into account the statement of
Director (Finance and Legal) that additional expenditure was incurred for
machinery, manpower, IT support, disaster recovery etc. in respect of the
CD segment system. It was also admitted that surveillance system for the
CD segment was also set up. It was also admitted that there were many
dedicated employees for the CD segment and NSE paid substantial amount
to these employees and therefore, the D.G. came to the conclusion that
the contention of NSE that none of these costs constitute variable costs
could not be accepted. Various views taken by the international
jurisdictions were considered by the D.G. including the US Department of
Justice, DG Competition of European Union etc. Various other discussion
papers on EC Exclusionary Abuses were also taken into consideration. All
the concepts like average variable costs, AAC, long run average
incremental cost were taken into consideration by the D.G. The D.G. relied
on the following observation of the European Commission :-
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If the price 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.
The D.G. then went on to hold that there was a strong justification for
following ATC or at least AIC in the instant case for determining predatory
pricing in the relevant market of stock exchange.
35. Undoubtedly, the NSE had been asked about the details of allocation
of all fixed and variable costs for the CD segment for the last two years.
However, very significantly NSE submitted that it did not prepare accounts
in which separate profit and loss account statements are provided for
either the CD segment or any other segments. The NSE tried to justify this
stand by saying that there were difficulties in allocating common costs
across a multiple products firm. However, the D.G. examined certain
trends in the balance sheets and provided a profit and loss accounts of
NSE. From the investigation, it was pointed out that there was a quantum
increase in fixed assets in general and IT hardware/ software, since the CD
segments started in particular after financial year 2007-08. Previous to
that, the increase in the fixed assets was only Rs.31.472 crores, however,
there was an increase of Rs.133.671 crores. During 2008-09 a further
increase was of Rs.93.475 crores and further in the following year it was
Rs.90.1 crores. In respect of refusal by the NSE to provide segmented
costs, the DG considered the details of overall capital costs, expenses,
segment-wise long run incremental cost (LAIC) and established the effect
on the costs subsequent to the start of CD segment. The D.G. observed
that the total cost for 2008-09 worked out to Rs.4.42 crores and 2009-10 it
came to Rs.31.07 crores. The D.G. distributed the total cost of NSE on a
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pro-rata basis for all the segments that the NSE was dealing with. The
D.G. also estimated the depreciation of Rs.5.63 crores during 2009-10.
The D.G. also noted that NSE had conducted several seminars, workshops
and road shows for promoting operations in CD segment including 1163
promotional activities in 103 locations across India, the expenditure of
which was not provided in the details of expenditure.
37. The D.G. also examined the pattern of clearing and settlement
charges incurred by NSE. These activities were executed by the NSE
through NSCCL, which is wholly-owned subsidiary of NSE. It was found
that for other segments like F&O and equity, the NSCCL was charging NSE
at 15% of the transaction charges in equity charges. The D.G. therefore,
held that transaction charges amounted to a variable cost linked to the
volume of transaction. The D.G. also observed that the NSE Board by a
resolution in June 2010 enhanced clearing of settlement charges in the
F&O segment, showing the clear strategy for loading the settlement
charges for the CD segment on to the F&O segment. After considering the
issue of notional clearing and settlement charges for the CD segment at
15% of transaction charge, the D.G. came to the conclusion that the
expenditure could be notionally Rs.13.74 crores, payable to the NSCCL for
the periods from August 2008 to April, 2010. The DG also came to the
conclusion that MCX-SX was operating only in the CD segment and its
operating expenses could be no different from the expenses of NSE. The
D.G. on this basis rejected the theory of NSE that it did not incur any
variable costs. The D.G. also relied on the judgment of Ontario Supreme
Court of Canada in Regina vs. Hoff Mann La Roche Ltd. On this basis, the
D.G. concluded that the waiver of transaction charges, data feed charges,
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admission fees and the reduction of deposit levels by NSE amounted to the
actions violating section 4(2)(a)(ii) of the Competition Act.
38. In addition to above, the D.G. held that NSE had used its dominant
position for leveraging and thereby it is guilty of contravention of section
4(2)(e) of the Act. For this purpose, the D.G. took into consideration the
share of NSE in F&O, the equity and WDM segment, which were 100%,
75% and 90% respectively. The D.G. held that NSE was using this profit,
which it earned to leverage this position in the CD segment, wherein MCX-
SX was competing with it and this it was doing by not charging transaction
fee, data feed fee etc. The D.G. seems to have relied on few cases like
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.
On these accounts, the D.G. found NSE guilty of contravention of section
4(2)(e) of the Act.
39. Ultimately the D.G. concluded that the acts on the part 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
indicated that such acts were done with intent to impede future market
access for potential competitors and to foreclose existing competition. The
D.G. also held that this anti-competitive conduct enhanced the harm as the
relevant market of the stock exchange services is a network effect of
market.
40. This report was forwarded to the CCI, which directed the service of
the report to the Opposite Parties No.1 and 2 for filing their reply/
objections. Some additional submissions were also made by the
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Informant, which were also forwarded to the Opposite Parties. Some other
applications filed by the Informant were also directed to be served to the
opposite parties.
41. The Opposite Parties No.1 and 2 filed their main reply along with
annexures. Thereafter several letters and submissions were filed on
various dates. The Informant also filed their preliminary submissions as
regards to the D.G. report. Further written submissions were also filed by
the Informant, while the Opposite Parties No.1 and 2 also filed additional
written submissions.
42. The Opposite Parties relied on the reports submitted by the Genesis
Economics Consulting Pvt. Ltd. (Genesis) and Prof. Richard Whish,
Professor of Law at Kings College. Similarly, the Informant relied on the
reports of their economic consultants, LECG Ltd.
43. The CCI has neatly and in great details noted the contentions raised
by the Opposite Parties No.1 and 2 as also the objections to D.G.s report.
So also it noted the legal and economic objections raised by Opposite
Parties No.1 and 2. It took into account its details and noted the same in
the impugned order. The CCI also noted the counter submissions of the
Informant on D.G.s report and the submissions of NSE on the D.G. report.
We need not deal with them as the further part of the judgment would be
devoted to consider those objections, which were not only raised before
the CCI, but before us also. Shortly stated on the basis of the rival
contentions, the CCI came to frame the following issues :-
(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?
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(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?
44. In its final judgment, however, there was a division of opinions. The
Chair-Person with three other learned Members has passed the final order
holding NSE guilty of the breach of section 4(2)(a)(ii) and 4(2)(e) and has
inflicted the penalty @ 5% of the average turnover of Rs.1110 crores
amounting to Rs.55.50 crores. On the other hand, the two learned
Members have written a separate order disagreeing with the conclusion
drawn in the majority order and have held that no violation of any of the
provisions of section 4 has been established against the NSE. Thereby, the
two learned members have completely exonerated the NSE. In addition to
inflicting of the penalties, the majority order has also issued certain
directions under section 27(a) as also under section 27(g). These
directions are :- (1) to cease and desist from unfair pricing, exclusionary
conduct and unfairly using its dominant position in other markets to protect
the relevant CD market; (2) to maintain separate accounts for each
segment with effect from 01.04.2012; (3) to modify its zero price policy in
the relevant market and to ensure that the appropriate transaction costs
are levied, which action was directed to be taken within 60 days; (4) The
NSE was 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 CD segment of NSE. This was directed to be done under
the overall supervision of SEBI, if necessary. For this NSE was also
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directed to ensure all cooperation from DotEx or Omnesys. Before we
proceed, we must put here that this fourth direction is of no consequence,
as there has been a compromise in this behalf before the Honble Bombay
High Court. The parties also did not address us in respect of this aspect.
45. Marathon arguments went on before us by the learned counsel who
appeared in this matter and possibly every view point was canvassed
vociferously before us. It is on these rival contentions that we now
proceed to decide the matter.
Relevant Market
46. According to the D.G. the geographical relevant market was India,
the product market was the services offered by the stock exchange.
There is no difficulty about the geographical market being of India, as both
the sides, as also the two deferring judgments by the CCI agreed on that
proposition. The question is about the product market. According to the
NSE, this market should be the market of currency futures as also the Over
The Counter (OTC) market. It is a common knowledge that the OTC
market is used by the hedgers, who want to cover their risk. The hedgers
include those who have to satisfy the claims in foreign currency
immediately or in future. Even the banks cover their risk by hedging on
the OTC market. Shri Sibal, arguing for the appellant very forcefully
submitted that in order to start a new segment of capital market in India,
namely exchange traded currency derivatives segment, a report was
brought into existence, which is RBI-SEBI Standing Technical Committee
Exchange Trade Currency Futures report (RBI-SEBI report) in 2008. Shri
Sibal very heavily relied on the following excerpt in this report :-
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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 Cooperation. 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.
Shri Sibal therefore, argued that since the exchange traded currency
futures and OTC, serve the same economic purpose, the relevant market
should be the market of the currency future along with OTC. The CCI in
both the judgments did not agree with this contention. In so far as the
OTC market is concerned, the CCI discussed it thoroughly. The CCI
pointed out that the CD market was futures derivative market where
underlying securities are the currencies. OTC market, however, includes
various products such as forwards, swaps and options for hedging the
currency risks. Functionally, the products may be considered as similar,
but according to CCI they are quite different in terms of characteristics as
well as participants. The CCI found that there was differentiation from the
OTC market in terms of settlement on maturity, settlement period, counter
party risk, size of market lot and participation, amongst other things. The
CCI also noted the major difference that the CD segment had maximum
maturity of 12 months, whereas OTC forwards could be for much longer
durations. While considering the participation, the CCI noted that the
equity and equity derivative segments or WDM segment were essentially
for investors or speculators who seek to gain from price movements of
equities. It noted, however, that the OTC segment was basically for
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importers and exporters having contractual exposures and who try to
hedge their risks emanating from fluctuations of exchange rates. The CCI
also noted that OTC products are not traded on exchanges and only
specified entities can participate in this market and since the CCI was
looking at a case where the Informant and the Opposite Parties are both
providing stock exchange services, a product that is not being traded,
cannot be said to be a part of any market the two are operating in. The
CCI also considered the SSNIP tests and found it to be unnecessary in the
circumstances. For this purpose, the CCI relied on the US Horizontal
Merger Guidelines 2010, which has held that the SSNIP test was solely a
methodological tool for performing hypothetical monopolist test for the
analysis of mergers. The CCI also referred to the Official Journal by
European Commission and came to the conclusion that the reliance on the
test was unnecessary. In that the CCI also referred to the small and
insignificant transaction fees and other fees. The CCI also refused to go
into the interchangeability or substitutability of the products. The CCI
therefore, rejected the plea that the OTC market should be included in the
relevant market.
47. Shri Sibal, the learned counsel appearing for the appellant, very
seriously urged that if the SSNIP test is to be considered as the applicable
test, then 5-10% increase in price for the service of CD is unlikely to drive
purchasers of CD contracts to purchase equity. However, in the very next
breath Shri Sibal urges that such a price increase could, however, drive
users of the CD segment to the OTC segment. Now these are the
contradictory arguments. Particularly when all the speculators and the
players in the CD market are not interested in the OTC market in which
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only the hedgers and arbitrageurs are interested and all the speculators
cannot be imagined to be the hedgers and arbitrageurs. Shri Sibal,
therefore, urged that the CD and OTC segment form part of the same
relevant market. When we consider the Genesis report as also the opinion
of Prof. Richard Whish, which were heavily relied upon by him, we find the
thrust of that report is not so much on OTC market, as it is to canvass that
all the stock exchange services like CD futures, F&O, WDM and securities
cannot be covered under the relevant market. The Genesis report as well
as Prof. Richard Whish have laid considerable stress only on that point.
There does not appear to be any relevant discussion about the OTC market
being the part of the CD market. We therefore, reject these reports at
least in so far as the first question is concerned, as to whether the OTC
market could be included in the CD market. It has already been
considered by the CCI and we also consider that the two have a complete
different complexion apart from the platform where the OTC and CD are
traded. The OTC market essentially comes under the regime of the
banking laws and would be restricted to the hedgers and arbitrageurs.
There would be no scope from the speculators in that market. We
therefore, uphold the finding of the CCI that OTC market cannot be a part
of the market for CD segment.
48. Now we consider the other finding on which both the judgments are
unanimous. The CCI seems to have relied on the further part of the
aforementioned report, particularly in para 5.2 of Chapter 5 where a clear
separation of CD segment from other segments in any recognized stock
exchange where other securities are also traded is given. It also relied on
the further stipulation that the trading and the order driven platform of the
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CD segment must be separate, as also the membership of the segment
must also be separate and the CD segment must have a separate
governing council. It also recommended a rigid arrangement to the effect
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. The CCI also referred to Chapter 7, where it was
mentioned to begin with, FIIs and NRIs would not be permitted to
participate in currency futures markets. After mentioning about the entry
of MCX-SX in the market and the fact that MCX-SX was only permitted to
operate in the CD segment, the CCI deduced three factors (1) that in the
minds of policymakers, the CD segment was not only completely different
from other segments but also differed from OTC in fundamental ways, and
therefore the policy recommended strict segregation of the CD segment;
(2) till 2008 the exchange capital market in India did not have exchange
traded currency forwards segments; and (3) competition concerns, if any,
have to be examined in the segregated and new market where the
Informant is operating. The CCI therefore, held that the exchange traded
CD market was fundamentally distinct from other segments of the capital
market. In fact, it did not exist prior to August 2008. The CCI therefore,
deduced that a market which 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. Ultimately, it came to
the conclusion that the CD segment being a distinctive and separate
market, the relevant market in this case should be the services offered in
CD segment.
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49. When we consider the findings of the minority order on this issue, we
find that the minority order has referred to section 2(r), 2(s) and 2(t). The
minority order has also in its determination and more particularly at para
7.6.1 noted that the exchanges only provide the infrastructure (platform)
for such products to be traded subject to regulations, rules, by-laws and
operative procedures. It concluded, therefore technological support and
the facilities provided by the exchanges, which results into easy execution,
lower cost of transaction, efficient risk of management, fail-proof
settlement mechanism. It mentions that a robust infrastructure
mechanism with enhanced technological support definitely adds volumes
necessary for the development of the market. It however, mentions that
merely because several products are traded in different segments of the
same stock exchange and are categorized as exchange traded products,
they do not lose their product differentiating features or their identity as
representing different asset classes with different target customers/
consumers. It, therefore, held that both the exchanges and the securities
traded are the external trappings while, the real substances lies in the
classes of assets that are traded as underlying. It then jumped to the
conclusion that the relevant market in the present case is currency
derivatives segment of stock exchange services. It is, therefore, clear that
we would have to concentrate on the majority judgment for examining the
correctness of the ultimate finding that the relevant market was related to
the CD segment. We have already referred to the three deductions, first
being about the policy; second being about the CD segment being
introduced only in 2008; and thirdly the Informant operating only in the
market of CD segment. In our view, the third deduction about the
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Informant operating only in the CD market is irrelevant. After all when the
judgment was written in June 2011, a third player had also been added
right from September 2010, that was United Stock Exchange (USE).
Though it had lesser market share as compared to NSE and MCX-SX, in
fact USE has started in September 2010 with highest market share of
45.53%. It started losing its market share gradually with sporadic gaining
the market share upto June 2011. Again nothing depended upon the
Informants being engaged only in CD segment. In our view, the CCI
committed an error in relying on this factor. There was after all no
guarantee that the other exchanges would not step into and it actually
happened much latter when even Bombay Stock Exchange also joined the
CD segment, somewhere from November 2013, during the pendency of
this Appeal. When we consider the second factor that the CD segment
started only in 2008, that in our view again would be an irrelevant factor.
Merely because the CD segment started in 2008, would not make it a
distinct market. Lastly, even the first factor about policy, to say the least is
inconsequential factor. The policy did not show that CD segment was
totally and completely different. All that it says in para 5.2 that a
recognised stock exchange where other securities are also being traded
may set up a separate currency futures segment. It has then suggested
the three factors (1) the trading and the order driven platform of
currency futures should be separate from the trading platforms of the other
segments; (2) the membership of the currency futures segment should be
separate from the membership of the other segments; (3) the currency
futures segment should have a separate Governing Council on which the
representation of Trading/ Clearing Members of the currency futures
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segment should not exceed 25%. Further 50% of the public
representatives on the Governing Council of the currency futures segment
can be common with the Governing Council of the cash/ equity derivatives
segments and the Exchange; (4) The Chairman of the Governing Council of
the currency futures segment shall be a member of the Governing Council.
If the Chairman is a Trading Member/ Clearing Member, then he shall not
carry on any trading/ clearing business on any Exchange during his tenure
as a Chairman; (5) No trading/ clearing member should be allowed
simultaneously to be on the Governing Council of the currency futures
segment and the cash/ equity derivatives segments We have gone
through practically the reports supplied to us, para 5.3 describes the
eligibility criteria for Clearing Corporation of the currency futures segments,
while para 5.4 speaks about the separation from other segments of the
Clearing Corporation. In our view this report merely considers the safety
aspect and the insulation of possible disputes due to the interlinked
interests of the exchanges and/ or the officials. In fact, the report and
more particularly para 1.2 specifically hints at the difference between OTC
and the currency futures. The report is a complete mechanism on as to
how the CD segment would work and the separation procedure provided in
para 5.4 is more or the less is a safety mechanism. We fail to understand,
as to how this report by itself could be relied upon by the CCI to hold that
currency futures is a different product. The Informant MCX-SX has filed
before us the report of internal working group on currency futures. The
findings in their internal group do suggest that OTC segment could not
form a part of the same relevant market as the CD segment.
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50. We have now to consider whether the CD market by itself could be a
separate and distinct market. We must here note that a fundamental error
committed in treating the CD segment as a product by itself. In fact, at
one place the majority order had defined the relevant product market as
stock exchange services in respect of the CD segment. Now, if the stock
exchange services were common, then there was no need to restrict these
stock exchange services in respect of CD segment alone. The fundamental
error that was committed by the majority and minority order was that it
says that it assess the relevant market focused on the products being
traded on stock exchange as opposed to the services, which are offered by
the stock exchanges. It must be understood here that a stock exchange
does not manufacture, offer or sale any product. It simply offers a trading
platform and associated services for brokers to use. The market for
assessment therefore, has to be the services offered by stock exchange
independent of the product being traded on that exchange because a stock
exchange does not sell a product. It must be borne in mind that a stock
exchange does not create products like WDM, F&O, securities and currency
derivatives. It merely offers the services. The competition assessment has
to be therefore, only in respect of the services offered by the stock
exchanges irrespective and independent of the products traded on the
stock exchange. The learned counsel for the MCX-SX rightly argues that
SEBI allowed the trading on stock exchanges of (1) equity; (2) debts; (3)
futures; (4) options; and (5) currency derivatives. All the stock exchanges
provide trading services in respect of these products, though at the
relevant time, the MCX-SX was providing the service only in CD segment.
When the competition question comes, it would have to be understood, as
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to in what manner and what conditions these services were offered by
various stock exchanges including NSE and MCX-SX. The very existence of
the institution of stock exchange is for providing services to the
speculators, brokers and all those interested in those products. Therefore,
what is important is a service not the segments in which the stock
exchanges deal. A beautiful example came to be cited by Shri Haksar. He
compared the stock exchanges with the firm doing the business of dry-
cleaning. He pointed out that in a competition between the two dry-
cleaners, the only relevant factor would be the services given by the dry-
cleaners in dry-cleaning the clothes, whether it be shirts or coats or pants.
According to him, it cannot be imagined that one dry-cleaning firm is
cleaning only shirts, or only pants, or only coats. The example is extremely
apt. It must be realized that the nature of the product does not affect the
services, and the competition law assessment can and should be done only
with respect to the services being offered, especially when the enterprises
concerned do not have any control over the products being traded because
the products do not belong to them or nor are they created by them. Shri
Haksar points out that in the present case, the NSE did not waive the price
of the product being traded on its platform, but simply waived the fee for
the services offered by NSE. He also gave another example of a card
room. A person operating a card room simply provides the premises, a
pack of cards, and various tables for the players to play. All these items
would be the services offered by the proprietor of the card room. Whether
the players play poker at one table and bridge at another, does not take
away the fact that proprietor of the card room is simply providing certain
services to the card players. A competition law assessment between the
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two proprietors of the card room would, therefore, be based only on the
services offered by each of them and not based on the card games that the
players playing inside each of the card rooms. What the players wish to
play at any time is determined by the players, not by the proprietor of the
card room, and the similar things take place at the stock exchanges. A
stock exchange provides certain services to the participants (i.e. broker) on
its platforms. Whether a broker uses its services for trading in shares or
currency derivative, does not affect the nature of services provided by a
stock exchange for competition law assessment. In our opinion the
argument is infallible.
51. It was also heavily argued by NSE that considering the definition of
section 2(t), the relevant product market must comprise of all those
products/ services, which are viewed as an interchangeable/ substitutable
by the consumer. According to him, this implies that only demand side
substitutability, namely what consumers consider as interchangeable, that
according to him is the only relevant consideration for determining the
relevant product market. He further argues that what suppliers found to
be substitutable (i.e. supply side substitutability) is not a factor to be
considered in determining relevant market for the purpose of the
Competition Act. He has given the example that a person going to Mandi
to purchase onions will not find wheat seller at the Mandi to provide an
adequate substitute. He therefore, argues that as long as onions are not
substitutable for equity/ F&O/ WDM, the products (and consequently their
service) cannot form part of the same relevant market. According to him
in paragraph 10.24 of the majority order seems to have agreed with this
argument. Before proceeding further, we must hold that what the
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consumer wants from the Mandi seller, is a definite product like onion or
potatoes or grains. He does not go to the shopkeeper for his services. He
has a definite product in mind. Such product is absent in the present
scenario. If a person wants to purchase or deal in shares, he only uses the
services of the stock exchange. He may in the process purchase few
shares, but those shares are not the products. The product is the service
offered by the stock exchange for getting either shares or F&O or WDM or
CD derivatives. Therefore, the example is incorrect. There is tangible
product in this example in shape of onions or potatoes or grains. Such
tangible product is absent here. This is apart from the fact that a person
purchasing CD need not restrict himself only to CD, he may have a choice
to deal with the securities or WDM or F&O. It is always a broker, who
deals and broker need not restrict himself only to the product of CDs. He
can deal with any other product, provided he has the license to that effect.
It is, therefore, that we say that the argument about supply side and
demand side is irrelevant in this matter for the simple reason that it is a
question of service being offered to the customer in this case either the
broker or the speculator or anybody. Merely because a broker could get a
service of CD from a separate platform that does not become a whole
relevant market. It was tried to be argued by Shri Sibal that of the twenty
largest trading members by volume in NSE CD segment, only three are also
amongst the top twenty traders in the equity and F&O segments. Very
strangely, the learned counsel relied on this data for canvassing that the
two are separate markets. We fail to follow. Even if the three persons out
of the top twenty persons are dealing both in CD segment, equity, F&O
segments that is enough to buttress the point that it is the service of the
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stock exchange in all the sectors, which would be a relevant market. The
learned counsel has also relied on the percentage, the 7.6% of the trading
volumes of the CD segment. In our opinion, this argument must be
rejected as inconsequential. The learned counsel also argued on the basis
of SSNIP test and contended that if there was non-transitory increase in
price of 5-10%, it was unlikely to drive the purchasers of the CD contracts
to purchase equity. In the same breath, however, the learned counsel
urges that such a price increase could, however, drive users of the CD
segment to the OTC segment. We do not agree. It may be that if a
transaction fee was charged by the NSE in CD sector, the concerned broker
might stop dealing in the CD sector altogether and might turn to the other
segments as he has to remain in the business. Therefore, in our opinion,
SSNIP test would be of no consequence. We must again realize that in
section 2(t) there is a separate mention of the products or the services.
Therefore, the two concepts cannot be confused with each other. What
are we concerned here, are not the CDs, futures derivatives for CD or the
shares or the WDM or F&O. We are concerned with the price of a service,
which is offered by NSE. The real issue was as to whether the NSE in
offering the service had abused its dominance. While interpreting section
2(t), we cannot ignore section 2(u), the definition of service, which
suggests as under :-
2(u) service means service of any description which is made
available to the potential users and includes the provision of services
in connection with business of any industrial or commercial matters
such as banking, communication, education, financing, insurance, chit
funds, real estate, transport, storage, material treatment, processing,
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supply of electrical or other energy, boarding, lodging, entertainment,
amusement, construction, repair, conveying of news or information
and advertising.
The latter part of the definition though restricts itself to the factors
mentioned, it cannot be ignored that basically service means 'service' of
any description. The only condition is that 'service' must have been made
available to the potential users. In this case the 'service' is used by the
brokers, speculators and other players of the stock exchanges, which the
stock exchanges offer. It provides the platform to such person for giving
the service. Now, it is not as if a person dealing in the stock exchange
service for CD, he would not utilize that service in the other sectors, that
only depends upon on his will. Therefore, what is relevant here is the
service. It cannot be further restricted to what the CCI has done by
treating service only to the CD segment. That is clearly impermissible.
52. Our attention was invited to the 2nd Genesis report and more
particularly to para 2.1.4 of that report. It was tried to be shown that the
international case precedent had consistently found that equities are in a
separate market to currency derivative based on differences from a
demand-side perspective. The first such example was merger of TSX
Group Inc and Bourse de Montreal (2009). A quotation is used in that case
equities, derivatives and commodities had distinct risk profiles; as such,
demand substitutability was limited. The Bureau concluded that these
instruments were not competitive substitutes with one another and
examined these three grouping separately.
53. Second example given was Australian Stock Exchange and SFE
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merger, the law laid down will not be applicable to the present case, where
the relevant product is a service offered by the security exchange. After all
a service offered by NSE was complained of, as they refused to charge
anything for that service and thereby had tried to bleed MCX-SX slowly,
since MCX-SX did not have a license for any other segment except the CD
segment. If the services offered by NSE without charging anything was
the cause of the complaint by MCX-SX, then we would strictly have to take
into consideration the service aspect. The service offered by NSE in the
matter of currency derivatives, would be no different than the service
offered in the other segments in which it was operating. It has already
been shown that it was not necessary that a person taking the service in
currency derivatives would not take that service in the other segments. On
the other hand, it was clear from the statistics that there were number of
persons, who were utilizing the service in the other segments also. In fact,
it is an admitted position that out of the biggest twenty players, as many
as three players were utilizing the service of NSE in the other segments.
Therefore, while dwelling upon to decide the relevant market, this aspect
of service alone cannot be ignored and it would have to be held that the
service offered by the security exchanges would be the relevant market.
55. We must not ignore the fact that for the purpose of defining relevant
market in a case relating to abuse of dominance, there is no international
precedent in construing different services offered by the stock exchanges
as separate relevant market. Secondly, even if a separate relevant market
is found, as it has been found in the aforementioned four cases, that has
been found only in the cases of mergers and joint-ventures. Thirdly, the
present case is not the case of merger approval, where for defining
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relevant market, each service has to be compared with the competitors
service, so that a single player does not start to dominate after getting
merged with another entity. In our opinion, therefore, it would be
irrelevant to rely on the decision holding the relevant market for merger
cases for being used in the case under abuse of dominance. A holistic
picture would have to be taken into consideration and in our opinion the
D.G. has correctly held the relevant product market to be the services. It
must also be noted that the merger analysis is an ex-ante review of the
proposed merger and to examine whether the proposed merger will
significantly alter the structure of the market and impact the participants in
the market in the futures. It is an assessment frequently based on an
assessment of probabilities and likelihood of certain types of behavior
arising from the merger. Therefore, it is natural that the definition of
relevant market for assessment becomes as narrow as possible to evaluate
the impact of merger in the future. The consideration is that if the
proposed merger does not significantly and adversely alter the structure of
the narrowest possible relevant market, then it can be justifiably concluded
that the proposed merger may not have an impact on competition in
future. This is in sharp contra distinction with a review in connection with
abuse of dominance case, which is an ex-post facto review. The
competition authorities in an abuse of dominance case review and assess
the conduct of an enterprise in the past of an event, which has taken place
already or is continuing as on the date of investigation/ order. This,
therefore, becomes a static analysis of an event, which has occurred
between the two points in time. Thus, a merger analysis is a prospective
assessment, while the abuse of dominance position assessment is
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effectively an assessment of the conduct that has already taken place. Shri
Haksar very earnestly urged this proposition for which he relied on extracts
from Bellamy and Child. Shri Haksar also analyzed the aforementioned
cases cited by NSE and contended that in the case of merger of TSX Group
Inc. and Bourse de Montreal Inc., the Canadian Competition Bureau had to
define the relevant market as services offered in respect of each segment
to assess any potential overlaps that may raise competition concerns. This
depended on the specialization agreement, which played critical role in this
assessment. He also commented that in Deutsche Borse AG, Euronext NV
and London Stock Exchange, the assessment focused on services offered in
the equity segment because the target enterprise i.e. London Stock
Exchange operated primarily on the equity segment and the derivatives
segment constituted only 3% of the business transacted on the London
Stock Exchange. Shri Haksar explained that due to insignificant business of
the target company i.e. London Stock Exchange in the derivatives segment,
the UK Competition Commission confined its assessment of the potential
impact of the merger to the equity trading segment. That was because
the business of the derivatives segment was insignificant and the proposed
acquisition of the London Stock Exchange could not raise any competition
concerns in UK. He also pointed out that the parties in this case were ad
idemon the narrow market definition.
56. Alternatively, Shri Haksar contended that there are various similarities
between F&O and CD segments. He brought out as many as ten
similarities, they being :-
(i) All derivatives markets in India are cash settled no one gets an
actual share or foreign currency by entering into derivatives
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contract. He only gets the difference in cash which is common
for F&O and CD. F&O and CD contracts are very similar as
borne out by following.
(ii) A consumer in either segment does not have any ownership
right to an underlying security or currency, but only gets a
contractual right to the difference in prices.
(iii) CD & F&O Contracts are unique to the exchange which have
launched it and can be closed out only on the same exchange;
unlike securities purchased in Equity Segment, which can be
sold in any other exchange.
(iv) Nature of derivatives contracts available for trading in both
segments are very similar futures and European style options.
(v) F&O segment regulations adopted as it is for CD segment by
NSE, pursuant to a specific permissive clause in Chapter VII of
RBI-SEBI Technical Committee Report.
(vi) SEBIs Master Circulars issued on December 31, 2010 clearly
club F&O and CD segment contracts in single circular, while
Equity is segregated in a separate Master Circular of same date.
(viii) Consumer view: Statement of a very sophisticated global
consumer i.e., Bloomberg, as extracted in page 81 and 82 of
DG Report.
(ix) Trading member, clearing member classification only relevant
for F&O and CD segments.
(x) Trading parameters, margins and settlement modes for
derivatives (similar for both F&O and CD) are very different
from those for cash trades.
57. Shri Haksar, therefore, urged that if at all CD market is to be
considered as a separate relevant market then it should also be considered
along with F&O market, in which obviously the NSE has a forceful
presence. It is not necessary for us to go to this aspect, as we are
convinced that the relevant market in this case is that of the services
offered by the stock exchanges. In that view, we confirm the finding of
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the D.G. on this issue. We would not, however, comment on both the
majority and minority orders, which has accepted the CD segment as the
relevant market, for the simple reason that even if that market is to be
held as a relevant market, in our opinion, the majority order was correct in
deducing that the NSE is a dominant player in that market.
58. It need not detain us, if the relevant market is taken to be the
services offered by the security exchanges then there would be no
question of the NSE not being a dominant player. We would separately
consider the arguments of the parties on the aspect that the relevant
market was the CD segment alone and the NSE was a dominant player,
even if that market alone is considered as the relevant market.
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59. This takes us to the issue of dominance. We have to consider
whether the NSE is a dominant player in the relevant market. We have
already clarified that even when the relevant market was defined narrowly
as being the market of currency derivatives alone, by both the judgments
of the CCI, the majority order held NSE to be a dominant player. We
would, therefore, consider as to whether the NSE was rightly held to be
dominant in that judgment of the CCI, even when the relevant market was
construed narrowly to be the market only for currency derivatives. We
must at this juncture point out that before holding the CD market to be the
relevant market, the CCI separately considered the various aspects of
equity market, F&O market and WDM market. Lastly, it also considered
the CD market and the OTC market. The CCI then went on to record that
equity and equity derivatives segments or WDM segment were essentially
for the investors or speculators, who seek to gain from price movements of
equities, while the OTC segment was basically for importers and exporters
having contractual exposures and who try to hedge their risk emanating
from fluctuations of exchange rates. The CCI then went on to record that
the CD segment primarily for speculators of currency values and short term
hedgers, who want to cover their economic exposure, but require greater
liquidity. Then the CCI in its majority order went on to reject the SSNIP
test, holding that it was merely a methodological tool for performing
hypothetical monopolist test for the analysis of mergers. It then referred
to the Cellophane Fallacy. The majority order also refused to go into the
extended debate to distinguish the words interchangeable or
substitutable, considering the facts of the case and different aspects of
capital market in India. The CCI held this to be unnecessary and not
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useful. It acknowledged that equities and currencies were entirely
different and consequently related derivatives were also different. It
therefore, went on to hold that the currencies and equities were related to
the different market. It acknowledged that from any practical point of
view, a product over CD segment exchange could not be said to be either
interchangeable or substitutable by a product in segments like equity and
F&O. We have also indicated above that we do not subscribe to this view
because, this view is predominantly a view treating equities and currency
derivatives to be the products, which itself is not a correct notion. The
majority judgment then went on record to say that the stock exchange
services in respect of the CD segment is clearly an independent and distinct
relevant market. Though, the majority order in para 10.24 agreed that the
DG had found a high degree of commonality amongst the members of the
MCX-SE and NSE and held that this itself had no bearing on
interchangeability or substitutability between various segments of stock
exchange services. It wrongly gave an example of wholesale traders of
grains and wholesale trading of vegetables, completely ignoring that in that
example, the products were tangible products of grains and vegetables. It
is on this basis that the majority order came to the conclusion that relevant
market was CD segment in India.
60. Though, we do not see this as an absolutely correct finding, all the
same we will have to consider, as to whether the majority judgment was
correct in holding the NSE as a dominant player in the narrow market of
CD segment. The following factors, which were found by the DG or
mentioned in the majority judgment are stated as under :-
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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.
61. According to the majority judgment, these factors which were
undisputed created a complete picture of players in the capital market in
general and in the relevant market of currency derivatives. The order then
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touches upon history relating to the first half century of independent India,
in which BSE was way ahead of all the regional stock exchanges, but only
before the entry of NSE on the scene, which soon became the market
leader. The CCI then referred to the entry of MCX-SX and USE in the CD
segment and noted that by the time these two players made entries, NSE
had already occupied an overall position of strength. The order then notes
that there were only three players in the market, i.e. NSE, MCX-SE and USE
and referred to their current percentage, to be 34% MCX-SX, 30% NSE
and 36% with the latest entrant USE as of October 2010. The judgment
then mentions that it is these three players which 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. The CCI majority
judgment then went on to refer to section 19(4). It mentioned in this
behalf that the position of strength has to be arrived at after rational
consideration of relevant facts, holistic interpretation of seemingly
unconnected statistics or information and application of several aspects of
the Indian economy. It mentions that 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 so 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.
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On this backdrop, it referred to in Explanation (a) to section 4 of the Act
and then proceeded to consider whether NSE had a position of strength,
which enabled it to affect MCX-SX as a competitor in its favour.
62. It firstly asked itself a question (1) can NSE sustain zero pricing
policy in the relevant market long enough to outlive effective competition?
It answered this question holding 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. According to it this was clearly a position of strength.
63. The second aspect that came for consideration was whether there
was any indication that the conduct of NSE showed that it was aware of its
capability? The CCI noted that NSE had not followed Accounts Standard 17
(AS17), which stipulated the segment reporting. The CCI in the majority
order rejected the facile explanation that the so called detachment of profit
motive was with the desire to develop the CD segment for the larger good
of the capital market in India. The CCI rejected this explanation as
unpalatable. It then mentioned 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.
64. The third aspect, which was considered was whether in the absence
of above strengths, would NSE be able to or want to continue with zero
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pricing indefinitely? The majority order answered this question holding
that 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
derivatives forwards market. It also noted that in this behalf MCX-SX or
any other current or future competitor did not have similar advantages.
From this, the majority order deduced that NSE enjoyed a position of
strength in the relevant market, which enabled it to affect its competitors
in its favour. It mentions that for arriving at this conclusion, the CCI have
taken into account relevant aspect of the financial statements of the parties
concerned, HHI index of more than 5000 in the CD segment (2009-10),
ICR3 of more than 99 and other key indicators. The majority order said
that it had also given consideration to some important cases from
international jurisdiction, such as AKZO, [1978] ECR 207, United Brands
[1991] ECR I-3339, Du Pont. From this, the majority order came to the
conclusion that NSE had the position of strength and therefore, enjoyed
dominant position in the relevant market.
65. In this behalf, when we consider the minority order, reference is
made to the finding of D.G. that NSE held absolute dominance, even if CD
market is assessed in isolation with other segments, on account of its
incomparable economic power, size, resources, higher degree of vertical
integration, absolute dependence of consumers and large degree of
economies of scale in operating different segments with adequate scale in
each of those segments. The minority order then went on to consider the
argument by NSE that while it started with 100% of the CD segment
market in October 2008, it did not enjoy the first position in terms of
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market share and this indicated that NSE was not able to operate
independent of competitive forces, nor could it affect its competitors. It
also noted the argument by NSE that MCX-SX had continued to increase its
market share after entry, pushing NSE to second position and its market
share had gone up to 60.47% by August 2010, when USE entered the
market in September 2010. The respective share of NSE, MCX-SX and USE
was 32.48%, 42.77% and 24.75%. The minority order then considered
the position upto October 2010 of the respective market shares, which was
taken from Genesis report dated 30thOctober, 2010. The minority order
then went on to analyze the market shares. It deduced
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