TaxTMI 
TaxTMI 
2014 (8) TMI 1251
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.... the average turnover) falls for consideration in this Appeal. The other order passed by the minority two Members namely-Shri Anurag Goel and Dr. Geeta Gouri, however, exonerating the Appellant-NSE, holding that there was no violation of Section 4 of the Competition Act, 2002 (for short 'the Act') on the part of NSE does not. 2. Information was led before the CCI at the instance of the respondent-MCX Stock Exchange Ltd. ('MCX-SX' for short) against the National Stock Exchange of India Ltd. (the appellant herein) and DotEx International Ltd. ('DotEx' for short). The MCX-SX is now Respondent No. 2 in this Appeal while DotEx has not been joined as a party to this Appeal which was registered as Appeal No. 15 of 2011. 3. In the said information, it was alleged that the appellant had abused its dominance under Section 4 of the Act by introducing predatory pricing by waiving transaction fee altogether in the newly established Currency Derivatives Segment ('CD Segment' for short). It was also urged that for this NSE was using its dominance in the non-CD segments to enter into and protect its position in the CD Segment and was also causing denial of mar....
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....ual subscription charges, advance minimum transaction charges and also fee for providing data fee and thus it had no income from the CD segment whatsoever and further CD segment was only segment in which the MCX SX was given. 5. A complaint was also made in respect of OMNESYS which was a software provider for financial and security market in which the NSE had taken 26% stake through DotEx, which is a 100% subsidiary of NSE. It was urged that the DotEx/OMNESYS had introduced a new software known as "NOW" to substitute a software called "ODIN" developed by Financial Technologies India Ltd. (FTIL), which was the promoter of the MCX-SX and the market leader in the brokerage solution sector. 6. It was further urged that after taking stake in OMNESYS, DotEx which was 100% subsidiary of NSE had written individually to the NSE members offering them the technology of "NOW" free of cost for the next year. Simultaneously, NSE had refused to share its CD Segment Application Programme Interface Code (APIC) with FTIL and thus disabling the ODIN users from connecting to the NSE CD segment trading platform through their preferred mode. The product was thus thrust upon the consumers desirous ....
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....nd the low level of deposit requirements only with respect to the CD segment of NSE were completely at a variance with its conduct in other segments and were aimed at eliminating competition and discouraging potential entrants and amounted to the tactics for excluding the other competitors from entering into the field. On this basis number of reliefs were prayed: (a) To investigate infringement of Section 4 of the Act by NSE; (b) To direct the NSE to discontinue transaction fee, data-feed fee and the admission fee waivers in respect of the CD segment and to impose transaction fees, data-feed fee and admission fee in the said segment equal to that in the other segments of NSE; (c) To order NSE to require its members to maintain deposits for the CD segment at a level that is consistent with the levels of other segments; (d) To grant an injunction restraining the NSE from continuing the transaction fee, data-feed and admission fee in respect of the CD segment in line with those in other segments; and (iii) mandate NSE to collect deposits from members at a level on par with those in its other segments, pending final disposal of the complaint; ....
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....fferentiation was not of much practical consequence and the demands-supply structure was similar across all the segments and there was obvious co-relation between the segments which were limited in number. It was also noted by him that from the demand side, majority of the stock brokers are the members of all the segments and the users were also almost common. He deduced that each product was used with a common objective of profiteering of investment and trading. 16. This view was obviously opposed by the NSE according to which the stock exchange services could not be a relevant market in this case. It argued before the D.G. that each segment of the capital market and the debt market is a distinct market by itself as there were separate trades at stock exchange in respect of different segments. It was argued by the NSE before the DG that the CD market was of recent origin and could not be said to be interchangeable or substitutable from the demand side. Further, it pointed out that the CD segment was essentially for the importers and exporters who desired to hedge the currency fluctuation risk which was not in case of equities/debts/F & O segments. Without prejudice to this cont....
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....cteristics basis." He also observed that F & O market and CD market are used by similar type of participant, namely speculators and hedgers. He, however, came to the conclusion that this could not be said about the OTC market for which he firstly relied on the provisions of SCRA, RBI Internal Working Group Report, RBI-SEBI report on CD Market, FEMA etc. He thus concluded on the similarity of operations of stock exchange services in relation to different segments traded in exchanges, that they were substitutable. 19. He also took into account the membership patterns of MCX-SX and NSE and found a very high commonality of members at NSE as well as MCX-SX with the membership of other segments. According to him, this clearly established that the existing members of other segments were primary traders in the CD segment, which further implied that actual hedgers of foreign exchange did not see substitutability or interchangeability in the CD market as against the OTC market. 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 st....
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....at unlike MCX-SX, NSE could raise equity and debts to funds its requirements. On this count also the D.G. considered NSE as a dominant player. 25. On the next count of vertical integration of enterprises or sale or services net work of such enterprises, the D.G. clearly held that the NSE came clearly as a leader. 26. So also on the other factor of dependence on consumers the D.G. held that there was a far greater number of buyers and sellers to NSE and it enjoyed the benefits of network effects resulting from higher liquidity and lower transaction costs and thus it emerged as a leader. On the last two aspects on the countervailing buying power it was held that the users of the stock exchange services were individually too small to countervail buying power. 27. On entry barriers, it was noted by the D.G. that stock exchange services was an area of high regulatory barriers. He also considered the high capital cost of entry, financial risk, marketing and technical entry barriers further strengthens the already dominant position of NSE. Thus the D.G. concluded that the NSE was a dominant player in the market. 28. On the question of abuse of dominant position, the D.G. exami....
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....009, when it was the only exchange trading in Gold ETF segment. However, it was only after February, 2010 that NSE waived/reduced transaction fee in Gold ETF segment. From this the D.G. came to the conclusion, after noting the entry of BSE into Gold ETF market, that the NSE introduced waivers/reductions in this sub segment from March, 2010 with the obvious view of maintaining its superiority in the market. After examining various board minutes and agenda items of NSE, the D.G. concluded that Pricing Committee never went into the factors such as cost of infrastructure, man-power, and risk containment measures etc. while deciding upon the fee structure or waivers. (We must here itself note that the Pricing Committee which was deciding upon the policy of pricing for the CD segment does not seem to have taken into consideration the advent of the Act. In fact, after 30th of March, 2009 when it had issued the last circular, when section 4 was promulgated on 20th May, 2009, it was expected to take into account the effect of the zero pricing, particularly because it was then not the only player in the market and the only other player in the market was the MCS-SX, which had no other busi....
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.... the NSE that it was not incurring any 'variable cost' for running the CD segment and therefore, the zero pricing could not amount to predatory pricing within the meaning of section 4 of the Act. The D.G. asked a very relevant question, that being, if NSE was not having any other segment to support income, could it survive with this zero pricing policy in respect of the CD segment and noted that answer would be obviously in the negative. The D.G. also considered the argument from the NSE that this policy was in the nature of 'introductory' or 'penetration pricing', which has no objective of ousting or reducing the competition. The D.G. however, observed that even in the introductory/penetration pricing, there had to be an element of pricing. The NSE argued before the D.G. that the variable cost under the circumstances was zero and since this cost was zero (approximately) therefore, no pricing policy, could not be said to be a predatory pricing policy. The D.G. observed that the NSE could run operations in the CD segment only due to substantial fixed cost, which it has already incurred for all the segments. If the pricing of any segment is to be linked only t....
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....xed assets in general and IT hardware/software, since the CD segments started in particular after financial year 2007-08. Previous to that, the increase in the fixed assets was only Rs. 31.472 crores, however, there was an increase of Rs. 133.671 crores. During 2008-09 a further increase was of Rs. 93.475 crores and further in the following year it was Rs. 90.1 crores. In respect of refusal by the NSE to provide segmented costs, the DG considered the details of overall capital costs, expenses, segment-wise long run incremental cost (LAIC) and established the effect on the costs subsequent to the start of CD segment. The D.G. observed that the total cost for 2008-09 worked out to Rs. 4.42 crores and 2009-10 it came to Rs. 31.07 crores. The D.G. distributed the total cost of NSE on a pro-rata basis for all the segments that the NSE was dealing with. The D.G. also estimated the depreciation of Rs. 5.63 crores during 2009-10. The D.G. also noted that NSE had conducted several seminars, workshops and road shows for promoting operations in CD segment including 1163 promotional activities in 103 locations across India, the expenditure of which was not provided in the details of expenditur....
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.... of contravention of section 4(2)(e) of the Act. 38. Ultimately the D.G. concluded that the acts on the part of NSE have harmed competition in the Indian Capital Market particularly in the CD segment. The behaviour of NSE is clearly exclusionary and the facts indicated that such acts were done with intent to impede future market access for potential competitors and to foreclose existing competition. The D.G. also held that this anti-competitive conduct enhanced the harm as the relevant market of the stock exchange services is a network effect of market. 39. This report was forwarded to the CCI, which directed the service of the report to the Opposite Parties No. 1 and 2 for filing their reply/objections. Some additional submissions were also made by the Informant, which were also forwarded to the Opposite Parties. Some other applications filed by the Informant were also directed to be served to the opposite parties. 40. The Opposite Parties No. 1 and 2 filed their main reply along with annexures. Thereafter several letters and submissions were filed on various dates. The Informant also filed their preliminary submissions as regards to the D.G. report. Further written submi....
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....its dominant position in other markets to protect the relevant CD market; (2) to maintain separate accounts for each segment with effect from 01.04.2012; (3) to modify its zero price policy in the relevant market and to ensure that the appropriate transaction costs are levied, which action was directed to be taken within 60 days; (4) The NSE was directed to put in place system that would allow NSE members free choice to select NOW, ODIN or any other market watch software for trading on the CD segment of NSE. This was directed to be done under the overall supervision of SEBI, if necessary. For this NSE was also directed to ensure all cooperation from DotEx or Omnesys. Before we proceed, we must put here that this fourth direction is of no consequence, as there has been a compromise in this behalf before the Hon'ble Bombay High Court. The parties also did not address us in respect of this aspect. 44. Marathon arguments went on before us by the learned counsel who appeared in this matter and possibly every view point was canvassed vociferously before us. It is on these rival contentions that we now proceed to decide the matter. Relevant Market 45. According to the D.G. th....
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....f settlement on maturity, settlement period, counter party risk, size of market lot and participation, amongst other things. The CCI also noted the major difference that the CD segment had maximum maturity of 12 months, whereas OTC forwards could be for much longer durations. While considering the participation, the CCI noted that the equity and equity derivative segments or WDM segment were essentially for investors or speculators who seek to gain from price movements of equities. It noted, however, that the OTC segment was basically for importers and exporters having contractual exposures and who try to hedge their risks emanating from fluctuations of exchange rates. The CCI also noted that OTC products are not traded on exchanges and only specified entities can participate in this market and since the CCI was looking at a case where the Informant and the Opposite Parties are both providing stock exchange services, a product that is not being traded, cannot be said to be a part of any market the two are operating in. The CCI also considered the SSNIP tests and found it to be unnecessary in the circumstances. For this purpose, the CCI relied on the US Horizontal Merger Guidelines ....
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....ulators in that market. We therefore, uphold the finding of the CCI that OTC market cannot be a part of the market for CD segment. 47. Now we consider the other finding on which both the judgments are unanimous. The CCI seems to have relied on the further part of the aforementioned report, particularly in para 5.2 of Chapter 5 where a clear separation of CD segment from other segments in any recognized stock exchange where other securities are also traded is given. It also relied on the further stipulation that the trading and the order driven platform of the CD segment must be separate, as also the membership of the segment must also be separate and the CD segment must have a separate governing council. It also recommended a rigid arrangement to the effect that no trading/clearing member should be allowed simultaneously to be on the governing council of the CD segment and the cash/equity derivatives segment. The CCI also referred to Chapter 7, where it was mentioned "to begin with, FIIs and NRIs would not be permitted to participate in currency futures markets". After mentioning about the entry of MCX-SX in the market and the fact that MCX-SX was only permitted to operate in th....
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....t market in the present case is currency derivatives segment of stock exchange services. It is, therefore, clear that we would have to concentrate on the majority judgment for examining the correctness of the ultimate finding that the relevant market was related to the CD segment. We have already referred to the three deductions, first being about the policy; second being about the CD segment being introduced only in 2008; and thirdly the Informant operating only in the market of CD segment. In our view, the third deduction about the Informant operating only in the CD market is irrelevant. After all when the judgment was written in June 2011, a third player had also been added right from September 2010, that was United Stock Exchange (USE). Though it had lesser market share as compared to NSE and MCX-SX, in fact USE has started in September 2010 with highest market share of 45.53%. It started losing its market share gradually with sporadic gaining the market share upto June 2011. Again nothing depended upon the Informants being engaged only in CD segment. In our view, the CCI committed an error in relying on this factor. There was after all no guarantee that the other exchanges wou....
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.... complete mechanism on as to how the CD segment would work and the separation procedure provided in para 5.4 is more or the less is a safety mechanism. We fail to understand, as to how this report by itself could be relied upon by the CCI to hold that currency futures is a different product. The Informant MCX-SX has filed before us the report of internal working group on currency futures. The findings in their internal group do suggest that OTC segment could not form a part of the same relevant market as the CD segment. 49. We have now to consider whether the CD market by itself could be a separate and distinct market. We must here note that a fundamental error committed in treating the CD segment as a product by itself. In fact, at one place the majority order had defined the relevant product market as stock exchange services in respect of the CD segment. Now, if the stock exchange services were common, then there was no need to restrict these stock exchange services in respect of CD segment alone. The fundamental error that was committed by the majority and minority order was that it says that it assess the relevant market focused on the products being traded on stock exchange....
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.... are they created by them. Shri Haksar points out that in the present case, the NSE did not waive the price of the product being traded on its platform, but simply waived the fee for the services offered by NSE. He also gave another example of a card room. A person operating a card room simply provides the premises, a pack of cards, and various tables for the players to play. All these items would be the services offered by the proprietor of the card room. Whether the players play poker at one table and bridge at another, does not take away the fact that proprietor of the card room is simply providing certain services to the card players. A competition law assessment between the two proprietors of the card room would, therefore, be based only on the services offered by each of them and not based on the card games that the players playing inside each of the card rooms. What the players wish to play at any time is determined by the players, not by the proprietor of the card room, and the similar things take place at the stock exchanges. A stock exchange provides certain services to the participants (i.e. broker) on its platforms. Whether a broker uses its services for trading in shar....
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....e and demand side is irrelevant in this matter for the simple reason that it is a question of service being offered to the customer in this case either the broker or the speculator or anybody. Merely because a broker could get a service of CD from a separate platform that does not become a whole relevant market. It was tried to be argued by Shri Sibal that of the twenty largest trading members by volume in NSE CD segment, only three are also amongst the top twenty traders in the equity and F & O segments. Very strangely, the learned counsel relied on this data for canvassing that the two are separate markets. We fail to follow. Even if the three persons out of the top twenty persons are dealing both in CD segment, equity, F & O segments that is enough to buttress the point that it is the service of the stock exchange in all the sectors, which would be a relevant market. The learned counsel has also relied on the percentage, the 7.6% of the trading volumes of the CD segment. In our opinion, this argument must be rejected as inconsequential. The learned counsel also argued on the basis of SSNIP test and contended that if there was non-transitory increase in price of 5-10%, it was unl....
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....rmissible. 51. Our attention was invited to the 2nd Genesis report and more particularly to para 2.1.4 of that report. It was tried to be shown that the international case precedent had consistently found that equities are in a separate market to currency derivative based on differences from a demand-side perspective. The first such example was merger of TSX Group Inc and Bourse de Montreal (2009). A quotation is used in that case "equities, derivatives and commodities had distinct risk profiles; as such, demand substitutability was limited. The Bureau concluded that these instruments were not competitive substitutes with one another and examined these three grouping separately". 52. Second example given was Australian Stock Exchange and SFE Corporation Ltd. (2006), where it is suggested that the merger between an equities exchange and derivatives exchange was approved on the basis that there was no product substitutability, implying a lack of demand substitutability. The Australian Competition and Consumer Commission (ACCC) also found that supply side substitutability was unlikely in practice due to network effects and that could arise as a result of liquidity requirements. ....
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....an admitted position that out of the biggest twenty players, as many as three players were utilizing the service of NSE in the other segments. Therefore, while dwelling upon to decide the relevant market, this aspect of service alone cannot be ignored and it would have to be held that the service offered by the security exchanges would be the relevant market. 54. We must not ignore the fact that for the purpose of defining relevant market in a case relating to abuse of dominance, there is no international precedent in construing different services offered by the stock exchanges as separate relevant market. Secondly, even if a separate relevant market is found, as it has been found in the aforementioned four cases, that has been found only in the cases of mergers and joint-ventures. Thirdly, the present case is not the case of merger approval, where for defining relevant market, each service has to be compared with the competitors' service, so that a single player does not start to dominate after getting merged with another entity. In our opinion, therefore, it would be irrelevant to rely on the decision holding the relevant market for merger cases for being used in the case ....
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.... derivatives segment constituted only 3% of the business transacted on the London Stock Exchange. Shri Haksar explained that due to insignificant business of the target company i.e. London Stock Exchange in the derivatives segment, the UK Competition Commission confined its assessment of the potential impact of the merger to the equity trading segment. That was because the business of the derivatives segment was insignificant and the proposed acquisition of the London Stock Exchange could not raise any competition concerns in UK. He also pointed out that the parties in this case were ad idem on the narrow market definition. 55. Alternatively, Shri Haksar contended that there are various similarities between F & O and CD segments. He brought out as many as ten similarities, they being:- (i) All derivatives markets in India are cash settled no one gets an actual share or foreign currency by entering into derivatives contract. He only gets the difference in cash which is common for F & O and CD. F & O and CD contracts are very similar as borne out by following. (ii) A consumer in either segment does not have any ownership right to an underlying security or currenc....
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....s takes us to the issue of dominance. We have to consider whether the NSE is a dominant player in the relevant market. We have already clarified that even when the relevant market was defined narrowly as being the market of currency derivatives alone, by both the judgments of the CCI, the majority order held NSE to be a dominant player. We would, therefore, consider as to whether the NSE was rightly held to be dominant in that judgment of the CCI, even when the relevant market was construed narrowly to be the market only for currency derivatives. We must at this juncture point out that before holding the CD market to be the relevant market, the CCI separately considered the various aspects of equity market, F & O market and WDM market. Lastly, it also considered the CD market and the OTC market. The CCI then went on to record that equity and equity derivatives segments or WDM segment were essentially for the investors or speculators, who seek to gain from price movements of equities, while the OTC segment was basically for importers and exporters having contractual exposures and who try to hedge their risk emanating from fluctuations of exchange rates. The CCI then went on to recor....
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....r:- a. In the equity segment of stock exchange services in India, NSE has continuously held high market share for the past 8 years going beyond 71% in 2008-09. b. In the F & O segment, NSE has almost 100% market share. c. In WDM segment, NSE has maintained more than 90% market share for the past 6-7 years. d. Putting together equity, F & O, WDM and CD segments, NSE have garnered 92% market share as of 2008-09. e. In CD segment itself, NSE has a market share of 48% according to the DG report. f. NSE has been in existence since 1994 as against incorporation of MCX-SX IN August, 2008. g. As at 31.3.2009, reserves and surplus of NSE stood at Rs. 18.64 million, deposits at Rs. 9.17 billion and profit before tax at Rs. 6.89 billion. h. In comparison, BSE had a net profit of Rs. 2.6 billion only and MCX-SX carried forward net loss of Rs. 298.7 million for the period ending 31.3.2009. i. NSE has presence in 1486 cities and towns across India. BSE has presence mainly in Maharashtra and Gujarat and is now reduced to mostly operating in equity segment. MCX-SX has only about 450 centres and operates only in CD seg....
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....the competitors". On this backdrop, it referred to in Explanation (a) to section 4 of the Act and then proceeded to consider whether NSE had a position of strength, which enabled it to affect MCX-SX as a competitor in its favour. 61. It firstly asked itself a question-(1) can NSE sustain zero pricing policy in the relevant market long enough to outlive effective competition? It answered this question holding "looking at the financial statements of NSE, its reserves and surplus or its profits after tax, it cannot be argued that the capacity of NSE to defer profits or to bear long-term risk of possible market failure is lesser than that of MCX-SX in the relevant market". According to it this was clearly a position of strength. 62. The second aspect that came for consideration was whether there was any indication that the conduct of NSE showed that it was aware of its capability? The CCI noted that NSE had not followed Accounts Standard 17 (AS17), which stipulated the segment reporting. The CCI in the majority order rejected the facile explanation that the so called detachment of profit motive was with the desire to develop the CD segment for the larger good of the capital marke....
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....CD segment market in October 2008, it did not enjoy the first position in terms of market share and this indicated that NSE was not able to operate independent of competitive forces, nor could it affect its competitors. It also noted the argument by NSE that MCX-SX had continued to increase its market share after entry, pushing NSE to second position and its market share had gone up to 60.47% by August 2010, when USE entered the market in September 2010. The respective share of NSE, MCX-SX and USE was 32.48%, 42.77% and 24.75%. The minority order then considered the position upto October 2010 of the respective market shares, which was taken from Genesis report dated 30th October, 2010. The minority order then went on to analyze the market shares. It deduced from this that the NSE at least on the basis of the market share could not be said to be a number one player. It disagreed with the deduction of D.G. as also the majority that NSE enjoyed economic power, which was reflected in its ability to maintain zero price over the long run and to sustain losses in the CD segment from other segments. It rejected the argument that all of these could be perhaps under different circumstances t....
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....er 2009, in majority of months the market share of NSE was more than the market share of MCX-SX and when it was not so, it was fully comparable to the market share of MCX-SX. Shri Sibal pointed out that the period of 1st Circular when NSE charged zero price for the transaction fee was issued on 26th August, 2008 and was valid for about one month i.e. upto 30th September, 2008. The second Circular was dated 26th September, 2008 and was valid upto 30th November 2008. The third Circular was issued on 28th November, 2008 and was valid upto 31st March, 2009. All these Circulars undoubtedly are prior to 20th of May, 2009, when section 4 was for the first time activated. The culprit Circular is dated 30th of March, 2009, which is valid upto 30th of June 2009. When the Act came on 20th May, 2009, NSE was a clear leader, having 53.19% of market share as compared to the market share of MCX-SX being 46.81%. This position continued upto August 2009 i.e. for four months including May, when the market share of NSE was more than the market share of MCX-SX. Again for the next four months the market shares are almost similar with MCX-SX. We have it on record that the Circular dated 30th March, 2009....
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....tion of NSE cannot be disputed. Same thing can be said about the market structure and the size of the market as covered in clause (j) of section 19(4) of the Act. Our attention was invited by Shri Sibal to LECG Report and the alleged admission therein at page 2370 that "NSE would probably not be dominant in the market that the Genesis Reports define, whether or not that market includes OTC products". However, further contents in the same paragraph are worth noting:- We agree that NSE would probably not be dominant in the market that the Genesis Reports define, whether or not that market includes OTC products. However, this does not rule out the possibility of abuse. NSE could be dominant in other markets from which it is leveraging market power onto a market for trading services in currency derivatives. The evidence shows that NSE is indeed dominant on such markets. We find that if separate markets are defined for stock exchange services in the trading of each of cash equities, equity derivatives and wholesale debt products, then these markets will be closely associated with the provision of stock exchange services in currency derivatives. NSE would be dominant in....
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....petitors were able to match and successfully outmanoeuvre NSE and as a result the market share of NSE fell from 100% to 33.6%. We have already commented on the market share percentage aspect to suggest that, that is not be-all and end-all of the matter, apart from the fact that the overall picture suggests that even if the CD segment is held to be the relevant market, NSE still was the leader for the major part of the time span. It is further urged that NSE could not affect its competitors in its favour, as BSE, MCX-SX and USE successfully entered the CD segment and were able to sustain zero pricing for periods longer than NSE. We do not agree with this contention, as firstly it is misnomer to say that MCX-SX successfully entered the market and were able to sustain themselves. It was because MCX-SX has suffered huge losses when the transaction fees was not being charged at all by NSE and consequently by themselves. Shri Sibal also pointed out that now because of the introduction of the transaction fee pursuant to the impugned order by the CCI, the consumers are now paying for the services, which they were getting free. He also pointed out that the trading volumes also halved leadin....
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.... NSE is unmatched. The vertical integration was also commented upon by the learned counsel and he contended that the competitors in CD segment, namely-USE and MCX-SX are closely linked to the extensive infrastructures and capabilities of their promoters. He urges that MCX-SX promoter MCX operates a clearing house, while its other promoter, FTIL markets a trading software ODIN. In our opinion, all these arguments are of no consequence, particularly when it is clear that in so far as the infrastructure is concerned, NSE is clearly a leader. There is again no point in describing the strength of MCX, which is only a promoter company of MCX-SX, nor is the strength of FTIL in any manner is relevant in the present controversy. The learned counsel further argues that the fact that MCX-SX and USE have been able to enter and operate in the CD segment suggests that there are no entry barriers. The fact that MCX-SX and USE have entered the market cannot be a relevant fact by itself for giving a finding on entry barrier. That would have to be tested on the policy of NSE of not charging any transaction fees and it will have to be considered as to whether in such a situation would any new player ....
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....ized this reliance by saying that in that case, the worldwide strength of Michelin was taken into consideration as in the opinion of the Court that strength gave the distinct advantage over its competitors in the relevant market i.e. Netherlands. Shri Sibal then urged that this judgment is in apposite for the present controversy. In our opinion, the judgment applies on all fours. In fact, the overall strength of NSE clearly gives it a leverage to be benefited in the CD segment. The other observations in Michelin's case are extremely relevant. They being about the temporary losses suffered by the dominant player. 72. Shri Sibal argued that the present figures regarding the market shares should not have been taken into consideration and only the market shares at the time when the alleged abuse took place should be considered. He is undoubtedly right and hence we have seen that in first few months, the NSE clearly emerged as a leader on account of its policy of zero transaction fees. Shri Sibal from time to time relied on the minority order and quoted various paragraphs, they include paragraphs 8.6.2 (vii), 8.2.8 as also paragraphs 8.2.7 of the minority order. We have already c....
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....hat in case of predatory pricing, cost would be as determined by the regulations. He, therefore invites our attention to the Determination of Cost of Production Regulations, 2009 and relies on Regulation 3, which suggests that the "Cost" in the Explanation to section 4 of the Act shall, generally, be taken as average variable cost, as a proxy for marginal cost. There is a proviso to it, which is as under:- Provided that in specific cases, for reasons to be recorded in writing, the Commission may, depending on the nature of the industry, market and technology used, consider any other relevant cost concept such as avoidable cost, long run average incremental cost, market value. He further points out that the marginal cost is a cost for producing one additional unit. He gave an example of a manufacturing concern that in a factory manufacturing steel, there would be fixed costs, like rent paid for the use of the factory, salaries of employees, etc. and these costs have to be incurred irrespective of the amount of steel that is produced. While variable costs for the same factory would be iron ore and other raw materials, electricity etc., that is a costs which would vary wit....
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....ve to arrive at a "total variable cost". Now "total variable cost" in the present case would be the "total cost" as defined in Regulation 2(1)(c)(i) minus the fixed cost and share of fixed overheads, if any, during the referred period. We must appreciate that in this case, the average variable cost is claimed to be zero. This situation can come only by first arriving at the total variable cost being zero. In our opinion and there is good evidence available to suggest that the total variable cost cannot be zero in order to justify the zero available variable cost. It is only when the total variable cost is zero, then that zero cost is divided by total output cost. It need not be explained that when zero is divided by some figure, the result has to be necessarily a zero. Such is certainly not a case here. This situation could have come only and only, if total variable cost comes to a zero. It has not been shown by NSE that the total variable cost in this case was a zero or in other words, there was no total variable cost. The figures of the total variable cost have been provided by NSE in their confidential version. They had to show that their total variable cost was zero as their to....
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.... meeting also speak that the NSE wanted to encourage the participation in trading in currency futures and it had paid special attention to the fact that the exchange traded currency future was still in the nascent stage. In that view, it decided to extend the waiver of fees upto 31st March, 2009. On 3rd March, 2009 again the Pricing Committee sat to consider its pricing policy, where it specifically considered the extension of waiver of admission fees for the new members in CD segment, as also considered the waiver of levy of transaction charges in respect of the trades done in currency futures. By this, it considered the proposal to extend the transaction fee waiver upto 30th September, 2009. There is also a 6th meeting of the Pricing Committee alleged to have been held on 27th August, 2009, in which again there was an extension of waiver of levy of transaction fees in respect of the trades in currency futures and it agreed to continue it upto 31st March, 2010. Strangely enough the Circulars issued by the NSE, however, do not tally with these minutes, because by the first circular, the valid period for the zero transaction fees was only upto 30th November, 2008. Second Circular ca....
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....red profit of Rs. 515.54. It was known all over the world that MCX-SX do not have any other license for running the stock exchange in any other segments excepting CD segment and therefore, if they persisted with their zero transaction fees policy, which was a direct outcome of NSE's zero transaction fees policy, they would certainly bleed to death. That it did not happen, cannot be a justification for NSE to, firstly, totally ignore section 4 and to remain complacent with their own policy by firstly introducing the same and secondly continuing the same in spite of the advent of section 4. In our view, this was the best example of abuse. In this, one can analyse that MCX-SX could not have effectively competed with NSE on the basis of this zero pricing conduct. The data clearly suggests that the prices charged by NSE had the potential to foreclose MCX-SX, which was the only competitor in the field then, or for that matter any other competitor, who did not have the strengths of NSE. In our opinion, there is enough evidence to support this in as much as the losses suffered by MCX-SX kept on increasing. It was a well known fact that it did not have any other segments to deal with an....
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....ee in its CD segment and also did not collect any subscription charges and advance fee in the CD segment. The reasons for not charging given by NSE were also referred to. The other factors in respect of admission fee and deposit level waivers were also considered by the D.G. The D.G. also observed in his report that NSE had reduced deposit structure w.e.f. November, 28, 2008 which was subsequently followed by MCX-SX from January, 2009. 82. Same such observation was made by the D.G. in respect of the data feed fee waiver. It also considered the argument of NSE that the waiver in data feed fee was for the same reason for not charging transaction fee for the CD segment. The D.G. observed in this behalf that the issue of data feed fee was never discussed during any board meetings over the initial 16 months from the date of commencement of trading in CD segment. 83. As regards exclusionary denial of integrated market watch facility, we need not express anything here about the D.G.'s observation in view of settlement of the concerned parties. 84. While analyzing the predatory pricing by NSE, the D.G. considered Regulation 3(1) of Cost Regulations and also further considered ....
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.... out to Rs. 4.42 crores for the year 2008-09 and Rs. 37.07 crores for the year 2009-10 which had been arrived at by the D.G. on the basis of pro rata assumption. 86. We are deliberately making a detailed reference to the D.G. report as even the CCI has completely relied on the same. It was argued before the CCI, firstly about the NSE not being dominant, secondly the transaction fee waivers were done in order to develop the nascent market, thirdly that NSE had historical philosophy of waiving fee in developing nascent market and fourthly that there was no element of predatory pricing as there was no variable cost and lastly that the charge of leveraging could not apply as NSE was not dominant in the CD Segment. The CCI firstly rejected the argument about the dominance and then considered the theory of development of nascent market. It discussed in detail the various stages of nascency of a market and came to the conclusion that the market could be nascent for the first few months but certainly not for ever or for indefinite period. According to the CCI, this waiver policy was a strategy and not a bona fide step for preserving or developing an otherwise nascent market. It consider....
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....I then referred to the fact that NSE was in a position of strength which enabled NSE to resort to zero pricing since August, 2008 while MCX-SX did not have such strength. The CCI then observed-"There is practically no justifiable reason for NSE to continue offering its services free of charge for such a long duration when it is paying for manpower and other resources for running the business. It is also a fact that no enterprise would have the intention to engage in a profit-less venture for eternity." The CCI then referred to the fact that MCX-SX had only CD segment and that was a major constraint and therefore the zero price policy of NSE was unfair. On this basis, the CCI came to the conclusion that the zero pricing policy was unfair. It then observed in para 10.77 that-"In this case the conduct of NSE is beyond the parameters of promotional or penetrative pricing. It can, in fact, be termed as annihilating or destructive pricing". 92. We generally agree with the finding of abuse of dominance given by the D.G. as well as the CCI. We find no justification on the part of NSE to continue with the predatory pricing for unspecified period after 20th May, 2009. Much of the discussi....
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....ging zero price for a service that costs money to run; (c) As a result of zero price, MCX-SX is slowly bleeding to death; and (d) The unfairness of price is accentuated by the inequality in available resources between NSE and MCX-SX. 95. The counsel again repeats about the theory of deeper pockets. We have already shown that the financial power of MCX, the promoter of MCX-SX is irrelevant in this situation. It is again repeated that the so called zero pricing was with an idea to increase liquidity in the market. We have already pointed out that, that may be so in the beginning, but there was no justification to continue with the same policy after 20th May, 2009. Frequent references in these written submissions have been made to the entry of BSE and USE. In our opinion, USE's entry and exit and BSE's entry in the market would go to prove nothing. Very strangely, a reference is made that the MCX-SX has followed the zero price policy in the other segments it has entered. Thereby, the learned counsel wanted to draw our attention at the facts, which were much posterior to the relevant period. The learned counsel relied on a singular factor that USE decided t....
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.... predatory pricing, though initially the enterprise suffers the losses, it then can start charging higher prices vis-a-vis the consumers. Much was said about the effect of the transaction fee being charged. We do not think that it is in any way relevant to the present controversy. Much was said about the fact that selling at cost was not predatory, but was merely an example of forging profits and that other competitors also could have chosen to follow the same price policy by forgoing their profits. We have already shown that NSE had nothing to lose in this, whereas MCX-SX had no other segment except the CD segment and would have incurred tremendous losses, which it actually did. The learned counsel urged that there was no evidence to state that NSE planned to continue the zero price strategy for eternity. We do not think the learned counsel is right in that behalf. After the last Circular in which zero transaction fee policy was to last only upto 30th June, 2009, thereafter no Circular came and the zero price policy continued till the impugned order of CCI. The learned counsel also urged about the actus reus and the cause of action. In our opinion, the cause of action started righ....
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....ction fees policy. It has miserably failed to do so. Two orders of Securities Appellate Tribunal (SAT) and one of SC were relied upon. They being-Sterlite Industries (India) Ltd. vs. SEBI, Appeal No. 20/2011 (Order dated 22.10.2001) and Dilip Pendse vs. SEBI, Appeal No. 80 of 2009 (Order dated 19.11.2009) as also Mousam Singha Roy vs. State of West Bengal, (2003) 12 SCC 377. The two judgments of the SAT speak about the standard of proof, while the Supreme Court judgment deals with the murder case. We have nothing to say about the laid down standards, but we fail to see, as to how the judgments apply here. A judgment of Competition Appeal Tribunal (CAT) of UK was also referred to, where the UK Tribunal held that the infringements were not classified as criminal offences and had further expressed that the issues regarding relevant market, dominance, abuse etc. have to be decided on the basis of economic data and also the conflicting expert evidence. That Tribunal also held that the burden of proof in civil matters applies in such matters. We have already shown earlier that in this case the facts were plain and simple. We have also made reference to the minutes of the Pricing Committe....
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....As regards the documentary evidence available, the learned counsel relies on the Pricing Committee agenda and minutes. We have already made our extensive comments on the relevant meetings. Indeed if Pricing Committee was and we believe it comprised of experts, we would have expected it to take notice of the advent of section 4 of the Act before deciding to continue with the zero transaction fees policy. We see an admission to that effect, which is as under:- NSE's Pricing Committee could not have predicted a brightline test as to when the CD Segment would be mature as such a consideration requires an assessment of a host of factors including the size of the CD Segment, the growth of the CD Segment, the current and projected volatility of the Rupee, state of the Indian economy, etc. What the Pricing Committee can do, and the evidence on record shows that they did so, was consider the status of the CD Segment when they made their decisions and determined that, at that time, the CD Segment was not mature enough to levy a fee; Strangely enough, it does not even distinctly mention about the effect of promulgation of section 4 of the Act. The other contentions on these Ci....
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....arguments for nascency of the market. 106. The impugned order of the majority was criticized on the ground that a distinction made by majority in nascent, infancy, immature and mature market is devoid of logic. Again this is nothing but repetition of earlier plea about the nascency. 107. An argument was raised about the Bolton Test and the following three factors were suggested as the conditions thereof:- (a) Enhanced efficiency gains: meaning falling unit costs, and increase in the hedging activity; (b) No less restrictive means of gaining efficiency: includes the low prices to attract users. (c) Recoupment due to efficiency: refers to lower per unit cost to recoup all cost, to recoup all costs. 108. The submission also refers to the Test proposed by the European Commission in the EC's Guidelines on the Commission enforcement priorities in applying Article 82 to abusive exclusionary conduct by dominant undertakings, they being:- (a) Efficiencies brought about the conduct; (b) The conduct is indispensable to realize those efficiencies; (c) Efficiencies outweigh way any likely negative effects on competition and cons....
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....swers thereto, as also about the Equity, F & O and WDM segments of NSE, so also Gold ETF. We find all these contentions to be irrelevant. It was further suggested that the argument that NSE was aware of MCX-SX potential entry and hence in the very first decision it decided to waive transaction fees was incorrect and flawed. This argument is in fact termed as being too remote. We do not think so. The action on the part of NSE in continuing with the zero transaction fees policy, according to us is a classic example of exclusionary conduct. Same argument are repeated in respect of data feed waivers and the same plea of nascent market etc. are repeated in the written submissions. We have already dealt with data feed waivers. We have no doubt that, it was also a part of the strategy on the part of NSE. Some facts about the DotEx were also pleaded. We have already pointed out that, this issue was no more open. We would therefore not go into that issue. 112. Similar arguments appear to have been addressed in the written submissions in respect of admission fees and deposit fees. Admittedly, the same arguments in respect of transaction fees waiver are also repeated in respect of both the....
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....ection 4(2)(e) of the Act have to be relevant market. We must add that what is required to be guilty of the breach of section 4(2)(e) is under:- (1) That the enterprise has a dominant position in one market; (2) That the enterprise is dealing in not only the market in which it is dominant, but some other market also; and (3) It wants to enter into an entirely new market or protect the same. 116. In paragraph 10.83 of the impugned order an incorrect proposition of law appears as under:- While its conduct in the second market has to be separately examined for abuse if and after it acquires a dominant position there, the fact that it has used the strengths from the first market to wrongfully enter into or to protect the second market is independently considered harmful to competition under the Act. 117. We must point out that it is not necessary for the breach of section 4(2)(e) of the Act to be dominant in the second relevant market. It is enough, even if the enterprise wishes to use its strength in the market in which it is dominant to enter into or to protect the other (second market). In paragraph 10.84 of the impugned order, the CCI consi....
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....uation of any other abuse of dominance separately. At the same time, the wrongful exercise of that strength by itself is also held as abusive conduct in its own right, under section 4(2)(e). 119. The CCI has completely misdirected itself on the basis of incorrect and faulty logic. In paragraph 10.89 of the impugned order, the CCI proceeded on the ground that in both 'X' as well 'Y' market the enterprise was dominant and held that same was the situation in this case, meaning NSE was dominant in both CD market as well as in the so called non-CD segment. After thus discussing the law, the CCI posed four questions, which were:- (a) Whether NSE held a position of strength in the CD segment market comparable to its position in the CD and non CD segment markets as a whole? (b) Whether NSE enjoyed advantages in the CD segment market by virtue of its dominance in the non CD segment market? (c) Whether NSE customers in one market were potential customers in the other? (d) Whether NSE and its competitors could become competitors in both markets? 120. It then proceeded to hold that the two relevant markets had associational links and th....
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....y of the NSE were small in comparison with MCX-SX excess capital and MCX-SX not being harmed; (6) Benefit to ultimate consumers; (7) Expansion of the market; (8) Contribution to economic development; (9) Meeting the competition; (10) Full support and cooperation; (11) Principle of Proportionality; (12) Order contrary to foreign precedents; (13) Miscellaneous arguments made before them on the basis of case laws of European Commission. 122. It was also argued that the OECD document mentioned that lighter measures should be used when such a subject was never dealt with by the Courts in past. Even section 53N of the Act was referred to press the contention that no penalty should be imposed. Arguments were also made before CCI on the question of behavioural remedy. It was also urged that the cost estimates provided by the D.G. were incorrect. Further, the concept of turnover was also attacked and it was suggested that since turnover was zero in the CD segment, there was no need of penalty. The CCI seems to have discussed all these aspects in details in paragraph 18 of its order and answered each such aspect, part....
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....so repeated before us that this was a new law and like European Union in two cases, no penalty should have been levied. It was also argued that in past the CCI had imposed either no penalties or symbolic penalties. The examples of Distribution of package tours during the 1990 World Cup, [(1992) OJ L 326/31] as also Clear Stream (Clearing and Settlement), 2009 [OJ C 165/7] case were given where no impositions of penalty was ordered. The CCI has thoroughly discussed all these arguments, which were placed before it. We are quite satisfied with the appreciation of the material put before the CCI as also before us. The uncertainty in the application of law was also pressed into service like it was done before the CCI. We agree with the CCI in its observations about these aspects. It was tried to be said that there were benefits of zero pricing and that there was no denial of market access. We agree with the CCI for the reasons given for rejecting these contentions and for the same reasons, we also reject these contentions. Much was made about penalty levied @ 5% of the average turnover. Our judgment in the case of M/s. Excel Crop vs. CCI was pressed into service to suggest that the rele....