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TMI Blog2011 (6) TMI 1043X X X X Extracts X X X X X X X X Extracts X X X X ..... y market and secondary market. 1.3. Primary market is that part of the capital markets that deals with the issuance of new securities. It is where the initially listed shares are traded first time, changing hands from the listed company to the investors. It refers to the process through which the companies acquire capital through the sale of new stock or bond issue to investors. This is typically done through a syndicate of securities dealers. 1.4. The secondary market is an ongoing market, which is equipped and organized with its own infrastructure and other resources required for trading securities subsequent to their initial offering. It refers to a specific place where securities transaction among several and unspecified persons is carried out through the medium of the securities firms such as licensed brokers or specialized trading organizations in accordance with the rules and regulations established by the exchanges and the extant laws and regulations laid down by the regulators. Such an institution is called a stock exchange. 1.5. Stock exchanges are enmeshed in the economy of a nation and are the most important mechanism of transforming savings into investments. Over the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k market in India was the formation of the Native Share and Stock Brokers Association at Bombay in 1875, the precursor of the present day Bombay Stock Exchange. During that time trading in stock market was just a nascent concept and was limited to merely 12-15 brokers. The 'stock market' was situated under a banyan tree in front of the Town hall in Bombay (now Mumbai). This was followed by the formation of associations/exchanges in Ahmedabad (1894), Kolkata (1908), and Chennai (1937). In addition, a large number of short-lived exchanges emerged mainly in buoyant periods to fade into oblivion during subsequent economic downswings. After 5 decades of existence, the Bombay Stock Exchange was recognized in May 1927 under the Bombay Security Contracts Control Act, 1925. 1.10. Recognizing the growing importance of stock exchanges and the consequent need to regulate their affairs, the Government of India passed the Securities Contract Act in 1956. With the start of the era of economic reforms and liberalization in the '90s, the Government revoked the outdated Capital Issue Act of 1947 and established The Securities and Exchange Board of India (SEBI) on 12 April, 1992, in accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he initial recognition has been extended from time to time by SEBI vide gazette notifications. It is now understood that the renewal of recognition has further been extended for one more year. Further, as per the information, MCX-SX has regulatory approvals to operate an exchange platform for trades in currency derivatives (CD segment). The initial approval permitted only 'currency futures' in USD-INR of different tenures up to 12 months for trading on MCX-SX exchange platform. However, IP has now been granted approvals for trading in GPB-INR, EUR-INR and JPY-INR pairs. MCX-SX has also got the necessary authorization from Reserve Bank of India ('RBI') under section 10 of Foreign Exchange Management Act, 1999 ('FEMA') to undertake above activities. MCS-SX has also applied to SEBI for permission to operate in the equity/cash ('equity') and equity derivatives--futures and options ('F O') segments. MCX-SX has also communicated its willingness to SEBI to commence the SME (small and medium enterprises) segment and also applied for permission to introduce interest rate futures. (ii) The promoters of the informant are Financial Technologies of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indices, for co-branding equity indices. IISL provides a broad range of services, products and professional index services. It maintains over 80 equity indices comprising broad-based benchmark indices, sectoral indices and customized indices. Many investment and risk management products based on IISL indices have been developed in the recent past, within India and abroad. These include index-based derivatives traded on NSE and Singapore Exchange and a number of index funds. NSE owns 50.99% equity in IISL. (c) National Securities Clearing Corporation Limited ('NSCCL') is a wholly owned subsidiary of NSE which was incorporated in August 1995. It was set up to bring and sustain confidence in clearing and settlement of securities; to promote and maintain, short and consistent settlement cycles; to provide counter-party risk guarantee, and to operate a tight risk containment system. NSCCL commenced clearing operations in April 1996. NSCCL carries out the clearing and settlement of the trades executed in the equities and derivatives segments and operates subsidiary general ledger (SGL) for settlement of trades in Government securities. It assumes the counter-party risk of each me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock exchange services. 2.2. The informant submitted that the informant and NSE are providing currency futures exchange services. The NSE through its circular dated 26.8.2008 announced a transaction fee waiver in respect of all currency future trades executed on its platform. NSE has continued to extend its waiver programme from time to time despite the fact that the currency derivatives (CD) segment is now mature and trading the CD segment has become high volume and potentially profitable. 2.3. It is alleged that due to transaction fee waiver by the NSE, the MCX was forced to also waive the transaction fee for the transactions on its platform for CD segment from the date of its entry into the stock exchange business which results into losses to the MCX. 2.4. It is also alleged that NSE is charging no admission fee for membership in its CD segment as compared to charging of membership fee in the equity, F O and debt segments. NSE also does not collect the annual subscription charges and an advance minimum transaction charges in respect of CD segment. The cash deposits to be maintained by a member in the CD segments are also kept at a very low level compared to its other segments. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ractices based on massive reserves built through accumulation of 'monopoly profits over the years. In contrast, informant is dependent solely on the revenues from the CD segment and its losses are mounting in view of its transaction fee waiver, the continuation of which is compelled by the NSE's decision to continue with the fee waiver. 2.10. It is also alleged that the continuation of NSE's fee waiver would not only eliminate the business of the informant in CD segment but also eliminate potential and efficient competitors from the entire stock exchange services. Informant has alleged that the fee waiver and other concessions in CD segment have been adopted by the NSE as an exclusionary device to kill competition and competitors, and to eliminate the informant from the market as a supplier of stock exchange services. NSE has, therefore, used its dominant position in the relevant market to eliminate competition and its competitors. Informant has also alleged that the NSE along with DotEx and Omnesys violated provisions of section 4 of the Act by denying the integrated market watch facility to the consumers by denying access of Application Programme Interface Code (APIC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 26(1) of the Act. The Commission, therefore, directed the office of Director General, vide Order No. F. No. 1(20)2009-Sectt., dated 30.03.2010, to investigate the matter and submit the report to the Commission. 4. Application for interim relief 4.1. The informant also filed an application for interim relief under section 33 on 6.7.2010. In its application, the informant stated that the opposite party continues to offer its services in the CD segment free of cost despite a significant increase in turn over. Consequently, the Informant claimed to have suffered a combined loss of around Rs. 100 crores (1 billion). 4.2. The informant also submitted that the Commission had already formed a prima-facie opinion in this case and ordered investigation under section 26(1) of the Competition Act, 2002. The predatory conduct of the opposite party had continued despite initiation of investigation. If the informant is forced to exit market, it would result in irreparable injury. Therefore, the informant pleaded that the balance of convenience is in favour of grant of interim relief against NSE and its associates. The informant also argued that unless interim relief was granted, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t stock exchanges. The derivative market is of recent origin and not interchangeable or substitutable from the demand side. Further, the CD segment is essentially for the importers and exporters who desire to hedge the currency fluctuation risk which is not the case in equities/debts/F O segments. Without prejudice to this contention, NSE argued that if at all the question of interchangeability or substitutability arises the CD market may be seen as a substitute of the OTC segment. 5.4. The DG has considered the following segments for arriving at a relevant product market: (i) Equity segment; (ii) Equity F O segment; (iii) Debt segment; (iv) CD segment; and (v) OTC market for trades in foreign currency. 5.5. The DG report observes that MCX-SX, NSE and BSE are all recognised exchanges under the Securities Contracts (Regulation) Act, 1956 (SCRA). After the issue of regulatory framework, both BSE and NSE could commence trading in CD segment immediately. This fact indicates that CD segment is part of the stock exchange market services. According to the DG report, since any exchange can easily start operations in any of the segments of capital market, there is supply side substitutabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report further observes that the 'end to end operation and control mechanism for all the segments of stock exchanges is identical and indicates towards product substitutability'. Thus, the DG report takes the position that similarity of operations of stock exchange services in relation to different segments traded in exchanges indicates that the products and indeed the segments are substitutable. 5.11. The DG report has also examined the membership patterns of MCX-SX and NSE and concluded that 'a very high commonality of members at NSE as well as IP (MCX SX) with the membership of other segments clearly establish that the existing members of other segments are primary traders in the CD segment........This further implies that actual hedgers of foreign exchange do not see any substitutability or interchangeability in the CD market as against OTC market'. 5.12. During the course of the discussion on delineation of the relevant market, the DG report has examined the efficacy of using the SSNIP test for determining market definition. The report observes that 'demand substitution can only be found by considering a speculative experiment, postulating a hypothetical s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arted in June, 2001. However, since 2001-02, NSE has consistently maintained market share of over 90% with a slight dip to 88.91% during 2009-10. As per the information available at the time of investigation, NSE had a market share of 47-48% in the CD segment as against 52-53% of MCXSX. The combined market share of NSE for equity, F O, WDM and CD segment rose to 92.53% in 2008-09 as compared to 5.01% in 1993-94. In view of this statistics, NSE is a dominant player. (ii) Size and resources of the enterprise: Financial statements of NSE were examined for the financial years 2008-09 and 2009-10. As at 31.3.2009, equity capital of NSE stood at Rs. 45 crores (450 million); reserves and surplus of Rs. 1,864 crores (18.64 million) and deposits from trading members of Rs. 917 crores (9.17 billion). During the year, NSE earned a total income of Rs. 1042 crores (10.24 billion) with profit before tax of Rs. 689 crores (6.89 billion). These figures indicate a very sound financial position and consequent market power of NSE. (iii) Size and importance of the competitors: After commencement of trading by NSE in November, 1994, the remaining 19 original exchanges started collapsing due to intense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... These carry out a gamut of stock exchange related activities such as IT solutions for investors and brokers, rating and indexing services, trading platforms, market watch, etc. In contrast neither BSE nor MCX-SX have themselves or through group companies such wide array of activities related to stock exchange services. MCX SX is in about 450 centres only and operates merely in the CD segment. BSE is largely concentrated in Maharashtra and Gujarat and that too is limited to the equity segment. (vi) Dependence of consumers: Due to its resources, market share, economic power, integrated operations, NSE dominates the consumers of stock exchange services in India. Stock exchanges work on the basis of network effect or network externalities. With a far greater number of buyers and sellers using NSE, it enjoys the benefits of network effects resulting from higher liquidity and lower transaction costs. These positive network effects attract even more buyers and sellers to NSE as a chain reaction. Thus an increasing numbers of consumers are depending on NSE not only in respect of trading but in respect of a host of related services. (vii) Countervailing buying power: Typically, the users o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s segments. For the capital market equity segment, it was observed that NSE has charged transaction fees ranging from Rs. 9 to Rs. 12.50 per lakh (1,00,000) in the past. In F O segment, where both NSE and BSE commenced trading in June, 2000, NSE levied Rs. 2 per lakh of trading value (0.002% each side) or Rs. 1.00 lakh annually, whichever is higher. After two months, NSE waived transaction charges in this segment through a circular dated 31 July 2000. Soon, this strategy brought results as NSE turnover outstripped that of BSE by mid-2001. By March, 2002, NSE turnover was Rs. 1078 crores (10.78 billion) whereas BSE turnover was meagre Rs. 2.52 crores (20.52 million). NSE did not extend the waiver. The waiver in options in sub-sections of F O continued till 2005. 5.20. In WDM segment, NSE commenced trading in June, 1994, and till June, 1995, levied transaction charges of Re. 1 per Rs. 1 lakh (Rs. 1,00,000) of order value of trades. This clearly shows that NSE did not have a historical philosophy of waiving fee to develop a nascent market. 5.21. Another example to refute the development of nascent market theory of NSE indicated in the DG report is its conduct relating to Gold ETF. Tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocuments, the DG report observes that NSE reduced deposit structure w.e.f. 28 November, 2008 which was subsequently followed by MCS-SX from 13 January, 2009. Thus, as per DG report, even here it was NSE that took the first step. Data Feed Fee waiver: 5.28. The Informant had alleged that NSE is not charging any fee in respect of its CD segment right from the beginning. Consequently, MCX-SX has also not been in a position to charge the fee. Data feed refers to providing prevailing market prices and data for the segment by the stock exchange for significant consideration. The vendors display this information on their subscribers' terminals. The data fee is a significant source of income for the stock exchanges. 5.29. In its response, NSE stated that the reasons for not charging data fee were the same as those for not charging transaction fee for the CD segment. NSE informed that DotEx (a 100% subsidiary) provides the data feed service for NSE in various forms such as on-line streaming, intraday snap shot, end of day feed and historical feed. Since DotEx does not charge any fee for the CD segment and, therefore, NSE does not charge its clients. However, as per its own admission, NS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial facility of APIC is still available to ODIN for other segments, the same has not been given for the CD segment. 5.35. In its reply, NSE submitted before the DG that it had placed ODIN on watch list due to complaints of its members and their constituent clients. Ini support, NSE submitted 10 complaints against ODIN, the first such instance being dated 10.4.2006. 5.36. Upon examination of correspondence made available by NSE, the informant and FTIL, the DG concluded that complaints against ODIN had been few and far between. On the whole, end users of ODIN appear to be generally satisfied, which is reflected in the fact that a vast majority of NSE members are still using ODIN for all other segments. ODIN is also being used by several other exchanges in the country. The DG also examined several representations of members of NSE and recorded their statements. Questions regarding the performance of ODIN and NOW were posed to these people. From the statements recorded, no evidence was found to justify the claim of NSE that ODIN was put on watch list due to performance issues. At the same time, investigation and statement of one of the board of directors of Omnesys revealed that even N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etration pricing is to open up newer market segments. There is no intention on part of NSE to oust or eliminate or reduce competition therefore the concept of predatory pricing is not applicable'. 5.43. The DG report contends that even in introductory/penetration pricing, there has to be an element of pricing. According to the DG, in the submissions of NSE, 'the benchmark for assessing the cost has been taken on the premise that costs are fixed if they would not change, were output to double from current levels'. In other words, NSE has argued that if prices do not change even if output is doubled, then it indicates that the cost structure of the product is wholly fixed in nature and, therefore, variable cost can be considered to be approximately zero. NSE contended that for assessing predation, the correct benchmark is average variable cost and since, in this case, that cost is approximately zero then even zero cannot be said to be predatory pricing. 5.44. NSE submitted that average variable cost should be taken as a basis for defining the cost. The cost structure of the CD segment is only fixed in nature and, therefore, variable costs can be considered to be approxima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t cost measure to evaluation predation claims. The limitations of AVC and AAC forced an inclination towards long run average incremental cost (LAIC or LRAIC) as an appropriate cost measure for assessing predation. Unlike AVC, LAIC includes all products specific fixed costs whether recoverable or sunk. It also includes costs incurred before predation period. 5.49. The DG report further states that the Indian stock exchange services, which is the relevant product market in this case, works on the basis of high level of network externalities. Such network effect industries work on very high sunk costs. 5.50. The DG report refers to the Wanadoo Interactive SA (WIN) case of the European Commission [France Telecom SA v. Commission of the European Communities (C-202/07) (2009) ECR I-2369: (2009) 4 CMLR 25] where the concept of average total cost (ATC) was applied. The court in first instance rejected the appeal by WIN against the ruling of the European Commission and ruled,-- If the prices are below average total costs but above average variable costs, those prices must be regarded as all abuses are determined as a part of the plan for eliminating a competitor 5.51. Based on international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segment, 2% to WDM segment and about 1% to corporate debt segment and 7% to CD segment for 2009-2010. 5.56. The DG report makes a reference to European Commission notice-98/C 39/02 wherein it is stated,-- The operators (of postal services) should not use the income from such reserved areas to cross-subsidise activities in areas open to competition...... the price of competitive services offered.......should, because of the difficulty of allocating common cost, in principle be at least equal to the average total cost of provision. This means covering the direct costs plus the appropriate proportion of the common and overhead cost of the operator...... 5.57. The DG report, therefore, makes a strong argument for appropriating proportions of common costs for the CD segment of NSE. Further] the DG has relied on Kelco Disposal I C v. Browing-Ferris Indus of Vt. Inc. 845.2d 404, 408 (2(d) Cir. 1988), of the Second Circuit Court (USA) where it was held that 'the general legal rule is for depreciation caused by use is a variable cost, while the depreciation through obsolescence is a fixed cost'. The DG has, therefore, estimated depreciation of Rs. 5.63 crores (56.3 million) during 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... G report observes that despite there being no adverse change in any of these factors, the NSE board passed a resolution in June, 2010, to enhance clearing and settlement charges in the F O segment. This was clearly a strategy for loading settlement charges for the CD segment on to the F O segment. 5.62. The DG report considered the nature of clearing and settlement services involved in CD segment as being identical to that involved in F O segment, and, therefore, presumes that, as an independent entity, NSCCL would notionaily be incurring expenses in relation to CD segment, such as computer stationery, manpower, computer time, power, etc. Accordingly, DG has applied a notional clearing and settlement charge for the CD segment at 15% of transaction charge and has notionaily taken transaction charge at Rs. 400 per crore (10 million) of turnover which is prevailing in respect of F O segment. Based on this, the DG report makes a notional estimate of Rs. 13.74 crores (137.4 million) which would represent charges payable to NSCCL for the periods from August 2008 to April, 2010. 5.63. To get a clearer picture of cost factors involved in running CD segment, the DG called for financial stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting with it. By not charging transaction fee, data feed fee, etc., NSE is subsidising activities in CD segment which is open to competition. 5.70. The report of the DG refers to Tetrapak II Case and Deutsche Post AG (DPAG)/United Parcel Service (UPS) case where the strategy of cross-subsidies from other business activities was found to be anti-competitive by the European Commission. 5.71. According to the DG report, in the instant case, NSE is charging zero fees in the CD segment but is having substantial earnings from other segments. These aspects have been discussed in detail in the foregoing paras. NSE is also creating barriers for users of ODIN software by not providing APIC to its own software NOW. 5.72. According to the DG report, these conducts of NSE are aimed at leveraging its near monopolistic dominance in F O, equity and WDM segment for protecting its position in the CD segment. Therefore, NSE is in violation of section 4(2) (e) of the Act. 5.73. The DG has concluded that the aforementioned acts of NSE have harmed competition in the Indian Capital Market, particularly in the CD segment. The behaviour of NSE is clearly exclusionary and the-facts gathered during investiga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.2010, 14.12.2010, 22/2/2011, 10.3.2011, 14.3.2011 and 24.3.2011. The informant filed a rebuttal on 21.2.2011 and further submissions on 22.2.2011, 10.3.2011 and 24.3.2011. 6.3. The informant filed further written submissions on 22.2.2011, 10.3.2011, 14.3.2011 and 24.3.2011. The opposite parties 1 and 2 filed additional written submissions on 9.3.2011. Omnesys Technologies (P) Ltd. filed written submissions on 28.2.2011. 6.4. In their submissions and arguments, the opposite parties prominently relied on reports submitted by their economic consultants, Genesis Economics Consulting (P) Ltd. (Genesis) and Prof. Richard Whish, Professor of Law at King's College, London. Similarly, the informant also relied upon reports of their economic consultants, LECG Ltd. (LECG). All the major aspects of the opinions of the above consultants formed an intrinsic part of the arguments of the respective parties and have been dealt with in this order at the appropriate place in the following discussions. 6.5. The main points of all the submissions made and oral arguments of the parties concerned are encapsulated in the following sections. 7. Contentions of opposite parties 1 and 2 and objections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f these discussions are dealt with in the following paragraphs: Applicability of SSNIP Test 7.5. The DG report has erred in rejecting applicability of the SSNIP test for determining relevant market in this case. It is averred that-- SSNIP test can often is used conceptually, in other words, it is a structured approach for identifying products and producers that provide a competitive constraint. This is often done without quantitative analysis. Further, it was contended 'that not the current price, but a non-zero estimate of the competitive price is to be used. Further, an absolute increase in monitory terms can be used to carry out the analysis...........the hypothetical monopolist test is in fact designed for assessing the competitive interaction between differentiated products...... 7.6. Finally, it is contended that the transaction fees are only a small part of the costs incurred by a trader in stock exchanges, hence,-- The necessary implication is that market participants would not switch to another segment in the face of the modest or even large increase in trading fees, therefore, the segments do not constraint the trading fees charged in other segments and hence are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E in other segment. 7.13. When NSE commenced trading in capital market segment (CMS) in November, 1994, there were about 20 other exchanges already in existence in India. The equity segment products were being traded in these exchanges and the investing public was fully familiar with it. Therefore, initially, no waiver was made by NSE in this segment. The transaction charges imposed by NSE in the equity segment initially were higher than those imposed by other exchanges. Therefore, it cannot be said that NSE uses transaction charges with exclusionary intent. 7.14. NSE commenced trading in the F O segment in June 2000 and imposed a transaction charge of Rs. 2 per lakh of trading value or Rs. 1.00 lakh annually whichever was higher. But soon thereafter, in order to encourage trading in the newly introduced segment, NSE waived transaction fee. It was BSE and not NSE which was the first to reduce transaction fees in the F O segment. The poor performance of the BSE in the F O segment was because of its own shortcomings and there is no evidence that links waiver of transaction fee by NSE to decline of BSE in the F O segment. 7.15. BSE had the same rationale for waiving/reducing transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons other than encouraging wider participation for the waiver. Admission fee and deposit level waiver 7.21. It is contended that NSE reduced deposit level as a reaction to reduction in the same by MCS-SX. Further, there was an objective of market development also involved in its decision. 7.22. MCX-SX waived deposit and admission fees at least up to 6.9.2008. No single waiver was granted by NSE at that time. Data fee waiver: 7.23. The decision regarding the timing of imposing data feed fee in the CD segment was left to the director-in-charge who decided to act on the basis of feedback received from their leading vendors. The decision of the DotEx board as reflected in the minutes was not intended to be immediately followed by imposition of data fee but was intended to be in nature of 'in-principle' approval. The two vendors whose feedback was considered by the director-in-charge are world leaders in financial news reporting and together contributed more than 50% of the revenue of DotEx. That is why their feedback had to be given due weightage. Exclusionary denial of integrated market watch facility 7.24. The conclusion of the DG that denial of access to integrated market wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s empanelment in other sectors. The only reason for NSE for denying APIC for CD segment to the FTIL software ODIN was the complaints received in relation to the functioning of ODIN. Legal and economic objections: 7.33. The DG has wrongly concluded that the 'relevant product market' is the 'stock exchange services market'. It is reiterated that the CM (equity) segment, F O, WDM and CD segments fall into different markets. Also over-the-counter (OTC) market exercise meaningful constraint on the CD segment and the two could be considered as part of the same market. The OPs have emphatically submitted that: (i) Supply side substitutability is not a factor when defining the relevant market. (ii) The rejection of the SSNIP test in this case is incorrect in principle. (iii) The concepts of interchangeability and substitutability are one and the same. 7.34. It is contended that the Indian Competition Act requires that the market should be defined by reference to demand-side considerations, which means that one should take a conventional approach, based on consumers' uses for the products in question. Detailed analysis of the relevant market lead to the conclusion th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded that market shares do not support NSE's dominance in the CD segment. Further, DG has erred in concluding that network affects, economies of scale, and leverage from the broader exchange market creates dominance of NSE in the CD segment. The additional resources available to NSE by virtue of its larger size do not result in any additional advantages nor does the higher degree of vertical integration confer any market power. Abuse of dominance: 7.41. Without prejudice to the contention that NSE is not dominant in the CD segment, the OPs have submitted that- (a) NSE has not provided service at a price which is below cost; (b) NSE's intention to follow a zero pricing policy was not with a view to reduce competition or eliminate competitors. 7.42. It is contended that the DG has erred in concluding that there is a strong case for following average total cost (ATC) or at least long run average incremental cost (LAIC). It is argued that average variable cost (AVC) is the appropriate cost measure. 7.43. It is contended that AVC or average avoidable cost (AAC) is the standard measure for assessing predation. ATC cannot be the standard for determining predation, particularly in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minate effective competition. 7.50. The conclusion of exclusionary abuses by NSE arrived at in the DG report is incorrect. This conclusion is proved wrong due to facts such as consistent growth of MCX-SX; fee waivers by MCX-SX and USE; indication that USE will continue with fee waivers and potential entry of a new exchange of Standard Chartered in the CD segment. These facts clearly reveal that no anti-competitive effect/result has flowed from zero pricing approach. 7.51. The OPs have also argued that any conduct has to be examined so as to demonstrate actual exclusionary foreclosure or a strong likelihood of it. This approach is gaining increasing recognition in the European Commission. The successful entry of USE in the market indicates that NSE's behaviour does not have exclusionary effect. Leveraging dominance: 7.52. The OPs have vigorously objected to the finding of the DG report that NSE has abused its dominant position in the equity, F O and WDM segments to protect its dominant position in the CD segment. 7.53. It is contended that analysis of leveraging requires delineation of two markets that are closely associated with each other. The DG has not defined two such separ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not homogenous. Finally, it was argued that since transaction fees are only a small part of the cost incurred by traders, a small change in the fees would not influence the decision of participants to switch and hence the test would be useless in the instant case. 8.5. The informant also submitted extensive analysis reports by professional consultants and opinions of experts in support of their contentions. Findings of fact in the DC's investigation report 8.6. The informant asserted that the DG has correctly determined all disputed facts first before going on to comprehensive competition law and economic analysis. The informant strongly supported these findings of fact and objected to NSE's allegation that DG had tried to first malign and discredit NSE. The informant considers the investigation report to be the result of meticulous and unbiased investigation. Transaction fee waivers: 8.7. The informant contended that the DG's analysis of NSE's conduct in the matter of transaction fee waiver not only in the CD segment but also in other segments is based on incontrovertible data. NSE's rebuttal is nothing more than afterthought and diversionary tactics. 8.8. Ini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken its minutes, agenda papers, circulars, etc., on face value is not acceptable. The DG has drawn his conclusions based on historical trends and incontrovertible facts. 8.13. The DG has compared NSE's pricing history in equity segment and clearly stated that no waiver of transaction fee was done because NSE was meeting competition rather than beating the competition. Similarly, in F O segments, the DG logically establishes how NSE succeeded over BSE on account of zero pricing and, after vanquishing BSE, it proceeded to impose transaction charges. NSE's argument that it waived transaction fee in F O segment only after BSE reduced their fee from Rs. 2.65 to Re. 0.56 is nothing but a convenient afterthought. This contradicts NSE's argument that it waives transaction fee whenever it launches a new segment/product Clearly, this philosophy was not adopted in F O segment. The informant further contends that complete waiver of transaction fee as a response to reduction by BSE clearly indicates NSE easily resorts to predatory (zero) pricing when faced with competition pressure. 8.14. The informant supports the observation of the DG that NSE followed a similar strategy in the G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and this is not disputed by NSE. Therefore, it is argued that the market definition given by the DG is the correct delineation. 8.21. The informant also argued that exchange-traded currency derivatives and OTC currency contracts form different markets. The RBI Internal Working Group Report on Exchange Traded Currency Derivatives, which is the basis for introduction of CD segment, has itself differentiated the OTC market. Further, OTC products market itself is not homogenous and is segmented; into the merchant bank market and the interbank market. The CD segment: involves standardised contracts for small lot size (USD 1000) bought and sold by hedgers, speculators, arbitrageurs, etc. CD Contracts are markedly different from OTC contracts in terms of characteristics, intended use and class of consumers. Most of the CD segment consumers regard OTC contracts as different and a majority even lacks the legal capacity to enter into OTC contracts. CD segment is regulated by SEBI whereas OTC segment is regulated exclusively under FEMA. 8.22. CD futures is not very liquid and excludes long maturities beyond a couple of months. The OTC market allows only hedging of contractual exposures as op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e financial analysis on the costs. These facts are borne out by the DG report 8.28. It is vehemently argued that there is no need to enter any complicated exercise for determining appropriate cost pricing because in the present case, the OP is charging zero-price. Thus, little would turn on whether AVC, ATC, LRAIC, AAC or any other cost measure is used for establishing guilt. 8.29. It is argued that a particular feature of network markets is consumer lock-in and ex-post hold-ups. In such, markets, once competition is substantially reduced or eliminated, the incumbent player starts charging super normal profits. 8.30. The second limb of definition of predatory price requires below cost pricing with a view to reduce competition or eliminate competitors. The informant argued that the findings of fact in the DG report clearly establish the harmful intent of NSE by looking at past conduct, circulars, minutes and agendas of board meetings, etc. The informant contended that there was considerable direct and indirect evidence from which the intent of NSE becomes apparent. 8.31. The informant has completely rejected NSE's objections to the finding of DG regarding leverage of dominant po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c) Consequently, no claims, under section 4(2)(a), (d), of. the Act will exist; and (d) Without prejudice to the above, there can be no contravention of section 4(2) (e) since the markets are not closely associated and no special circumstances exist which would justify a leverage claim. 10. Issues 10.1. The Commission has given due consideration to facts given in the information, the investigation report of the DG, the detailed written and oral submissions made by the concerned parties along with opinions and analysis of experts relied upon by the informant and the OPs. The relevant material available on record and the facts and circumstances of the case throw up the following issues for determination in this case: (a) What is the relevant market, in the context of section 4 read with section 2(r) and section 19(5) of the Competition Act, 2002? (b) Is any of the OPs dominant in the above relevant market, in the context of section 4 read with section 19(4) of the Competition Act? (c) If so, is there any abuse of its dominant position in the relevant market by the above party? Issue No. 1 10.2. The edifice of competition law rests upon dynamics of competition in one particular market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rading and the order driven platform of the CD segment must be separate; membership of the segment must also be separate and the CD segment must have a separate governing council. The demarcation was so rigid as to stipulate 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. 10.6. Chapter 7 of the report dealing with regulatory and legal aspects stipulates that before the start of the CD segment, the exchange shall obtain prior approval of SEBI. Para 7.4 also stated, 'To begin with, FIIs and NRIs would not be permitted to participate in currency futures markets'. 10.7. The second indicator to be kept in mind is the fact that the informant, MCX-SX was incorporated on 14.8.2008 and was initially authorised by SEBI to operate an exchange platform in trades in CD segment for currency futures in USD-INR of different tenures upto 12 months. NSE was an existing exchange and got permission to commence trading in CD segment on 29.8.2008. The latest entrant into the segment, USE got approval of SEBI in January, 2009. 10.8. The information in this case has been filed by MCX-SX which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uity market 10.13.1 The equity market in the context of the information is the secondary market which allows trading in the equities of various companies at the stock exchanges. The underlying asset in this market is equity. Typically, the stock brokers/traders trading on this market follow trends in the shares of various companies and seek, to gain from movement in share prices. Largely, investment in the stock of companies performing well is a major consideration for picking up equity in that company. (ii) F O market 10.13.2 Futures and options of the derivative market is the F O contracts have equities or equity indices as underlying securities. Futures are contracts to buy or sell an asset on or before a future date at a price specified today: Options are contracts that give the honour the right but not the obligation to buy (in the case of call option) or sell (in the case of a put option) an asset. The considerations for trading in this market, are largely-the same as those in the equity market and consequently/the participants are basically the same. (iii) WDM market 10.13.3 RBI has permitted banks, primary dealers and financial institutions in India to undertake transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing stock exchange services, a product that neither is trading in cannot be said to be part of any market the two are operating in. 10.16. This Commission finds it rather unnecessary to dive into technical tests such as SSNIP, particularly in the absence of historic data of prices. The SSNIP test is a tool of econometric analysis to evaluate competitive constraints between two products. It is used for assessing competitive interaction between different or differentiated products. Ideally, time-series price data or trend should be examined to see whether a small but significant non-transitional increase in price has led to switching of consumers from one product to another. However, international jurisdictions have not reposed excessive faith in this test. The US Horizontal Merger Guidelines, 2010, consider SNIPP test as solely a methodological tool for performing hypothetical monopolist test for the analysis of mergers. Similarly, in its notice published in the Official Journal C 372, 09/12/1997 P, 005-0013, the European Commission advises action on the applicability of SSNIP test for determining market definition in terms of Article 82 of the European Union Treaty. In the instant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remains that regulations require a complete segregation of and separate approval for the CD segment The technical, infrastructural or financial capability of any stock exchange operating in some segment, to start operating in another, has no relation to determination of supply substitutability between the segments. As an analogy, the capability of a grain mandi (wholesale market) to also start a wholesale spice mandi does not mean that grain and spices are interchangeable and substitutable nor does it mean that the platforms of the two mandis is interchangeable or substitutable. 10.21. As briefly discussed in the background section of this order, the stock exchange provides platform or service for stock broker and traders to trade in securities and derivatives. Essentially, a stock exchange is a composite of certain manpower, technologies, facilities and infrastructure which constitute a platform on which the trading is done. Both, MCX-SX the Informant, and NSE, OP I are providing such services for which there is a market. In this case, the stock exchange services in respect of the CD segment in India is clearly an independent and distinct relevant market. 10.22. In view of the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fect its competitors or consumers or the relevant market itself in its favour. 10.28. Unlike in some international jurisdictions, the evaluation of this 'strength' is to be done not merely on the basis of the market share of the enterprise but on the basis of a host of stipulated factors such as size and importance of competitors, economic power of the enterprise, entry barriers, etc., as mentioned in section 19(4) of the Act. This wide spectrum of factors provided in the section indicates that the Commission is required to take a very holistic and pragmatic approach while inquiring whether an enterprise enjoys a dominant position before arriving at a conclusion based upon such inquiry. 10.29. The investigation by the DG followed by the inquiry by the Commission during the course of the proceedings before it has thrown up several facts which, when viewed holistically, project a clear image. Some of the most important facts are mentioned below: (a) In the equity segment of stock exchange services in India, NSE has continuously held high market share for the past 8 years going beyond 71% in 2008-09. (b) In the F O segment, NSE has almost 100% market share. (c) In WDM segment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CD segment market was the latest market opened by the regulators and every one hoped to get a fair piece of this pie. By then, NSE had acquired an overall position of strength in the capital markets and substantial financial might, arguably due to better planning, strategy and management. Every new player would have been aware of this position of strength of NSE but would have hoped that this strength would not be misused to throttle competition. 10.33. The facts and conduct of NSE has to be viewed in the perspective of the picture that has been outlined above. 10.34. An important point in consideration of this issue is the current market structure. As of now, the relevant market has only three players, viz., NSE, MCX-SX and USE. According to some recent figures published in the public domain, this market is currently divided almost equally with about 34% share with MCX-SX, 30% with NSE and 36% with the latest entrant USE, as of October, 2010. Incidentally, this is a very dynamic market and market shares could vary with time. But the important thing is that in a market with just three players, each would have at least some ability to affect its competitors or the relevant market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be done by posing a few questions. 10.39. Firstly, can NSE sustain zero pricing policy in the relevant market long enough to outlive effective competition? 10.40. To answer this, it must be kept in mind that the rationale for doing any business is to earn some profit out of it. Although there could be slightly diverse strategies such as output optimisation, turnover maximisation, profit maximisation, positioning, etc., the fact remains that earning of zero profit or accumulating losses for indeterminate period would never be the goal of any commercial enterprise. Even the desire to develop a nascent market would have the foresight behind it, that it can eventually see profit generating within reasonable and relatively short time frame. No enterprise would spend an eternity on selfless development of any market without any prospects of making profit. The greater the financial and commercial strength of an enterprise, the longer it can wait and the greater risks it can take. Looking at the financial statements of NSE, its reserves and surplus or its profits after tax, it cannot be argued that the capacity of NSE to defer profits or to bear long-term risk of possible market failure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not have similar advantages, is clearly in a weaker position. 10.47. The above discussion leads to the only rational conclusion possible that NSE enjoys a position of strength in the relevant market which enables it to affect its competitors in its favour. To conclude otherwise would not only be turning a blind eye to the facts available but also to the provisions of the Competition Act and to the intent and spirit of this economic legislation. 10.48. In arriving at this conclusion, the Commission has taken into account relevant aspects of the financial statements of the parties concerned, HHI index of more than 5000 in the CD segment (2009-10), ICR3 of more than 99 and other key indicators. The Commission has also interpreted all facts in the context of typical features of regulations in the Indian capital market as well as historical perspective of stock exchange services in India. The Commission has also given due consideration to some important cases from international jurisdictions such as AKZO [(C-62/86) (1991) ECR I-3359: (1993) 5 CMLR 215], United Brands [Case 27/76, decided on 14 February 1978 [United Brands Company and United Brands Continentaal(sic) BV v. Commission of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rkets and there is not enough associational link between the CD segment and remaining segments. 10.54. The Commission has considered every aspect of the investigation report; arguments and contentions made by the informant as well as the OPs and has applied its mind to the facts, circumstances and nuances of the arguments. Many of these have been already detailed in their respective place earlier in this order and it is not necessary to repeat them here. 10.55. While discussing the issue of dominance in the previous section, this Commission has established the position of strength and, therefore, dominant position that NSE enjoys in the market of stock exchange services for currency derivatives in India, which has been ascertained as relevant market for this case. A point in order is that the OPs have themselves broadly contended that this is the correct relevant market. The Commission has only differed to the extent that it has not considered the OTC segment as part of the relevant market. Detailed reasoning for this has already been given at the appropriate place above. Therefore, the defence of the OPs in respect of the dominant position is no longer sustainable. 10.56. As regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edoubtable strength and deep pockets. 10.58. In context of the defence of nascent market development, the Commission has taken cognisance of certain incontrovertible investigative findings of the DG which have a strong bearing on the acceptability of the defence. Some of these main findings are mentioned below: (i) NSE issued a circular dated 26.8.2008 waiving transaction charges in the CD segment 'in order to encourage active participation in the currency derivation segment' till 30.9.2008. The waiver was again extended from time to time till 30.6.2009. Thereafter, the waiver has continued without any circulars. Thus, right from the start, the informant faced the restraint of zero fees. (ii) At no point did NSE waive transaction fee in the equity segment since 1994 because it was a case of meeting the competition rather than beating the competition. (iii) NSE commenced trading in the F O segment in June, 2000. It started with charging transaction fees. This does not support the claim that NSE historically waives fees to develop nascent market. NSE started fee waiver from August, 2000, which continued in varying degrees up to August, 2001. The effect could be seen in BSE tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 'enterprise or group' and Explanation (c) gives a definition for 'group'. Reading both together, non-charging of data feed fee is a conduct that is attributable to NSE and DotEx jointly. The defence of nascent market development and historical philosophy by DotEx is not tenable on this count for the same reasons as discussed above. 10.62. As regards waiver of data feed fee on the basis of customer requests, this Commission notes that the same magnanimity is not evidenced in respect of other segments where data feed has not been waived. Generation of data, creation of backend and front-end software and live data feed involves considerable technical and commercial investment and costs, not to speak of investment of billable man hours. No profit making enterprises delivering such costly services would deliver it free of cost for years merely on customer requests. Even with regard to customer requests not sufficient evidence was produced by the OPs to show that there was overwhelming demand for free services. Even this magnanimity would not have been felt had the only source of earning for the data feed services been the CD segment. For these reasons, this Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated costing based on allocation of various costs, etc., have been mentioned in earlier portions of this order. However, it has been elsewhere noted in this order that since NSE does not follow segment accounting and since it has not given any segment figures to the DG, any exercise to arrive at a costing benchmark would be an exercise in futility in this case. 10.67. A very important finding of the investigation of the DG is that from 1 October, 2008, to 31 October, 2010, BSE incurred Rs. 2.01 crores (20.1 million) for 2008-09 and Rs. 4,69 crores (46.9 million) for 2009-10 as direct and shared cost for running the CD segment. 10.68. The investigation also revealed that the informant MCX-SE is only-operating in the CD segment and examination of its financial statements of 2008-09 and 2009-10 reveals that it is incurring variable costs. The operating expenses include advertising, promotional activities, clearing and settlement, conveyance, communication and insurance, expenses. For 2008.-1)9, MCX-SX has incurred total expenses of Rs. 37.33 crores (373.3 million) and for 2009-10, it has incurred Rs. 85.78 crores (857.8 million). When these findings of facts are considered, it gives e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irness has to be determined on the basis of facts of a case. 10.72. It has been amply demonstrated in the DG report that there are manpower, hardware, infrastructure and other resources dedicated to CD segment operations by NSE. Several of these heads of expenditure are variable in nature. The operation of CD segment cannot be run without employing those resources and none of those resources including manpower and electricity etc. come for free. Even though it may not be easy to make cost allocations as claimed by NSE, it is certainly desirable and not impossible. Had NSE been operating in no other segment, it would certainly have ascertained its own cost of operations. As mentioned elsewhere while discussing dominance, this cavalier attitude of not allocating cost of operation for a clearly segregated operation can come only from a position of strength and the intent to wait for competition to die out. 10.73. The term 'unfair' mentioned in section 4(2) of the Act has to be examined either in the context of unfairness in relation to customer or in relation to a competitor. For unfairness of any act to be judged, all the surrounding facts have to be considered. It cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of identifying two distinct 'relevant markets', as per the provisions of section 4(2)(e) of the Act and for these two relevant markets to have associational link. 10.79. Coming now to the issue of leveraging in this case, it is pertinent to observe that there is a subtle difference in the concept of 'leveraging' as applied in some international jurisdictions (particularly the European Commission) and the wordings of the related provision in the Indian Competition Act, viz., section 4(2)(e). In the Indian context, competition regime is a very new tool for regulating market forces. Due to historical developments, several enterprises have been incumbent and entrenched in trade and commerce in India without any regulations to keep their anti-competitive conducts in check. This position is in sharp contrast with that in some mature jurisdictions like the US or EU where competition laws have been in force for a century. 10.80. The Indian Competition Act recognizes leveraging as an act by an enterprise or group that 'uses by its dominant position in one relevant market to enter into, or protect, other relevant market'. Nowhere does the Act indicate that there has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in intent for sections 4(1) and (2) but the relevant market in respect, of clauses (a) to (d) of section 4(2) can be different than the relevant market for the purpose of clause (e). 10.84. In-the instant case, the relevant market in respect of clauses (a) to (d) of section 4(2) has been taken as stock exchange services for currency derivatives in India. It must be emphasized that this Commission has considered NSE as being in dominant position in this market based on factors given in section 19(4). But it must be kept in mind that NSE is also operating in other markets, such as equity, F O and WDM. It is not the place to go into a discussion whether each of these is independent relevant market or some are interchangeable/substitutable for the consumer and therefore constitute a single market What is important is that this Commission has clearly differentiated the CD segment as an independent relevant market. For the sake of convenience, we shall refer, to the rest of the market (or markets) as the 'market of stock exchange services for the non CD segment'. In this discussion, we shall call the relevant market as the 'X market' and the market of stock exchange serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts of abuse (such as unfair pricing) in that relevant market, then there would be a separate violation of section 4(2)(a). 10.88. In the previous paras, the conduct of NSE has been examined within the relevant market delineated for this case (X market). However, the cumulative impact of those conducts also translates into the act of protecting its position in the X market by the dint of its strengths in the Y market where also NSE is dominant. Whereas X market is the 'relevant market' for sub sections (a) to (d), the Y market is the 'relevant market' for sub section (e). 10.89. It is worthwhile to observe here that the language of section 4(2)(e) does not exclude the possibility that the enterprise is dominant in both, the 'relevant market' as well as the 'other relevant market'. An enterprise can be dominant in one market and can enter another market, acquire position of strength there and then commit, acts to protect its position. This is the situation in this case. The acts of abuse in the market of stock exchange services in CD segment have to be examined in terms of sub sections (a) to (d) of section 4(2), whereas, the anticompetitive use of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... client desirous of trading on stock exchange would first choose some exchange. After that, for trading, he has to rely upon trading software such as data feed, market watch, etc., ODIN and NOW are both such software. In a technical sense, they are competing products. Also, the trading software is an essential facility without which trading cannot be done today. 10.94. NSE has placed FTIL, the developer of ODIN (and one of the promoters of MCX-SX) on its watch list and has denied APIC for interface between its own software NOW (the marketer DotEx is a 100% subsidiary) and ODIN for the CD segment. This prevents clients of NSE, most of who use ODIN for all other segments, from choosing ODIN for the CD segment trade on NSE. In the aftermarket of trading software for CD segment of NSE, it has denied access to ODIN. Had the APIC been provided to ODIN, the two software, viz., ODIN and NOW would have competed for clients. This, in fact, would lead to improvements in the technical development of all such softwares due to competitive forces in the aftermarket. 10.95. This situation is similar to the US v. Microsoft case where the allegation was that Microsoft had manipulated its application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct: The Commission also issued a reasoned order dated 25.5.2011 wherein the contraventions were elaborately dealt with. Copies of the order were conveyed to NSE and DotEx granting time for submission of replies and an opportunity to appear before the Commission. Copy of the minority order dated 3.6.2011 was also sent to parties. Accordingly, NSE filed a detailed reply to the aforementioned show cause notice on 10.6.2011. This was followed by oral hearing on 13.6.2011. Shri Soli Cooper, Counsel, Ms. Pallavi S. Shroff and Shri M.M. Sharma, Advocates, made oral submissions on behalf of NSE. DotEx did not file any reply or made any oral submissions. 12.2. The instant order under section 27 of the Competition Act, 2002, is to be read in continuation of this Commission's reasoned order dated 25.5.2011 establishing the contraventions of section 4 by opposite parties 1 and 2. The said order shall be considered an inherent part of and conjoined with this order. 13. Contentions of NSE in response to show cause 13.1. The essential ingredients of the detailed written submissions and oral arguments of the opposite party 1, NSE are summarized in the following paragraphs. 13.2. In its written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NSE contended that the main reason for prohibiting an abuse of dominance is to prevent competitive foreclosure. It was argued that since there has been no foreclosure in the CD segment, there cannot be any abuse of dominance. It was further contended that the Commission's mandate is 'to protect competition and not competitors'. Further, it was stated that 'the losses incurred by MCS SX as a result of the zero pricing policy of NSE are small relative to MCS SX's excess capital and MCS SX is not harmed that it will be unable to survive in the immediate future. Accordingly, no serious anticompetitive harm has been caused ....' It was pleaded that, in such circumstances, no penalties should be levied or remedies be ordered. (f) Benefit to ultimate consumers 14.6. It was argued that the Commission's order had made no observation on whether the consumers were being harmed. It was submitted that 'The Act mandates the Hon'ble Commission to protect competition and consumers and not competitors'. It was contended that the consumers have benefited from NSE's pricing policy and in fact 'competition has increased' and 'the competitors of N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the subject matter of litigation before the Bombay High Court. Further, ODIN was put on a watch list for justifiable reasons. It was stated that when NSE sought to conduct an audit of ODIN, it resulted in a dispute with FTIL and the audit is still pending. It was suggested that this issue should be referred to SEBI. It was further submitted that there are instances of major exchanges not sharing the APIs with competing exchanges. It is stated as an example that despite having completed all formalities, Omnesys was not granted API by MCX-SX for more than two years and the same was granted for the commodity segment by MCX after more than one year and on intervention of FMC. It was argued that it is not ideal for an exchange to share its APIs with vendors affiliated to other exchanges and hence there was business justification in denying API. Lastly, it was submitted that SEBI has already seized of the matter and if at all the remedy is sought to be provided, it should be referred to SEBI. 15. Miscellaneous arguments 15.1. NSE referred to some laws of European Commission such as Italian Flat Glass Case, National Grid plc v. Gas and Electricity Markets Authority etc. (2009) CAT 14, to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g fairly'. 15.6. NSE further contended that the cost estimates provided by the DG are flawed and cannot be relied upon and, therefore, the DG's estimates should be ignored in arriving at a fair price. 15.7. It was prayed that if at all a cease and desist order is passed by the Commission NSE should be allowed to decide the fair price. Further, NSE should also be allowed to decide to take any such actions as may be required to meet competition as covered under explanation to section 4(a) of the Act. 16. Turnover and profit calculation 16.1. It was submitted that while calculating penalties under section 27 of the Act only the turnover of the 'relevant market or 'affected market' i.e. stock exchange services in respect of CD segment in India should be considered and turnover of other segments should be disregarded. 16.2. It was further argued that it would be irrational for a penalty to be levied with reference to total turnover rather than turnover derived from relevant market. As an example, it was submitted that if two enterprises were found in contravention of section 3 of the Act and if one of the enterprises also happens to be trading in some other products, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by NSE as a consequence of show cause notice issued by the Commission on 29.4.2011. 18.2. Some of the contentions of NSE pertain to aspects of the substantive issues and facts which have already been elaborately discussed and determined in the Commission's order dated 25.5.2011 which clearly establishes contravention of section 4 of the Competition Act, 2002. It is not necessary to revisit those discussions or issues in the instant order which is limited to prescribing remedies or imposing penalty in the context of clauses (a) to (g) of section 27 of the Act. The following part of this order specifically deals with this aspect of the case. 19. Reference to the 'Majority Order' and 'Dissenting Order' In its written submissions, NSE has made references to the Commission's order dated 25.5.2011 as the 'Majority Order' and also reproduced highlights of the dissenting order dated 3.6.2011. Both these orders dealt with the various substantive issues in this case and gave the respective decisions of the Commission and that of the Hon'ble dissenting members. Therefore, it is not necessary to comment on this part of the submissions of NSE. 20. Novelty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at a concept was being decided for the first time in a particular case. Furthermore, it is settled law that an authority charged with imposing a penalty within a prescribed discretionary parameter is entitled to do so after considering all the facts and circumstances in a logical and fair manner. 21. Uncertainty on application of law 21.1. NSE had argued the 'absence of guidance papers or case law from the Commission' dealing with different concepts. The Commission does not find force in this argument because not only has it freely made available advocacy material on various aspects of the Competition Act, including a guidance booklet on competition compliance, but has also made considerable efforts to reach out to a large cross section of stake holders through seminars and conferences. Even more importantly, since 2009, the Commission has also published its final orders on its web portal which is in public domain, including orders under section 26(2). 21.2. While it may not be possible for any competition authority to clarify each and every concept that has been or could be adjudicated upon, this Commission has made considerable efforts to propagate the broader concepts pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or negligence 23.1. It has been argued that 'fines should only be imposed where the defendant has either intentionally or negligently infringed competition law'. This Commission is of the firm view that section 27 of the Act imposes no additional burden to establish intentionality or negligence. To offer such shield to an enterprise held in contravention would be granting protection to the very perpetrators this Commission is duty bound to punish. 23.2. Moreover, the order of this Commission dated 25.05.2011 elaborates on how the timings, manner and denouement of strategy leaves little doubt for a reasonable mind as to the intent of NSE behind its conduct of fee waivers, denial of APIC, etc. In this regard, the Commission has examined the historical conduct of NSE in context to other segments of stock exchange services and its impact on other exchanges like BSE. It has also been shown how zero pricing policy in CD segment not only affects MCX-SX adversely but would also impact other existing or future competitors and competition. The Commission has also elaborately examined and rejected the 'nascent market' defense taken. It has also shown the anti-competitive as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss do competitors have to suffer for a conduct to be considered anti-competitive? Further, how are the provisions of the Act equipped to distinguish 'serious' anticompetitive harm from the less serious? Would the harm be cognizable only when the competitor's 'excess capital' is wiped out? Can that harm be ignored if it does not kill competition in 'immediate future'? Lastly, does the Act provide different treatment for less serious anti-competitive conduct that cause less losses to competitors? These are imponderable questions to which no straight-jacket formula can be applied in all cases. These have to be determined considering the facts of each case. 25. Benefit to ultimate consumers 25.1. The contention that there is no observation on harm to consumers in the Commission's order dated 25.05.2011 and hence there is no element of abuse deserves to be dismissed because section 4 does not require it to be established. The section first and foremost requires that it be established that an enterprise or group is in dominant position in the relevant market. Thereafter, it is required to establish that it has engaged in a conduct as specified in clauses ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while prescribing remedies or imposing monetary penalty in this case. 28. Meeting the competition 28.1. The argument that zero fee policy was a result of meeting the competition because the competitors have imposed zero-fee would amount to turning the facts of the case on its head. It is not MCX-SX or any other competitor in the relevant market who initiated zero fee but NSE. NSE's admission that charging fee 'will cause serious damage to NSE's market position in the CD segment' ought to be confronted by their own argument about what is 'serious' harm. Following NSE's own contentions, if the damage is 'small' and it is not harmed to the extent that it will not be able to 'survive in the immediate future', NSE should not have any cause to worry. 28.2. International courts have also prescribed an 'As-efficient competitor test'. In AKZO v. Commission of the European Communities (C-62/86) (1991) ECR I-3359; (1993) 5 CMLR 215; and France Telecom SA v. Commission of the European Communities (C-202/07 P) (2009) ECR I-2369; (2009) 4 CMLR 25, it was held that in order to assess whether the pricing practices of a dominant undertaking were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or group and confining it to relevant market. As long as the entity that is guilty of contravention is a single entity, its entire turnover is the relevant turnover for the purpose of section 27(b). The only fetter which has been placed by section 27(b) of the Act on the power of the Commission to impose penalty in cases of infringement of section 4, is the cap of 10% of the average of turnover for the last three preceding financial years, 32. Contravention by DotEx 32.1. The Commission's order dated 25.05.2011 has elaborately discussed the role of DotEx in the exclusionary conduct of NSE, both as a subsidiary in terms of section 2(h) as well as a group company in terms of explanation (c) to section 4. However, it is felt that being a wholly owned subsidiary of NSE, DotEx had little independence of action. This has been kept in mind while prescribing remedies or penalties under section 27. 33. Orders by the Commission after inquiry into the abuse of dominance position 33.1. The Commission has duly considered the contentions and arguments made by NSE in the matter. Mitigating factors wherever justifiable have been acknowledged at the appropriate place. Aggravating factors have b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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