COMPETITION APPELLATE TRIBUNAL

Appeal No. 15 of 2011 with IA 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 Hon’ble Justice V.S. Sirpurkar Chairman Hon’ble Shri Rahul Sarin Member In the matter of: The National Stock Exchange of India Ltd. Through its Director Exchange 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-2 Shri 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

2

An order passed by the majority Members of the Competition

Commission of India (for short ‘the CCI’) holding Appellant-National Stock

Exchange of India Ltd. (for short ‘NSE’) to be a dominant player in the

relevant market and further holding that it had abused its dominance

therein and on that count inflicting a penalty of Rs. 55.50 crores (@ 5% of

the average turnover) falls for consideration in this Appeal. The other

order passed by the minority two Members namely - Shri Anurag Goel and

Dr. Geeta Gouri, however, exonerating the Appellant-NSE, holding that

there was no violation of Section 4 of the Competition Act, 2002 (for short

‘the Act’) on the part of NSE does not.

2. Information was led before the CCI at the instance of the respondent

– MCX Stock Exchange Ltd. (‘MCX-SX’ for short) against the National

Stock Exchange of India Ltd. (the appellant herein) and DotEx

International Ltd. (‘DotEx’ for short). The MCX-SX is now Respondent

No. 2 in this Appeal while DotEx has not been joined as a party to this

Appeal which was registered as Appeal No. 15 of 2011.

3. In the said information, it was alleged that the appellant had

abused its dominance under Section 4 of the Act by introducing predatory

pricing by waiving transaction fee altogether in the newly established

Currency Derivatives Segment (‘CD Segment’ for short). It was also

urged that for this NSE was using its dominance in the non-CD segments

to enter into and protect its position in the CD Segment and was also

causing denial of market access by promoting MCX SX, Financial

Technologies of India Ltd. (“FTIL”) from offering its software ODIN for

the use of its CD Segment. The information which was filed under

3

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

4

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"

5

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

6

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 4 of the Act by denying the integrated market watch

facility to the consumers by denying access of Application Programme

Interface Code (APIC) to the promoter of 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 4 of the Act by NSE;

(b) To direct the NSE to discontinue transaction fee, data-

feed fee and the admission fee waivers in respect of the CD segment and to impose transaction fees, data-feed fee and admission fee in the said segment equal to that in the other segments of NSE;

(c) To order NSE to require its members to maintain deposits for the CD segment at a level that is consistent with the levels of other segments;

(d) To grant an injunction restraining the NSE from continuing the transaction fee, data-feed and admission fee in respect of the CD segment in line with those in other segments; and (iii) mandate NSE to collect deposits from members at a level on par with those in its other segments, pending final disposal of the complaint;

(e) To order NSE to pay all of the complainant' costs and impose the highest level of penalties on the NSE in accordance with the Act, so as to have deterrent effect and ensure free and fair competition in the relevant market; and

7

(f) To pass such other order as the Commission may deem fit to ensure free and fair competition in stock exchange services 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 could suffer combined

loss of around Rs. 100 crores. It was urged that since the CCI

had already formed a prima-facie opinion 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.

8

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

9

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

10

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.

11

20. The D.G. also considered the SSNIP (Small but significant and non-

transitory increase in price) test and held that it was not possible to rely

on that test.

21. Thus the D.G. finally took the view that stock exchange services in

India including equity F&O, WDM and CD was the relevant market but

not the OTC market.

22. While assessing the dominant position, the D.G. examined the

status of the NSE on account of :

(a) Position of strength (b) Ability to operate independently of competitive forces

prevailing in the relevant market; and (c) Ability to affect its competitors of consumers or the

relevant market in its favour.

23. The D.G. also examined the market power along with the lines

indicated in Section 19(4) of the Act. While considering the market share

in the relevant market of stock exchange services, the D.G. found that

when NSE had started its operation in November, 1994 there were 21

stock exchanges in India with Bombay Stock Exchange (BSE) commanding

a market share of 41.5% in the equity segment. By 2008-09, NSE had

acquired 71.43% of the equity segment as against the vastly reduced

share of 28.55% of BSE. He found that in the F&O segment, NSE

commenced trading in June, 2000 and had risen to over 99% market share

since then. In the WDM segment, NSE commenced trading in June, 1984

NSE has consistently maintained market share of over 90% since 2001-

2002. It also found that insofar as the CD segment was concerned the

NSE had a market share of 47 - 48% as against 52 - 53% of MCX SX. In

view of this the DG found that NSE was a dominant player.

12

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.

13

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; and D. 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

14

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.

15

(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

20th May, 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

16

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

17

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 :-

18

“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

19

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,

20

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

21

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 King’s 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?

22

(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

23

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 Hon’ble 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 :-

24

“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

25

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

26

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

27

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.

28

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

29

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

30

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.

31

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

32

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

33

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

34

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

35

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,

36

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

37

Corporation Ltd. (2006), where it is suggested that the merger between an

equities exchange and derivatives exchange was approved on the basis

that there was no product substitutability, implying a lack of demand

substitutability. The Australian Competition and Consumer Commission

(ACCC) also found that supply side substitutability was unlikely in practice

due to network effects and that could arise as a result of liquidity

requirements. While giving the third example the report takes into

consideration the Deutsche Borse AG, Euronext NV and London Stock

Exchange. A quotation of the Competition Commission of UK was quoted

there to the following effect “derivatives, equities and bonds are really

substitutable from the purchasers’ point of view”. The UK Competition

Commission also found that there was no room for supply side substitutes

based on the facts that a platform would incur non-trivial cost over a year

or more in order to start trading in another product. Furthermore, they

noted the limitation on economies of scope arising from power in adjacent

markets. “Equities derivatives and bonds are typically traded on separate

platforms, suggesting that economies of scope are not strong enough to

warrant inclusion in the same market”. The fourth example is that of

Eurex. In this case the European Commission observed the following,

“despite the connections to the markets for listing and trading services for

securities, on which Parties operate, and the derivatives market, on which

Eurex operates, there are substantial differences between the two

markets.”

54. All these cases are merger cases apart from the fact that the law laid

down by foreign competition authorities, are not binding on this Tribunal.

It must be said in respect of these cases that, being cases relating to

38

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

39

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

40

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

idem on 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

41

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) SEBI’s 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

42

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.

43

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

44

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 :-

45

“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

46

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”.

47

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

48

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

49

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 30th October, 2010. The minority order

then went on to analyze the market shares. It deduced from this that the

NSE at least on the basis of the market share could not be said to be a

number one player. It disagreed with the deduction of D.G. as also the

majority that NSE enjoyed economic power, which was reflected in its

ability to maintain zero price over the long run and to sustain losses in the

CD segment from other segments. It rejected the argument that all of

these could be perhaps under different circumstances translated into a

competitive advantage. It mentioned that however, in a networked

industry, a new comer could have easily overcome the competitive

advantage of the incumbent by offering innovative product with value

added services. It also mentions that the CD segment did not drive any

specific benefit from other segments of the stock exchanges. It also took

stock of the further deduction by the D.G. about NSE’s dominance on the

basis of vertical integration of the enterprises. It also rejected the other

deductions of D.G. about entry barrier.

66. The minority order then went on to consider the definition of

‘dominance’ in section 4 and stressed at the words “….in its favour”. It

50

noted that the market share of NSE, which was 100% in August 2008, had

gone down to 33.17% nearly in two years time and this fact by itself

according to the minority order was sufficient to show NSE’s inability to

influence the market or its competitors in its favour. It then went on to

mention “we are not aware of any case in the history of competition

jurisprudence, where a firm’s market share has been reduced drastically (to

less than one third in this case) in a relatively short period (two years in

this case), and yet it has been found to be dominant by a competition

regulator or a court”.

67. In our opinion, the analysis by the majority order is correct and the

analysis by the minority order, more particularly about the market share

and the so called reduction thereof is not satisfactory. First, we will take

up for analysis the market share aspect. It seems that the minority order

has considered the position upto October 2010. This judgment is dated

03.06.2011. It is obvious that the minority order has restricted its findings

to the whole period of two years. Even if we consider the market share for

upto October 2010, as has been done by the minority order, it will be seen

that right from August 2008 upto November, the NSE was a clear market

leader. Again from December (2008), January and February (2009), its

market share was almost equal to the market share of MCX-SX. From

there again, its market share rose and it became number one from March

2009 to August 2009 i.e. the next six months. Then right upto December

2009, it was almost hand-in-hand with MCX-SX. In 2010, however, it

started declining. Therefore, right upto the month of August or September

2009, in majority of months the market share of NSE was more than the

market share of MCX-SX and when it was not so, it was fully comparable to

51

the market share of MCX-SX. Shri Sibal pointed out that the period of 1st

Circular when NSE charged zero price for the transaction fee was issued on

26th August, 2008 and was valid for about one month i.e. upto 30th

September, 2008. The second Circular was dated 26th September, 2008

and was valid upto 30th November 2008. The third Circular was issued on

28th November, 2008 and was valid upto 31st March, 2009. All these

Circulars undoubtedly are prior to 20th of May, 2009, when section 4 was

for the first time activated. The culprit Circular is dated 30th of March,

2009, which is valid upto 30th of June 2009. When the Act came on 20th

May, 2009, NSE was a clear leader, having 53.19% of market share as

compared to the market share of MCX-SX being 46.81%. This position

continued upto August 2009 i.e. for four months including May, when the

market share of NSE was more than the market share of MCX-SX. Again

for the next four months the market shares are almost similar with MCX-

SX. We have it on record that the Circular dated 30th March, 2009, which

was valid upto 30th June, 2009, was the last circular issued and thereafter

it was continued right till August 2011, when for the first time, the NSE

started charging the transaction fees. It is very significant to note that

thereafter it was number two only upto December 2011 and from January

2012 it bounced back and continued to have the number one position

excepting for the months of March and April 2012. Right till March 2014,

its number one position continues in so far as market share is concerned.

We are really concerned with not only the market share, but the other

relevant factors considered by the majority order and more or the less

ignored by the minority order. The most relevant question was as to

whether the NSE could continue with its no transaction fee policy, as

52

compared to its competitor MCX-SX. It is absolutely clear that while NSE

could continue because of its relative strength in other segments, MCX-SX

could not have continued with that policy and per force it had to adopt the

same policy of no transaction fees, as otherwise it could not have even

entered the market, forget about its sustenance in that market. In this

behalf, therefore, we feel that the consideration by the majority judgment

is more realistic, objective and covers wider spectrum.

68. Shri Sibal while addressing us on the question of dominance invited

our attention to Explanation (a) of section 4, as also the various provisions

in section 19(4) of the Act. We must at this juncture note that the duty of

the CCI while considering the position of dominance is to take into

consideration all the factors under section 19(4). However, sub-section (4)

also empowers the CCI to take “any” of the factors, considering that

market share is but one factor, size and resources of the enterprise,

economic power of the enterprise, vertical integration of enterprises or sale

or service network of such enterprises are also some of the other relevant

factors. It is obvious that the size and resources of NSE were tremendous.

We need not go into the details thereof. In so far as vertical integration is

concerned, NSE was the richest amongst all the stock exchanges. Its

economic power can also not be disputed and indeed it was not disputed

excepting that it was argued that MCX-SX was also a very big company. In

our opinion, though Shri Sibal argued on all these aspects, the leading

position of NSE cannot be disputed. Same thing can be said about the

market structure and the size of the market as covered in clause (j) of

section 19(4) of the Act. Our attention was invited by Shri Sibal to LECG

Report and the alleged admission therein at page 2370 that “NSE would

53

probably not be dominant in the market that the Genesis Reports define,

whether or not that market includes OTC products”. However, further

contents in the same paragraph are worth noting :-

“We agree that NSE would probably not be dominant in the market

that the Genesis Reports define, whether or not that market includes

OTC products. However, this does not rule out the possibility of

abuse. NSE could be dominant in other markets from which it is

leveraging market power onto a market for trading services in

currency derivatives. The evidence shows that NSE is indeed

dominant on such markets.

We find that if separate markets are defined for stock exchange

services in the trading of each of cash equities, equity derivatives and

wholesale debt products, then these markets will be closely

associated with the provision of stock exchange services in currency

derivatives. NSE would be dominant in these markets for cash

equities, equity derivates and wholesale debt products, and it may

then be able to leverage its dominance from these markets onto the

market for currency derivatives. This strategy would allow NSE to

protect its existing dominant positions by preventing MCX-SX from

growing to a size where it could challenge NSE’s existing dominant

positions.”

69. We have already shown that firstly, the market could not be CD

segment alone and even if it is CD segment, even then NSE would be a

leader. Shri Sibal is undoubtedly right when he argues that while applying

the factors listed under section 19(4) of the Act, a “check-the-box”

approach should not be followed and the factors in that section should only

be considered as an aid in assessing dominance. However, even if we

consider those factors, as is suggested by the learned counsel, the

inevitable result would be that NSE clearly emerges as a leader. Shri Sibal

54

argues giving the examples of Ashok Leyland and TATA Motors in the truck

market or Coca Cola and Pepsi in the soft drinks market. He urges that in

both these markets, the players have high market shares and immense

resources at their disposal and that they cannot be considered dominant

only on those factors. The argument is undoubtedly correct. However,

we hasten to add that in this present scenario MCX-SX or the other players

did not have the advantage of having the complete domination over the

other segments like securities, WDM and F&O. It was also argued by the

learned counsel that the finding of dominance could not be lightly given

since that finding imposes a special responsibility on enterprises to ensure

undistorted competition in the market. The learned counsel argues that by

that finding one hand of the dominant enterprises remains is tied behind its

back and it has to compete with such restraint in the relevant market. He

is undoubtedly right that a dominant player in the market has a

responsibility, an added one, because of its dominance. However, if that

responsibility were to be voiced against NSE, the results were bound to be

adverse to NSE. The learned counsel again reiterated his argument that

the NSE could not be said to be in a position of strength, since it could not

operate independently of the competitive forces. The learned counsel

pointed out that even when NSE did not charge for the transaction fee, its

competitors were able to match and successfully outmanoeuvre NSE and

as a result the market share of NSE fell from 100% to 33.6%. We have

already commented on the market share percentage aspect to suggest

that, that is not be-all and end-all of the matter, apart from the fact that

the overall picture suggests that even if the CD segment is held to be the

relevant market, NSE still was the leader for the major part of the time

55

span. It is further urged that NSE could not affect its competitors in its

favour, as BSE, MCX-SX and USE successfully entered the CD segment and

were able to sustain zero pricing for periods longer than NSE. We do not

agree with this contention, as firstly it is misnomer to say that MCX-SX

successfully entered the market and were able to sustain themselves. It

was because MCX-SX has suffered huge losses when the transaction fees

was not being charged at all by NSE and consequently by themselves. Shri

Sibal also pointed out that now because of the introduction of the

transaction fee pursuant to the impugned order by the CCI, the consumers

are now paying for the services, which they were getting free. He also

pointed out that the trading volumes also halved leading to lower chances

of consumers finding a counterparty at the price they wished to trade at.

This is also not a complete argument. There may be and we are sure

there are many other reasons for the decrease in the trading volumes. The

introduction of the transaction fees by itself cannot be the only reason for

that purpose. Shri Sibal also criticized the observation of the CCI in

paragraph 10.34 of the majority order and contended that the majority

should have found none of the players in the CD segment to be dominant.

We are unable to agree with this argument for the reasons already quoted

above. Shri Sibal further argues that in the majority order the strength of

NSE was considered and that should not have been done. He gave an

example that any rich person entering any market would be considered to

be dominant. He gave an example of Google entering into bicycle

manufacturing market and pricing its bicycles below those of its

competitors. The argument is defective, as the size of NSE and its

56

strength is not considered in isolation, it is only one of the factors to make

it as a dominant player in the relevant market.

70. Shri Sibal then relies on the observation of the minority particularly in

para 8.2.6. We have already pointed out that the consideration by minority

of the position upto October 2010 was not correct and it should have taken

an overall picture into account. The learned counsel then again argued on

all the factors including the market share. We have already pointed out

and analyzed the market share aspect in this case. In our opinion, the

argument of market share is clearly flawed. Shri Sibal takes an exception

on the historical aspect considered in majority order. In our opinion the

majority was absolutely right in considering that aspect. He has also

addressed us on the profitability aspect, national presence of NSE, degree

of vertical integration and entry barriers etc. The argument about the

profitability aspect considered in majority order is that the USE and MCX-SX

were new ventures and therefore expected to have a lower level of

profitability. Then the argument is put about the strength of USE and

MCX-SX and their values. All these details in our opinion are unnecessary.

We have nothing to do with the strength of BSE and FTIL and the worth of

MCX-SX. Even if MCX is a big company, in the relevant market as we have

held, the strength of NSE is unmatched. The vertical integration was also

commented upon by the learned counsel and he contended that the

competitors in CD segment, namely – USE and MCX-SX are closely linked

to the extensive infrastructures and capabilities of their promoters. He

urges that MCX-SX promoter MCX operates a clearing house, while its other

promoter, FTIL markets a trading software ODIN. In our opinion, all these

arguments are of no consequence, particularly when it is clear that in so

57

far as the infrastructure is concerned, NSE is clearly a leader. There is

again no point in describing the strength of MCX, which is only a promoter

company of MCX-SX, nor is the strength of FTIL in any manner is relevant

in the present controversy. The learned counsel further argues that the

fact that MCX-SX and USE have been able to enter and operate in the CD

segment suggests that there are no entry barriers. The fact that MCX-SX

and USE have entered the market cannot be a relevant fact by itself for

giving a finding on entry barrier. That would have to be tested on the

policy of NSE of not charging any transaction fees and it will have to be

considered as to whether in such a situation would any new player chose

to enter the CD segment. The answer of which would always be in

negative. This argument is opposed by the MCX-SX by pointing out that

for entering into the CD segment there are some onerous conditions put in

by SEBI, which alone is authorized to allow for starting of stock exchange.

In short, to start a stock exchange is not a small exercise. That also goes

in favour of the argument about the entry barriers. The learned counsel

also severely criticized the three questions asked by the majority order to

itself and contended that these questions lacked economic logic. In our

opinion, the majority order committed no error in asking the three

questions. It has to be considered that it is not only on the basis of

answers to those three questions that finding about the dominance of the

NSE has been arrived at.

71. Shri Sibal then contends that the majority order focused only on one

competitor, rather than the category of competitors. He secondly argued

that the financial resources of all the players were not correctly

ascertained. Thirdly, it was urged that it was wrongly considered that NSE

58

had a better capacity to defer the profits in comparison to MCX-SX. Lastly

it was urged that the test of the deepest pockets was of no consequence.

In our opinion, all these arguments must be rejected. It is incorrect to rely

on a stray observation in a order. The stray observation was in respect of

the MCX-SX and that leads to the argument that majority order considered

only MCX-SX. In fact for first few months there was only one competitor

and probably that is why the majority took into consideration the position

of MCX-SX vis-à-vis NSE. We have already commented upon the so called

financial power of the MCX company, which was the promoter company of

MCX-SX. It is irrelevant as to who backs the company. What is required to

be considered is the company by itself and its strengths. Lastly, it cannot

be said that the MCX-SX was in better position than NSE to sustain the

losses and to keep on sustaining them.

72. Shri Sibal criticized the reliance placed by MCX-SX on the judgment of

the European Court of Justice in Michelin vs. Commission ([1983] ECR,

3461). In this case, it was held by the European Court of Justice that

Michelin had a worldwide strength while ascertaining whether it was in a

dominant position in the relevant market of Netherlands. Shri Haksar

criticized this reliance by saying that in that case, the worldwide strength of

Michelin was taken into consideration as in the opinion of the Court that

strength gave the distinct advantage over its competitors in the relevant

market i.e. Netherlands. Shri Sibal then urged that this judgment is in

apposite for the present controversy. In our opinion, the judgment applies

on all fours. In fact, the overall strength of NSE clearly gives it a leverage

to be benefited in the CD segment. The other observations in Michelin’s

59

case are extremely relevant. They being about the temporary losses

suffered by the dominant player.

73. Shri Sibal argued that the present figures regarding the market

shares should not have been taken into consideration and only the market

shares at the time when the alleged abuse took place should be

considered. He is undoubtedly right and hence we have seen that in first

few months, the NSE clearly emerged as a leader on account of its policy

of zero transaction fees. Shri Sibal from time to time relied on the minority

order and quoted various paragraphs, they include paragraphs 8.6.2 (vii),

8.2.8 as also paragraphs 8.2.7 of the minority order. We have already

considered these paragraphs and have given our reasons why we do agree

with the views expressed in those paragraphs. We are not impressed by

the other arguments regarding the speech of Shri Narayansami, on which

heavy reliance is placed by Shri Sibal. He has also raked up the

controversy about the alleged fraud in the MCX-SX by Mr. Jignesh Shah,

Vice-Chairman and Mr. Joseph Massey, Director. We find all these

references unnecessary in the present controversy. Shri Sibal also

commented on the judgment in United Brands vs. Commission [1978] ECR

207 on which MCX-SX had relied, which suggested that even if United

Brands had 40-45% market share, it was held to be a dominant player in

the market, because of its other strengths and advantages like ability to

control production, know-how, access to raw materials, large capital, brand

loyalty, transportation facilities etc. In our opinion, the judgment is rightly

relied upon by the MCX-SX, as it is already pointed out that NSE enjoys

many more factors as its strength, which have already been discussed in

the earlier paragraphs. We are also not impressed by the interview of Shri

60

T. Narayansami. We are also not impressed by the arguments about the

strength and the worth of MCX and FTIL. We have already rejected that

argument in the earlier part of the judgment. In short, we are convinced

with the finding of the majority order of the CCI that NSE was in a

dominant position.

74. That leaves us to decide as to whether in the present circumstances,

it has abused its dominant position. Lengthy arguments were addressed

on this question. Shri Sibal argued that in order to find the abuse of

dominance three tests have to be satisfied, they being - (a) dominance; (b)

pricing below cost; and (c) intent. We have already expressed that first

aspect about the dominance. Considering the second aspect of ‘pricing

below cost’, according to Shri Sibal, the term “cost” must not be confused

as used in the general parlance. He says that the manner of calculating

costs under the Competition Act is governed by the Determination of Cost

of Production Regulations, 2009 and more particularly Regulation No.3 of

it. He points out that under this Regulation, the concept of Average

Variable Cost (in short “AVC”) has to be considered. According to the

learned counsel, the language of explanation (b) to section 4 of the Act

itself suggests that in case of predatory pricing, cost would be as

determined by the regulations. He, therefore invites our attention to the

Determination of Cost of Production Regulations, 2009 and relies on

Regulation 3, which suggests that the “Cost” in the Explanation to section 4

of the Act shall, generally, be taken as average variable cost, as a proxy for

marginal cost. There is a proviso to it, which is as under :-

“Provided that in specific cases, for reasons to be recorded in

writing, the Commission may, depending on the nature of the

61

industry, market and technology used, consider any other relevant

cost concept such as avoidable cost, long run average incremental

cost, market value.”

He further points out that the marginal cost is a cost for producing one

additional unit. He gave an example of a manufacturing concern that in a

factory manufacturing steel, there would be fixed costs, like rent paid for

the use of the factory, salaries of employees, etc. and these costs have to

be incurred irrespective of the amount of steel that is produced. While

variable costs for the same factory would be iron ore and other raw

materials, electricity etc., that is a costs which would vary with each

additional unit of steel produced. He also takes an example of an ice

cream and suggests that the additional costs of milk, flavouring, sugar etc.

required to produce an additional scoop of ice cream. According to him,

the test for predatory pricing through the Cost Regulations ensure that

parties who are pricing low (a consumer benefit) are doing so in a way that

an equally efficient competitor could also provide the same product at such

low cost. According to him in the present case, this would amount to the

resources required to facilitate one extra trade on the CD segment.

According to him, since the marginal cost, is not always readily observable,

therefore, AVC is to be used as a proxy. The learned counsel further

argues that since in case of the stock exchanges, it is nearly impossible to

determine the costs involved in facilitating one extra trade, hence AVC is a

generally accepted cost benchmark to determine whether an enterprise has

engaged in predatory pricing. According to the learned counsel in case of

NSE, the AVC was zero and hence in not charging any transaction fees or

in other words charging zero price for transactions did not amount to

62

predatory pricing. We will have to test this claim of the average variable

cost being zero in case of CD segment. In our opinion, it is impossible to

support this conclusion.

75. The “average variable cost” is defined in the Regulations at 2(1)(b),

which is as under :-

“2(1)(b) “average variable cost” means total variable cost

divided by total output during referred period;”

76. A reference may be made to the definition of “total cost”, which is

defined in the Regulations at 2(1)(c)(i), it is as under :-

“2(1)(c)(i) “total cost” means the actual cost of

production including items, such as cost of material consumed,

direct wages and salaries, direct expenses, work overheads,

quality control cost, research and development cost, packaging

cost, finance and administrative overheads attributable to the

product during the reference period;”

77. The definition of “total variable cost” is as under “-

“2(1)(c)(ii) “total variable cost” means the total cost referred

to in clause (i) minus the fixed cost and share of fixed

overheads, if any, during the referred period;

78. These definitions would suggest that for arriving at the 'average

variable cost', first, one would have to arrive at a “total variable cost”.

Now “total variable cost” in the present case would be the “total cost” as

defined in Regulation 2(1)(c)(i) minus the fixed cost and share of fixed

overheads, if any, during the referred period. We must appreciate that in

this case, the average variable cost is claimed to be zero. This situation can

come only by first arriving at the total variable cost being zero. In our

opinion and there is good evidence available to suggest that the total

63

variable cost cannot be zero in order to justify the zero available variable

cost. It is only when the total variable cost is zero, then that zero cost is

divided by total output cost. It need not be explained that when zero is

divided by some figure, the result has to be necessarily a zero. Such is

certainly not a case here. This situation could have come only and only, if

total variable cost comes to a zero. It has not been shown by NSE that the

total variable cost in this case was a zero or in other words, there was no

total variable cost. The figures of the total variable cost have been

provided by NSE in their confidential version. They had to show that their

total variable cost was zero as their total cost minus the fixed cost and

share of fixed overheads came to zero. It is only and only in this situation

that their average variable cost could be zero. The most persuasive

argument of Shri Sibal as well as Shri Naval Chopra Satarawala could not

convince us on this aspect. In our opinion, it is not necessary for us to go

to the concepts of total avoidable cost and average avoidable cost or even

long run average incremental cost, in the facts of this particular case,

where the appellant NSE has not been able to convince us that the figure

of total variable cost comes to zero. In fact, it is on this short ground that

one can lead to the conclusion that NSE’s claim that it did not at all have

any total variable cost, in the sense that its total cost minus the fixed cost

and share of fixed overheads came to zero. We, therefore, straightway

reject this claim of the NSE that since it had zero average variable cost,

therefore, they were justified in introducing a zero transaction fees policy.

79. If this justification of introducing zero transaction policy fails, as we

have shown it must, fail, then we will have to examine the conduct of NSE

in introducing the zero transaction fee policy in August 2008 and then

64

despite the advent of section 4 of the Act, continuing with the same to an

indefinite period. In this behalf, we would have to consider as to whether

this policy of zero transaction fee was an outcome of the genuine concern

on the part of NSE to collect liquidity and also whether the NSE had taken

notice of the advent of section 4 of the Act, which NSE must have known.

It cannot happen that a player like NSE would not know of the activated

section 4. In this behalf, we must refer to the Pricing Committee meetings

of the NSE. As per the records, on 10th June, 2008, 2nd meeting of the

Pricing Committee was held in which a proposal was mooted to setup CD

segment and waiver of levy of transaction charges for a period of three

months, from the date of commencement of trading. We are prepared to

accept the position that this was obviously done in order to encourage the

liquidity in the market, after all the market was nascent at that time. We

do not have the advantage to know as to what transpired in the third

meeting of the Pricing Committee and it was only on 26th November, 2008

that the 4th meeting of the Pricing Committee was held. Minutes of this

meeting also speak that the NSE wanted to encourage the participation in

trading in currency futures and it had paid special attention to the fact that

the exchange traded currency future was still in the nascent stage. In that

view, it decided to extend the waiver of fees upto 31st March, 2009. On 3rd

March, 2009 again the Pricing Committee sat to consider its pricing policy,

where it specifically considered the extension of waiver of admission fees

for the new members in CD segment, as also considered the waiver of levy

of transaction charges in respect of the trades done in currency futures.

By this, it considered the proposal to extend the transaction fee waiver

upto 30th September, 2009. There is also a 6th meeting of the Pricing

65

Committee alleged to have been held on 27th August, 2009, in which again

there was an extension of waiver of levy of transaction fees in respect of

the trades in currency futures and it agreed to continue it upto 31st March,

2010. Strangely enough the Circulars issued by the NSE, however, do not

tally with these minutes, because by the first circular, the valid period for

the zero transaction fees was only upto 30th November, 2008. Second

Circular came on 28th November, 2008, in which the NSE declared that it

would not charge transaction fees upto 31st March, 2009. The last Circular

seems to have come on 30th March, 2009 and in this Circular the zero

transaction fees policy was to be continued upto 30th June, 2009, though,

the minutes suggest that they were to continue the zero transaction fees

policy upto 30th September, 2009. Very strangely, thereafter, in spite of

the fact that there was another meeting held on 27th August, 2009, in

which the Pricing Committee decided to extend the zero transaction fee

policy upto 31st March, 2010, no such Circular seems to have been issued.

At least that is not the claim made before us. In short the Circular dated

30th March, 2009, in which zero transaction fees was to be continued upto

to 30th June 2009 (i.e. after 20th of May, 2009 when section 4 was

introduced) merrily continued to rule the scenario and it seems that NSE in

spite of its meeting on 27th August, 2009 of Pricing Committee, did not

bother to issue any other Circular.

80. We must at this juncture point out that the minutes of both these

meetings are completely silent about the effect of section 4 having been

taken into consideration by NSE. We can understand about the meeting

dated 3rd March, 2009, on that day the section 4 had not come. But what

completely perplexes us is the studied(?) silence of the Pricing Committee

66

in the meeting dated 27th August, 2009. In fact, anybody would expect

that after the advent of section 4 the Pricing Committee would immediately

sit up and take the notice of section 4, as on 20th May, 2009 there were

only two players in the market, one was NSE itself and the second was

MCX-SX. The NSE was well aware of the fact that MCX-SX did not have

license for any other segment and were dealing exclusively in the CD

segment. They were actually the competitors of NSE, even if it is

considered that the relevant market was only currency derivatives. It was,

therefore, clear that if the zero transaction fees was continued by the NSE,

MCX-SX would have no other alternative but to also follow the suit, and

that is precisely what happened. The MCX-SX had to continue with the

zero transaction fees policy, if not anything else at least to meet the

competition and in the process the MCX-SX in the very first year suffered

the losses of Rs.29.81 crores, in comparison to NSE, which registered profit

of Rs.515.54. It was known all over the world that MCX-SX do not have

any other license for running the stock exchange in any other segments

excepting CD segment and therefore, if they persisted with their zero

transaction fees policy, which was a direct outcome of NSE's zero

transaction fees policy, they would certainly bleed to death. That it did not

happen, cannot be a justification for NSE to, firstly, totally ignore section 4

and to remain complacent with their own policy by firstly introducing the

same and secondly continuing the same in spite of the advent of section 4.

In our view, this was the best example of abuse. In this, one can analyse

that MCX-SX could not have effectively competed with NSE on the basis of

this zero pricing conduct. The data clearly suggests that the prices

charged by NSE had the potential to foreclose MCX-SX, which was the only

67

competitor in the field then, or for that matter any other competitor, who

did not have the strengths of NSE. In our opinion, there is enough

evidence to support this in as much as the losses suffered by MCX-SX kept

on increasing. It was a well known fact that it did not have any other

segments to deal with and it ultimately got the same somewhere after

about two years, after a litigation.

81. On this factual backdrop it would be interesting to see D.G.’s findings

on abuse of dominance by NSE. The DG had considered the following four

factors :-

a. Transaction fee waiver; b. Admission fee and deposit level waivers; c. Data feed fee waiver; and d. Exclusionary denial of "integrated market watch" facility.

While considering the transaction fee waiver, the DG took into

consideration some previous history in view of the argument of NSE that

the step of waivers were taken to encourage larger participation in the

nascent CD segment. It was also argued before the DG that this policy

was influenced by a report of the High Powered Study Group on

Establishment of New Stock Exchanges and lastly it was pointed out by

the NSE that it had constituted a pricing committee to guide and decide

all pricing matters.

82. The D.G. considered the earlier such waivers by NSE in various

other segments like equity, F&O and had also noted that the NSE had

outstripped BSE by 2001. It was also noted by the D.G. that after

outstripping BSE, NSE did not extend the waiver and the waiver in

options in segments of F&O had continued till 2005. Even in respect of

WDM segment, while the NSE had started trading in June, 1994, for one

68

year, NSE had levied charges of Re. 1/- per Rs. 1 Lakh. From this the

D.G. came to the conclusion that NSE did not have a historical philosophy

of waiving fee to develop a nascent market. The D.G. also considered

the conduct of NSE relating to Gold ETF segment where the transaction

charges were levied from March, 2007 till August, 2009 when NSE was

the only exchange trading in Gold ETF segment. However, it started

waiving/reducing transaction fee only after February, 2010. This was

probably to score over BSE which had entered into Gold ETF segment in

September, 2009 and had grabbed a market share of about 5% which

rose up to 19% by February, 2010. According to the DG this explained

as to why NSE had introduced waivers/reductions from March, 2010

onwards. The D.G. then observed that the management of competition

was the prime factor which influenced the transaction policy. The D.G.

also considered the fact that NSE collected admission fee of Rs.5,61,800

in equity, F&O and debt segment but did not charge any admission fee in

its CD segment and also did not collect any subscription charges and

advance fee in the CD segment. The reasons for not charging given by

NSE were also referred to. The other factors in respect of admission fee

and deposit level waivers were also considered by the D.G. The D.G.

also observed in his report that NSE had reduced deposit structure w.e.f.

November, 28, 2008 which was subsequently followed by MCX-SX from

January, 2009.

83. Same such observation was made by the D.G. in respect of the data

feed fee waiver. It also considered the argument of NSE that the waiver

in data feed fee was for the same reason for not charging transaction fee

for the CD segment. The D.G. observed in this behalf that the issue of

69

data feed fee was never discussed during any board meetings over the

initial 16 months from the date of commencement of trading in CD

segment.

84. As regards exclusionary denial of integrated market watch facility,

we need not express anything here about the D.G.’s observation in view

of settlement of the concerned parties.

85. While analyzing the predatory pricing by NSE, the D.G. considered

Regulation 3(1) of Cost Regulations and also further considered the

concepts of variable cost. The D.G. also posed a question whether in a

hypothetical situation of NSE not having any other segment to support its

income, could NSE have survived in the wake of its waiver policy? The

answer was obviously in negative. The D.G. observed the variable costs

being zero and rejected this argument. The DG referred to the additional

expenditure incurred by NSE for machinery, manpower, IT support,

disaster recovery etc. in respect of the CD segment along with other

factors like number of dedicated employees for the CD segment who

were engaged by NSE and were paid substantial amount. The D.G. came

to the conclusion that these costs did constitute variable costs. A

reference was made by the D.G. to examine the views taken by the

international jurisdictions while determining the appropriate cost and

further observed that the relevant product market was on the basis of

high level of network externalities. A reference was made by the D.G. to

the case of European Commission namely Wanadoo Interactive SA

(WIN).

86. The D.G. then noted that though NSE was asked to provide

comprehensive details of allocation of all fixed and variable costs for the

70

CD segment for the last two years, NSE had failed to do it on the ground

that it did not prepare accounts in which separate profit & loss account

statements are provided separately for either the CD segment or any of

the other four segments. The NSE had also argued before the D.G. on the

basis of the observations made by UK Competition Commission

investigation wherein it was concluded that the allocation of common

costs down to product level was impossible and would be misleading.

The D.G. countered these arguments on the basis of the balance sheet

and profit & loss accounts of NSE. The D.G. had noted that there was a

quantum increase in fixed assets of NSE in general and IT

hardware/software, since the CD segment started. It was noted that

during 2006-07, the increase in fixed assets was only Rs. 31.472 crores,

in comparison, the increase was Rs. 133.671 crores during 2007-08 that

is after the starting of CD segment in 2008-09, it was Rs. 93.475 crores

and during 2009-10, it was again Rs. 90.1 crores. The D.G. report had

looked at the details of overall capital cost expenses, segment wise long

run incremental cost etc. The D.G. also made estimation to the total

costs for the CD segment working out to Rs. 4.42 crores for the year

2008-09 and Rs. 37.07 crores for the year 2009-10 which had been

arrived at by the D.G. on the basis of pro rata assumption.

87. We are deliberately making a detailed reference to the D.G. report as

even the CCI has completely relied on the same. It was argued before the

CCI, firstly about the NSE not being dominant, secondly the transaction fee

waivers were done in order to develop the nascent market, thirdly that NSE

had historical philosophy of waiving fee in developing nascent market and

71

fourthly that there was no element of predatory pricing as there was no

variable cost and lastly that the charge of leveraging could not apply as

NSE was not dominant in the CD Segment. The CCI firstly rejected the

argument about the dominance and then considered the theory of

development of nascent market. It discussed in detail the various stages

of nascency of a market and came to the conclusion that the market could

be nascent for the first few months but certainly not for ever or for

indefinite period. According to the CCI, this waiver policy was a strategy

and not a bona fide step for preserving or developing an otherwise nascent

market. It considered the various occasions on which the notifications for

waiving transaction fees was issued. The CCI also considered the historical

background of waivers in case of equity segment and F&O segment and

upheld the observation of the D.G. that NSE only after outstripping BSE, re-

imposed transaction charges after it had surpassed BSE. Similarly, CCI

also confirmed the D.G.’s findings about WDM segment where after

commencing the trading on 30.6.1994, it levied transaction charges for a

full year till June, 1995. It confirmed the D.G.’s observation that this

conduct of NSE contradicted the claim of consistent policy of fee waivers to

develop nascent market. On these grounds it rejected the defence

regarding the development of nascent market.

88. It further noted the pattern of NSE behavior in respect of F&O

segment and WDM segment as also Gold ETF segment and concluded

that the historical conduct of NSE suffered from inconsistency and

nothing could be derived from this behaviour patterns which would lead

to the conclusion that NSE had consistently followed the philosophy of fee

72

waivers in the nascent market. It, therefore, confirmed the D.G.’s

observation in this behalf. Similarly, the CCI had found no merit in the

justification given by the NSE regarding data feed fee waiver.

89. It also noted about the NSE’s failure to give separate segment

figures to the DG.

90. It then referred to the fact that MCX-SX was operating only in the

CD segment as also its financial statements of 2008-09 and 2009-10

showed that it was incurring variable costs. It also referred to the total

expenses made in 2008-09 and 2009-10. The CCI, therefore, confirmed

the finding that the CD segment did require some variable costs to be

incurred by the stock exchange and it cannot be zero as claimed by the

NSE. (We have already in the earlier part of the judgment shown as to

how the theory of the average variable cost being zero was palpably

wrong).

91. Thereafter, the CCI referred to the exercise made by the DG for

allocating and estimating the costs. Thereafter, it referred to the zero

pricing.

92. After considering the concept of unfair pricing, the CCI came to the

conclusion that the D.G.’s observations about the variable costs were

correct. The CCI, therefore, came to the conclusion that the zero pricing

was unfair as far as MCX-SX was concerned. The CCI then referred to

the fact that NSE was in a position of strength which enabled NSE to

resort to zero pricing since August, 2008 while MCX-SX did not have such

strength. The CCI then observed - “There is practically no justifiable

reason for NSE to continue offering its services free of charge for such a

long duration when it is paying for manpower and other resources for

73

running the business. It is also a fact that no enterprise would have the

intention to engage in a profit-less venture for eternity.” The CCI then

referred to the fact that MCX-SX had only CD segment and that was a

major constraint and therefore the zero price policy of NSE was unfair.

On this basis, the CCI came to the conclusion that the zero pricing policy

was unfair. It then observed in para 10.77 that - “In this case the

conduct of NSE is beyond the parameters of promotional or penetrative

pricing. It can, in fact, be termed as annihilating or destructive pricing”.

93. We generally agree with the finding of abuse of dominance given

by the D.G. as well as the CCI. We find no justification on the part of

NSE to continue with the predatory pricing for unspecified period after

20th May, 2009. Much of the discussion has come as regards the

predatory pricing. We need not repeat that again.

94. Shri Sibal, however, calls the pricing as unfairly low pricing. His

submission appears to be that a zero price cannot be said to be predatory

pricing at all. We have given our own reasons in the earlier part of the

judgment to point out as to why a zero price would amount to predatory

pricing. As a matter of fact, there is a lot of difference in the concepts of

unfairly low price and zero price. In the former, there is at least some

price (which is more than zero), which is charged by the enterprise, while

in the latter there is absolutely no price and all the services required are

given free of cost. While discussing the issue of cost in the earlier part of

the judgment, we have already pointed out that there was no

justification, whatsoever in the claim of NSE that it did not have any

average variable cost, must fall to the ground. We have also pointed out,

as has been done by the D.G. and the CCI that there was no justification

74

for zero pricing. Shri Sibal argued that CCI has termed zero price as

unfairly low price. We do not agree. For unfairly low price, there has to

be some price somewhere, which is certainly more than zero. We,

therefore, reiterate our finding that this was a clear cut example of

predatory pricing. Without arguing as to what are the stringent tests for

predatory pricing, the learned counsel merely said that they have not

been met. Further arguments on these aspect regarding the concept of

dominance, pricing below cost, intent are merely the repetitions of the

earlier arguments. The learned counsel of the Appellant has given us a

“short” written submission consisting of 211 pages, most of which are

repetitions.

95. In the common parlance, predatory pricing means the pricing which

is essentially below the cost and has an intent of destroying the

competition in the market. We see no different meaning of this term.

The whole argument centers around the point that this was an example

of unfairly low price. We do not agree. In fact, it is a blanket

examination of predatory pricing. A comment was made about the four

pieces of evidence relied upon by the CCI for giving finding of “immediate

and demonstrable harm to competition”, they being :-

“(a) NSE has deeper pockets that MCX-SX;

(b) There is no justifiable reason for NSE to continue charging

zero price for a service that costs money to run;

(c) As a result of zero price, MCX-SX is slowly bleeding to death;

and

(d) The unfairness of price is accentuated by the inequality in

available resources between NSE and MCX-SX.”

75

96. The counsel again repeats about the theory of deeper pockets. We

have already shown that the financial power of MCX, the promoter of

MCX-SX is irrelevant in this situation. It is again repeated that the so

called zero pricing was with an idea to increase liquidity in the market.

We have already pointed out that, that may be so in the beginning, but

there was no justification to continue with the same policy after 20th May,

2009. Frequent references in these written submissions have been made

to the entry of BSE and USE. In our opinion, USE’s entry and exit and

BSE’s entry in the market would go to prove nothing. Very strangely, a

reference is made that the MCX-SX has followed the zero price policy in

the other segments it has entered. Thereby, the learned counsel wanted

to draw our attention at the facts, which were much posterior to the

relevant period. The learned counsel relied on a singular factor that USE

decided to enter the market and ensured that the zero transaction fee

policy did not have the exclusionary effect. We do not agree. We have

already given our reasons in the earlier part of the judgment. The

learned counsel then relied on the Genesis exclusionary conduct note

dated 19.02.2011 to say that by their calculations MCX-SX would have

taken 80 years to quit the market. This was very seriously doubted by

the other side. Be that as it may, it is not a question as to when the

competitor would have exited the market, once it is proved that the

competitor was suffering losses year after year. The learned counsel

tried to convince us that the zero price had its own benefits. It is then

argued that the unfair pricing was liable to be considered qua all the

concerned parties namely – competitors, consumers, the relevant market

and NSE itself and then it should have been balanced against the alleged

76

unfairness qua MCX-SX. We do not agree with this proposition, so long

as we are convinced that the zero transaction fee policy was a well

intentioned policy to oust the competitors from the market. Much has

been stated about the sentence that this policy was unfair to MCX-SX.

Shri Balbir Singh on behalf of CCI argued that even if a statement is

made only about MCX-SX, firstly, it was not only against the MCX-SX that

the matter was being considered, the reference to MCX-SX came because

the MCX-SX being the competitor was an Informant also. He also pointed

out that when NSE was proved to be a dominant player in the market, it

was not supposed to be abusive and if it targeted the only competitor in

the market for first few months, that too consciously after the advent of

the section 4 would still be an abuse of breach of section 4. We do not

consider that the finding of the CCI was only with regard to MCX-SX and

that any comparison as such was made only with MCX-SX. Though, the

learned counsel made much of this so called unfair only vis-à-vis MCX-SX,

we are of the clear opinion that the finding of the CCI is general in nature

and not only vis-à-vis MCX-SX. Much was said about the financial power

of MCX-SX and its expenditures even in the other segments. We do not

think all that is relevant in the present controversy.

97. The learned counsel also urged that this could not amount to an

unfair conduct vis-à-vis the consumer. It has been repeated again and

again that in applying predatory pricing, though initially the enterprise

suffers the losses, it then can start charging higher prices vis-à-vis the

consumers. Much was said about the effect of the transaction fee being

charged. We do not think that it is in any way relevant to the present

controversy. Much was said about the fact that selling at cost was not

77

predatory, but was merely an example of forging profits and that other

competitors also could have chosen to follow the same price policy by

forgoing their profits. We have already shown that NSE had nothing to

lose in this, whereas MCX-SX had no other segment except the CD

segment and would have incurred tremendous losses, which it actually

did. The learned counsel urged that there was no evidence to state that

NSE planned to continue the zero price strategy for eternity. We do not

think the learned counsel is right in that behalf. After the last Circular in

which zero transaction fee policy was to last only upto 30th June, 2009,

thereafter no Circular came and the zero price policy continued till the

impugned order of CCI. The learned counsel also urged about the actus

reus and the cause of action. In our opinion, the cause of action started

right on 20th May, 2009, when the zero transaction fee policy was in

operation and thereafter it continued everyday during the continuation of

that policy.

98. The learned counsel criticized the reliance by MCX-SX at AKZO

Chemie vs. Commission C-62/86. All that we say is that in AKZO, there

was at least an allegation that the price was below AVC. Here is an

example where there is no price whatsoever. In this behalf Shri Balbir

Singh for CCI and Shri Haksar for MCX-SX has rightly relied on AKZO and

the observations made therein.

99. In paragraph 174 of the written submissions made by NSE, there

are repetitions of the earlier argument that NSE had not priced below

cost. The learned counsel tried to point out that NSE had provided

extensive financial cost data for its CD segments for the financial year

2008-09 and 2009-10 in the First Genesis Report and in the Second

78

Genesis Report. We have already given our reasons why we are unable

to rely on these reports, particularly on the claim that there was no

variable cost. We have given our reasons during our discussion on the

Cost Regulations. In that behalf, we fully agree with the finding of the

D.G. as well as the CCI. Much was said about the management accounts.

We are not impressed by that argument at all. The fact of the matter is

that NSE had failed to submit its statutory audit in respect of the CD

segment on the special plea that it did not maintain the same. The other

arguments are merely repetitions of the earlier arguments on this aspect.

The other arguments about the costs are again repetitions of the earlier

arguments. Once we have rejected the theory of Genesis that the

variable cost was zero, in fact the argument should end there itself.

100. It is urged that NSE did not intend to reduce the competition or

eliminate competitors. The learned counsel argued that the standard of

proof should be the civil standard of preponderance or balance of

probabilities. We agree with the learned counsel. We also agree with

the learned counsel that the finding of predatory pricing should be on the

basis of strong evidence. Once it is accepted that the civil law standards

would apply, then the D.G. as well as the CCI were quite justified in

handing out that finding on the basis of the circumstances discussed

earlier. The facts in this case are telling themselves. In fact, it was for

NSE to justify the zero transaction fees policy. It has miserably failed to

do so. Two orders of Securities Appellate Tribunal (SAT) and one of SC

were relied upon. They being – Sterlite Industries (India) Ltd. vs. SEBI,

Appeal No.20/2011 (Order dated 22.10.2001) and Dilip Pendse vs. SEBI,

79

Appeal No.80 of 2009 (Order dated 19.11.2009) as also Mousam Singha

Roy vs. State of West Bengal, (2003) 12 SCC 377. The two judgments of

the SAT speak about the standard of proof, while the Supreme Court

judgment deals with the murder case. We have nothing to say about the

laid down standards, but we fail to see, as to how the judgments apply

here. A judgment of Competition Appeal Tribunal (CAT) of UK was also

referred to, where the UK Tribunal held that the infringements were not

classified as criminal offences and had further expressed that the issues

regarding relevant market, dominance, abuse etc. have to be decided on

the basis of economic data and also the conflicting expert evidence. That

Tribunal also held that the burden of proof in civil matters applies in such

matters. We have already shown earlier that in this case the facts were

plain and simple. We have also made reference to the minutes of the

Pricing Committee. We have also seen that a player like NSE chose to

ignore the advent of section 4 on the legal scenario. We are left with no

doubt that the whole exercise to continue with zero price policy was

deliberate. Very interestingly, an argument was made on the basis of a

decision by the Ontario Supreme Court in R vs. Hoffman La Roche

Limited (1981) 33 OR (2d) 694 that “while Hoffman La Roche engaged in

zero pricing in response to a new entrant, unlike in the CD Segment

where NSE imposed a zero price when it was the only player for pro-

competitive and profit maximizing motives”. We fail to see any rationale

behind this argument. Question was not on the date of imposition. The

relevant question is of “continuation of such policy indefinitely”. It is

further argued that there was no foreclosure from the market as was in

the case of Hoffman La Roche. We do not have to wait for the actual

80

foreclosure to happen, even if there is any possibility of the competition

being affected that is sufficient for the purpose of section 4(2). In this

case, it is quite clear that the idea was to oust MCX-SX from the market,

which was the only competitor. Very strangely a reference has been

made to suggest the bona fides on the part of NSE to NSE’s Pricing

Committee’s regular assessment of the nascency of the market after for

the alleged period of 3 years was vindicated on the levy of the fee. We

have already made extensive comments on the minutes of the Pricing

Committee and we need not say anything more. We do not know on

what basis it is then contended that the market continued to be nascent.

In short, we do not accept the six points, which are as under :-

“a. All documentary evidence available on the record evidence

good intent;

b. NSE’s Pricing Committee’s regular assessment of the nascency

of the market after for the alleged period of 3 years was

vindicated on the levy of a fee;

c. Economic analysis also shows that the market continued to be

nascent;

d. Promotional or penetration pricing is a legitimate business

strategy, especially in stock exchanges;

e. NSE was meeting its competition; and

f. NSE’s past conduct in other segments have been grossly

misinterpreted and in fact demonstrates that NSE did not

have any anti-competitive intent.”

In our opinion, the concept of nascency is extremely fluid.

101. As regards the documentary evidence available, the learned

counsel relies on the Pricing Committee agenda and minutes. We have

already made our extensive comments on the relevant meetings. Indeed

81

if Pricing Committee was and we believe it comprised of experts, we

would have expected it to take notice of the advent of section 4 of the

Act before deciding to continue with the zero transaction fees policy. We

see an admission to that effect, which is as under :-

“NSE’s Pricing Committee could not have predicted a brightline test

as to when the CD Segment would be mature as such a

consideration requires an assessment of a host of factors including

the size of the CD Segment, the growth of the CD Segment, the

current and projected volatility of the Rupee, state of the Indian

economy, etc. What the Pricing Committee can do, and the

evidence on record shows that they did so, was consider the status

of the CD Segment when they made their decisions and determined

that, at that time, the CD Segment was not mature enough to levy

a fee;

Strangely enough, it does not even distinctly mention about the effect of

promulgation of section 4 of the Act. The other contentions on these

Circulars are mere repetitions and we have already considered them

earlier.

102. A reliance has been placed on so called letters by Mr. S.B. Mathur

and Mr. Vijay Kelkar. We have mentioned these letters only to be

rejected as initially the introduction of zero transaction fee policy may be

justified, but its continuance after 20.05.2009 was certainly not justified.

103. The learned counsel argued on the good intention of NSE and

suggested that NSE had not destroyed any evidence. That may be so,

however, the intent of NSE was apparent enough and we have given our

reasons for holding so.

104. The learned counsel argued that since the market had not become

mature, they continued with the transaction fee waiver policy. This is

82

wholly incorrect. In this, there is no evidence to show that NSE ever took

the promulgation of section 4 of the Act into account as also the other

factors like MCX-SX not having any other segment than the CD segment.

The learned counsel tried to argue about the facts which are posterior to

the passing of the order of the CCI about the MCX-SX entry into Equity

and F&O segment. In our opinion, this argument is irrelevant. The

written submissions mention about some other stock exchanges offering

transaction fee waiver to develop the market like Chicago Mercantile

Exchange and NYSE Matchpoint. In our opinion, these facts are

irrelevant, as the facts in this case are entirely different. It was then

urged that the transaction fee waivers are a legitimate new market entry

strategy. That may be so, but the continuance thereof in the wake of the

available facts was wholly incorrect.

105. The submissions then referred to the aspect of nascent market and

the claim made on behalf of NSE that the market throughout remained

nascent, which justified the continuance of zero transaction fee policy.

We are not impressed by this argument at all, as the nascency of the

market does not appear to be the only reason for indefinite continuance

of zero transaction fee policy.

106. We are also not impressed by the five grounds given in support of

nascency of the market. In any circumstance, in our opinion, the

nascency could not continue forever, justifying the zero transaction fees

policy for an indefinite period and particularly after 20.05.2009. It was at

least bound to be considered afresh. The other contentions raised are

mere repetitions of the arguments for nascency of the market.

83

107. The impugned order of the majority was criticized on the ground

that a distinction made by majority in nascent, infancy, immature and

mature market is devoid of logic. Again this is nothing but repetition of

earlier plea about the nascency.

108. An argument was raised about the Bolton Test and the following

three factors were suggested as the conditions thereof :-

(a) Enhanced efficiency gains : meaning falling unit costs, and

increase in the hedging activity;

(b) No less restrictive means of gaining efficiency : includes the

low prices to attract users.

(c) Recoupment due to efficiency : refers to lower per unit cost

to recoup all cost, to recoup all costs.

109. The submission also refers to the Test proposed by the European

Commission in the EC’s Guidelines on the Commission enforcement

priorities in applying Article 82 to abusive exclusionary conduct by

dominant undertakings, they being :-

(a) Efficiencies brought about the conduct;

(b) The conduct is indispensable to realize those

efficiencies;

(c) Efficiencies outweigh way any likely negative effects on

competition and consumer welfare;

(d) Conduct does not eliminate effective competition.

110. Speaking strictly about Bolton test, we agree that the lower prices

are key to attract users. We also agree that the falling unit costs would

increase the hedging activity on the CD segment. However, that is not the

be-all and end-all of the matter. In fact, the last two factors in European

Commission’s Guidelines speak clearly about the negative effect on the

competition as also elimination of effective competition. This is precisely

84

what has happened because of the indefinite continuance of the so called

policy. In our opinion, even if we accept these tests as valid tests, NSE has

clearly failed in the same, in view of the reasons given above. It was very

interestingly suggested in para 244 of the written submissions as under :-

“NSE submits that even dominant enterprises should be allowed to

compete on merits and NSE was constrained to continue its zero

pricing to meet the competition posed by both, BSE and MCX-SX.”

111. It is very interesting to note that NSE describes itself as a dominant

enterprise and then speak about its constraints for continuing the

competition posed by BSE and MCX-SX. BSE was nowhere in the picture

and MCX-SX was the only competitor, whom they wished to eliminate

altogether by introducing zero transaction fees policy, fully knowing that

MCX-SX did not have any other segment to deal with. The written

submissions mention about the schedule of the Circulars right upto 26th

March, 2012. Very significantly, we do not see any Circular after 30th

March, 2009 even to cover the period after 20th May, 2009. All the other

contentions are repetitions of the earlier arguments, which have been

considered earlier.

112. A reliance placed by MCX-SX on the decision in Napp Pharmaceuticals

([2012] CAT 1) was criticized in the written submissions and it was

suggested that Napp was selectively pricing below AVC to “see off”

competitors and hence it was found guilty. It was then urged that NSE

did not price below its AVC, nor did it had any intention to “see off” its

competitors. We hasten to add that the contention is about the price being

below AVC is completely incorrect for the reasons given earlier. In our

opinion, MCX-SX correctly relied on the above mentioned decision.

85

Lengthy submissions were made about the questions posed by the D.G.

and the answers thereto, as also about the Equity, F&O and WDM

segments of NSE, so also Gold ETF. We find all these contentions to be

irrelevant. It was further suggested that the argument that NSE was

aware of MCX-SX potential entry and hence in the very first decision it

decided to waive transaction fees was incorrect and flawed. This argument

is in fact termed as being too remote. We do not think so. The action on

the part of NSE in continuing with the zero transaction fees policy,

according to us is a classic example of exclusionary conduct. Same

argument are repeated in respect of data feed waivers and the same plea

of nascent market etc. are repeated in the written submissions. We have

already dealt with data feed waivers. We have no doubt that, it was also a

part of the strategy on the part of NSE. Some facts about the DotEx were

also pleaded. We have already pointed out that, this issue was no more

open. We would therefore not go into that issue.

113. Similar arguments appear to have been addressed in the written

submissions in respect of admission fees and deposit fees. Admittedly, the

same arguments in respect of transaction fees waiver are also repeated in

respect of both these aspects. We endorse the finding of the majority that

these waivers too were anti-competitive in nature. We are therefore, fully

convinced that the conduct on the part of NSE in waiving various fees,

such as transaction fees, data feed fees, admission fees etc. was absolutely

anti-competitive. We also confirm the finding of the majority that this

caused the breach of section 4(2) of the Act and was a classic example of

abuse of dominating position by NSE. This takes us to the issue of

leveraging covered under section 4(2)(e).

86

114. We are fully convinced that majority order was incorrect in holding

the NSE guilty of the breach of section 4(2)(e). We have gone through the

order and the acrobatics therein for seeing two markets. We wonder as to

how a second market could be found out. We will discuss this in the

further paragraphs. However, Shri Haksar very fairly submits that if we

hold that the market, as we have held, being the security exchange

services, there would be no question of section 4(2)(e) being breached. As

it is, he did not very seriously press this issue, nor did he support the

finding of the majority on the question of the breach of section 4(2)(e), i.e.

leveraging for the same.

87

115. The language of section 4(2)(e) of the Act itself suggest that there

have to be two markets, one in which the enterprise has a dominant

position and the other in which it intends to enter or protect. However,

both the markets must be relevant markets distinct from each other. In

the wake of our finding, as also the finding by the D.G. that the relevant

market in this case is the services by the stock exchange, there is no

question of two markets and on that short ground itself the allegation

about being guilty of the breach of section 4(2)(e) of the Act must fail. In

our opinion, that will be the correct position in law.

116. However, we must at the same time take stock of the finding of CCI,

since we do not agree with their finding of the relevant market being the

market for services of stock exchange only in the CD segment. The CCI in

its discussion on the subject first discussed the language of the section and

goes on to consider the concept of associational link. The CCI also seems

to have taken into consideration the language of Explanation to section

4(2) of the Act. It has also taken into consideration the fact that both the

markets envisaged in section 4(2)(e) of the Act have to be relevant market.

We must add that what is required to be guilty of the breach of section

4(2)(e) is under :-

(1) That the enterprise has a dominant position in one market;

(2) That the enterprise is dealing in not only the market in which it

is dominant, but some other market also; and

(3) It wants to enter into an entirely new market or protect the

same.

117. In paragraph 10.83 of the impugned order an incorrect proposition of

law appears as under:-

88

“While its conduct in the second market has to be separately

examined for abuse if and after it acquires a dominant position there,

the fact that it has used the strengths from the first market to

wrongfully enter into or to protect the second market is

independently considered harmful to competition under the Act.”

118. We must point out that it is not necessary for the breach of section

4(2)(e) of the Act to be dominant in the second relevant market. It is

enough, even if the enterprise wishes to use its strength in the market in

which it is dominant to enter into or to protect the other (second market).

In paragraph 10.84 of the impugned order, the CCI considered the

differences in the language of sections 4(2)(a) to (d) of the Act on one

hand and section 4(2)(e) of the Act on the other. Then a very interesting

differentiation is made in the two markets. The first being the CD segment

as ‘X’ market, and the second being the non-CD segment as the ‘Y’ market.

The CCI then referred to the so called complexity on the basis of the fact

that NSE has been considered dominant in the CD segment due to its

strengths in all the non-CD segments. The CCI asked itself a question, as

to how, once determined as dominant in the CD segment, could the charge

of leveraging the position in the that market to enter or to protect the

same CD segment itself be made. Then it goes on to say that this question

assumes that once the CD segment has been taken as the relevant market,

then wherever the word relevant market occurs in clauses 4(2)(a) to (e) of

the Act, it should automatically refer to CD segment. In our opinion, this

discussion is completely illogical.

119. In paragraph 10.85 or the impugned order, the CCI goes on to

explain that the relevant market for clause 4(2)(e) of the Act can be

89

different from the relevant market for clauses 4(2)(a) to (d) of the Act, but

the aspects of dominance given in explanation (a) would apply equally to

both. We also do not approve of this statement of law. We also do not

approve of the further inference “in fact the scheme of the section,

particularly when read with section 19(4) is such that it is possible to take

one market as the relevant market for sub-sections (a) to (d) of section

4(2) and the same market as the other relevant market for section

4(2)(e)”. Reliance is then placed on section 19(4) in paragraph 10.88 of

the impugned order, which is as under :-

“In the Indian Competition Act, under section 19(4), the ability

to leverage, in itself, is taken as one of the factors of dominance.

This revalidates our observation above that both "position of

strength" as well as the concept of leveraging has slightly different

nuances in the Indian Act. Phrases like "size and importance of

competitors", "vertical integration", "relative advantage" etc. are

concepts that indicate the strength to leverage based on strengths in

other markets. It is this strength that would render an enterprise

dominant in the relevant market itself and would expose its conduct

therein to evaluation of any other abuse of dominance separately. At

the same time, the wrongful exercise of that strength by itself is also

held as abusive conduct in its own right, under section4(2)(e).

120. The CCI has completely misdirected itself on the basis of incorrect

and faulty logic. In paragraph 10.89 of the impugned order, the CCI

proceeded on the ground that in both ‘X’ as well ‘Y’ market the enterprise

was dominant and held that same was the situation in this case, meaning

NSE was dominant in both CD market as well as in the so called non-CD

segment. After thus discussing the law, the CCI posed four questions,

which were:-

90

“(a) Whether NSE held a position of strength in the CD segment

market comparable to its position in the CD and non CD

segment markets as a whole?

(b) Whether NSE enjoyed advantages in the CD segment market

by virtue of its dominance in the non CD segment market?

(c) Whether NSE customers in one market were potential

customers in the other?

(d) Whether NSE and its competitors could become competitors in

both markets?”

121. It then proceeded to hold that the two relevant markets had

associational links and therefore, NSE used its position of strength in non-

CD segment to protect its position in the CD segment. The CCI then

answered all these questions in positive, on the basis of non-existent fact

that MCX-SX was likely to be a competitor of NSE, since it had applied for

the other segments. We do not think that the order of CCI was for valid

reasons and was based on the correct interpretation of section 4(2)(e) of

the Act. In our opinion, if the relevant market as held by the CCI was only

the CD segment, then there could not be any other market like non-CD

segment. There was no necessity of putting all the other segments in one

group and indeed it could not have been done, much less to hold it as

another relevant market. The logic of the CCI on this question is flawed

and we reject the same. We, therefore, hold that the NSE could not have

been guilty of the breach of section 4(2)(e) of the Act, basically on the

logic that there was only one market and that market was the services of

the stock exchange. Merely because at the relevant time period, the

services of the stock exchange of MCX-SX were limited to CD segment, it

does not mean that the relevant market had to be held as a CD segment

91

market. We set aside the finding of the CCI on this issue. This brings us

to the question of penalty.

122. Detailed submissions were addressed to us on the question of

penalty. The CCI while considering the penalty considered the following

contentions raised by NSE in respect of the imposition of penalty. They

are:-

(1) Novelty : Meaning thereby that the alleged violations being

based on novel concepts and principles, they were incapable of

having been anticipated for the purpose of compliance;

(2) Uncertainty on application of law : It was suggested that since

in the absence of guidance papers or a case law from the

Commission, there was large element of uncertainty in the law;

(3) Lack of cogent or convincing evidence;

(4) Lack of intention or negligence : In this it was suggested that

there was no ill-intention, nor was there any negligence on the

part of NSE, in commencing the zero transaction policy;

(5) No foreclosure : In the sense that since there was no

foreclosure in the CD segment, there could not be an abuse of

dominance. In this, it was pointed out to the CCI the losses

incurred by MCX-SX as a result of zero pricing policy of the NSE

were small in comparison with MCX-SX excess capital and MCX-

SX not being harmed;

(6) Benefit to ultimate consumers;

(7) Expansion of the market;

(8) Contribution to economic development;

(9) Meeting the competition;

(10) Full support and cooperation;

(11) Principle of Proportionality;

(12) Order contrary to foreign precedents;

(13) Miscellaneous arguments made before them on the basis of

case laws of European Commission.

92

123. It was also argued that the OECD document mentioned that lighter

measures should be used when such a subject was never dealt with by the

Courts in past. Even section 53N of the Act was referred to press the

contention that no penalty should be imposed. Arguments were also made

before CCI on the question of behavioural remedy. It was also urged that

the cost estimates provided by the D.G. were incorrect. Further, the

concept of turnover was also attacked and it was suggested that since

turnover was zero in the CD segment, there was no need of penalty. The

CCI seems to have discussed all these aspects in details in paragraph 18 of

its order and answered each such aspect, particularly on the question of

novelty and uncertainty on application of law. We are generally satisfied

with that discussion. The CCI has also commented on the other aspects

like lack of cogent or convincing evidence and lack of intention or

negligence. A thorough discussion was done by the CCI in its order and

practically on all the aspects it has given its comments. We are completely

satisfied with the views expressed in this behalf while considering the

penalty under section 27 of the Act. Lastly it was mentioned that even the

mitigating factor wherever justifiable were not taken into consideration. It

has been held by the CCI that besides the abuse of dominant position in

terms of section 4(2)(a)(ii), it has cross subsidized from other segments of

business; that it also camouflaged its intentions by not maintaining

separate accounts for the CD segment; that NSE created a façade of the

nascency of market for not charging any fees on account of transactions in

the CD segment; it expressed that the small pockets were bound to be

thrown out of the market, if they had also followed the zero transaction fee

policy, which was adopted by NSE by incurring huge losses. The CCI also

93

took into consideration the past conduct of NSE and its conduct in the CD

segment suggesting longing on its part for dominance in any segments and

therefore, it proceeded to pass on the order prohibiting the NSE from the

practice of unfair pricing, exclusionary conduct and unfairly using its

dominant position in other markets to protect the CD segment market.

The CCI also directed NSE to maintain separate accounts and further

directed it to modify its zero price policy in the CD segment and ensure

that appropriate transaction costs were levied. It then proceeded to hold

that in view of this behavior on the part of NSE the penalty at the rate of

5% at the average turnover was liable to be levied. Accordingly, it took

into account the turnover being Rs.3328.98 crores, the average turnover

being Rs.1109.66 crores. Accordingly, the CCI ordered the penalty @ 5%.

In our considered opinion, the CCI has in fact practiced restraint on itself in

ordering only 5% of the average turnover, when it could have gone right

upto 10% of the average turnover. Considering the total turnover, the

average turnover, in our opinion the CCI was quite justified in ordering the

penalty at the rate of 5%. It was also repeated before us that this was a

new law and like European Union in two cases, no penalty should have

been levied. It was also argued that in past the CCI had imposed either no

penalties or symbolic penalties. The examples of Distribution of package

tours during the 1990 World Cup, [(1992) OJ L 326/31] as also Clear

Stream (Clearing and Settlement), 2009 [OJ C 165/7] case were given

where no impositions of penalty was ordered. The CCI has thoroughly

discussed all these arguments, which were placed before it. We are quite

satisfied with the appreciation of the material put before the CCI as also

before us. The uncertainty in the application of law was also pressed into

94

service like it was done before the CCI. We agree with the CCI in its

observations about these aspects. It was tried to be said that there were

benefits of zero pricing and that there was no denial of market access. We

agree with the CCI for the reasons given for rejecting these contentions

and for the same reasons, we also reject these contentions. Much was

made about penalty levied @ 5% of the average turnover. Our judgment

in the case of M/s. Excel Crop vs. CCI was pressed into service to suggest

that the relevant turnover should alone be considered for the sake of

penalty. All these arguments of relevant turnover should fall to the ground

in the wake of our finding that the relevant market in this case IS the

services of stock exchange in all the segments. In M/s. Excel Crop’s

judgment, there were well defined distinct markets and it was a multi-

commodity company. That is not a case here. Then, it was pointed out

that the relevant turnover on account of the zero transaction fees policy

was also zero. So, we were therefore asked to adopt a notional turnover

figure. We have already pointed out that the NSE was making tons of

profits from the relevant market on account of its services in the other

segments. Therefore, there can be no justification for taking any lenient

view, nor is it necessary to consider the concept of notional turnover

figure, when the turnover of the NSE is well available on the basis of

Annual Reports. We, therefore, reject the contention that the turnover for

the CD segment should be the relevant turnover. In our opinion, we have

given enough reasons to hold that the whole turnover of NSE should be

taken into consideration, in view of our finding on the relevant market.

We, therefore, do not propose to modify the order of CCI in this behalf. As

regards, the other remedies imposed, the NSE has submitted that it should

95

not be required to maintain segment wise account as in a multi-product

firm, it is difficult to apportion shared based fixed costs and further that AS

17 does not requires the maintaining of segment wise accounts. In view of

our finding that the relevant market is the services of Stock Exchange, in

all the segments it will not be necessary to maintain segment wise

accounts. We, therefore, do not approve of this direction by the CCI and it

is ordered to be deleted. Before closing, some submissions were filed on

behalf of the NSE on 30th July, 2014. In fact, these submissions have been

filed much after the time granted for the same and therefore, they should

not have been accepted by the Registry. We refuse to consider them on

this ground alone. We do not see any merits in the Appeal and dismiss the

same. Accordingly, the Appeal is dismissed.

Pronounced in open Court on 5th day of August, 2014.

( Justice V.S. Sirpurkar) Chairman

(Rahul Sarin) Member