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TMI Blog2014 (8) TMI 1251X X X X Extracts X X X X X X X X Extracts X X X X ..... tions 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. The CCI is agreed upon, for the reasons given for rejecting these contentions and for the same reasons, these contentions are rejected. Much was made about penalty levied @ 5% of the average turnover. The case of M/s. Excel Crop vs. CCI [ 2017 (5) TMI 542 - SUPREME COURT ] 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 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, it was asked to adopt a notional turnover figure. It is 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 taki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant 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 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) execu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccording 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.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 exch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ail 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able 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 thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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, 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, Professor of Law at King's College. Similarly, the Informant relied on the reports of their economic consultants, LECG Ltd. 42. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 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 br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange 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. 46. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 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 conclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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) optio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % 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 domin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 param ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 currency derivatives. The order then 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CI 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 . 63. 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 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 compet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive 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. 65. The minority order then went on to consider the definition of 'dominance' in section 4 and stressed at the words ....in its favour . It 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 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 jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holesale 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 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 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 argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice 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 strength is not considered in isolation, it is only one of the factors to make it as a dominant player in the relevant market. 69. Shri Sibal then relies on the observation of the minority particularly in para 8.2.6. We have already pointed out that the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 70. 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 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 op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 predatory pricing. We will have to test this claim of the average variable cost being zero in case of CD segment. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 78. 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 despite the advent of section 4 of the Act, continuing with the same to an indefinite period. In this behalf, we woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 79. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings 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. 81. 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 year, NSE had levied charges of Re. 1/- per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). 85. The D.G. then noted that though NSE was asked to provide comprehensive details of allocation of all fixed and variable costs for the 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 segme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 87. 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 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. 88. It also noted about the NSE's failure to give separate segment figures to the DG. 89. It then referred to the fact tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir 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 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 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. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel 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 policy. This is 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 availab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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 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. 110. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. 114. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termined 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. 118. 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 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, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 market. We set aside the finding of the CCI on this issue. This brings us to the question of penalty. 121. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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