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The Competition Appellate Tribunal has given a detailed order confirming the order of the Competition Commission of India (CCI) and has found that National Stock Exchange (NSE) has abused its dominance in the market of stock exchange services and has upheld the penalty imposition on NSE given by the CCI.
The case dates back to 2009 when MCX-SX had filed information before the CCI stating that NSE has abused its dominance in the market of stock exchange services by levying zero transaction fees only for the currency derivatives (CD) segment.
While NSE was charging transaction fees for other segments like futures & options (F&O), they were giving repeated waiver on transaction fees for the CD segment and had kept the admission fee at a low level. MCX-SX had no option but to follow suit and give a waiver on transaction fees to enter the stock exchange services market.
While NSE was charging transaction fees for other segments like futures & options (F&O), they were giving repeated waiver on transaction fees for the CD segment and had kept the admission fee at a low level. MCX-SX had no option but to follow suit and give a waiver on transaction fees to enter the stock exchange services market.
It must be noted herein that NSE operates on all four segments: equity, F&O, wholesale Debt Market (WDM) and currency derivatives whereas MCX-SX only has the regulatory license to operate in the currency derivative space. The CCI, in its order had held that NSE has abused its dominance in the market for “stock exchange services for currency derivative market” by indulging in abuse of predatory pricing and leveraging, and levied a penalty of INR 55.5 crores on NSE.
For undertaking any abuse of dominance complaint, there are three steps which needs to be undertaken by the competition authority - defining the relevant market, determining whether the entity in question enjoys a dominant position in the relevant market and whether the dominant entity has abused its dominance.
Relevant market
The Appellate Tribunal has noted 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 competition law assessment therefore has to be on the services offered by stock exchange, independent of the product being traded on that exchange because a stock exchange does not sell a product like WDM, F&O, securities and currency derivatives. Therefore, the Appellate Tribunal did not agree with the conclusion of the CCI on relevant market and held that the relevant market is the “market for stock exchange services” as opposed to stock exchange services for an individual segment like currency derivatives.
Dominance
The analysis of the Appellate Tribunal on dominance was based on the premise whether NSE could continue with its no-transaction-fee policy, as compared to its competitor MCX-SX. The Appellate Tribunal noted while NSE could continue because of its financial strength, MCX-SX could not have continued with that policy because they were suffering huge losses. The exchange had no choice but to adopt the same policy of no-transaction-fees to enter the market of providing stock exchange services.
NSE continues with their policy of providing repeated transaction waivers only for services provided by them in the CD segment knowing fully well that MCX-SX, which has no other presence apart from providing services in the CD segment, had no option but to follow suit. It was noted by the tribunal that in spite of levying zero transaction fees, NSE was making astronomical profits whereas MCX-SX was slowly bleeding to death by incurring huge losses.
Predatory pricing
To establish abuse of predatory pricing, two things have to be proved - pricing of the dominant enterprise was below cost, as identified by the CCI, which can be average variable cost, average total cost, long run incremental cost, depending on the nature of the industry and that the pricing was done with an intention to have an anti competitive foreclosure.
Having analysed the costs involved in providing stock exchange services in the currency derivative segment, the tribunal held that under no circumstances can the average variable cost in running services in the currency derivative segment be zero. Therefore, the policy of giving transaction waivers is definitely below cost.
On the aspect of anti competitive foreclosure, the tribunal concurred with the findings of the CCI that 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 running the business.
It is also a fact that no enterprise would have the intention to engage in a profit-less venture for eternity. Further, the Appellate Tribunal noted that for an offence of predatory pricing to be proven, the competition agencies need not wait for actual foreclosure to happen i.e. wait for MCX-SX to actually exit the market and that a possibility that competition will be foreclosed is sufficient. Based on the above, the Appellate Tribunal held that NSE has abused its dominance and upheld the penalty verdict of the CCI.
Gateway for filing a compensation application
Post the order of the Appellate Tribunal, MCX-SX can now file an action for compensation before the Appellate Tribunal under Section 53 N of the Competition Act. The Competition Act provides for an application to be filed to the Appellate Tribunal to adjudicate on any claim for compensation that may arise from the findings of the CCI on account of anti-competitive acts of any enterprise.
The compensation may be claimed for any loss or damage suffered as a result of the anti-competitive practices. It is a well settled proposition under antitrust laws internationally that damages include loss of profits and loss of business opportunities as well. As a general rule, these laws enable the complainant to be put back in a situation where there was no infringement.
Therefore, factual data on different economic variables such as transaction fees, transaction volumes, profits, costs or market shares needs to be submitted to Appellate Tribunal and analysis has to be done to determine a quantum of compensation.
(The author is Partner at Khare Legal Chambers and has written a book titled “Competition law in India”.)
