9911796707
TMI Blog2014 (8) TMI 1251X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 Tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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" develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gments 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. 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 "integrate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (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 waiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, 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 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 fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. 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 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. 36. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 39. 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 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. 40. 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. 41. The Opposite Parties relied on the reports submitted by the Genesis Economics Consulting Pvt. Ltd. (Genesis) and Prof. Richard Whish, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 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. 44. 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 45. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icipation, 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 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... X-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. 49. 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 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mises, 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 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. 50. It was also heavily argued by NSE that considering the definition of section 2(t), the relevant product market must comprise of all thos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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". 52. Second example given was Australian Stock Exchange and SFE 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges would be the relevant market. 54. 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 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 significa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 55. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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". ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are 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. 60. 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 currenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 62. 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 competit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... X-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssued 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 mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 68. 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s case are extremely relevant. They being about the temporary losses suffered by the dominant player. 72. 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 Brand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature of the 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 resource ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble 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 v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 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. 80. 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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. 83. 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. 84. 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 substan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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". 92. 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. 93. 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 abs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. 97. 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. 98. In paragraph 174 of the written submissions made by NSE, there are repetitions of the earlier argument that NSE had not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment, 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. 101. 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. 102. 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. 103. The learned counsel argued that since the market had not become mature, they continued with the transaction fee waiver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission 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. 109. 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 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 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 112. 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). 113. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the Act. 117. 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egment 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? 120. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cked 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 facade of the nascency of market for not charging any fees on account of transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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 contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
