Compat order vs NSE for MCX

8/12/2019 Compat order vs NSE for MCX

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COMPETITION APPELLATE TRIBUNAL

Appeal No. 15 of 2011 withIA NoS. 25/2011, 26/2011, 27/2011, 10/2012,27/2012

[Under Section 53B of the Competition Act, 2002 against the order dated 23.6.2011

passed by the Competition Commission of India in case no. 13/2009]

CORAM

Honble Justice V.S. Sirpurkar

Chairman

Honble Shri Rahul Sarin

Member

In the matter of:

The National Stock Exchange of India Ltd.Through its DirectorExchange Plaze, Plot C-1, G-Block,Bandra Kurla Complex, Bandra (East),Mumbai 400 051. Appellant

Vs.

1. Competition Commission of India,

Through its Secretary,

Hindustan Times House,

18-20, Kasturba Gandhi Marg,

New Delhi 110 001. Respondent No. 1

2. MCX Stock Exchange Limited

Through its Director,

Exchange Square, Suren Road,

Andheri (E), Mumbai 400 093. Respondent No. 2

Appearances: Shri Amit Sibal, Sr. Advocate with Shri Naval Satarawala

Chopra, Shri Prateek Bhattacharya and Shri Aman Singh Sethi,

Advocates for Appellant

Shri A. N. Haksar, Sr. Advocate with Shri Anand S. Pathak, Shri

Udayan Jain, Shri Abhijeet Sinha, Ms. Chitra Parande and Shri

Akshay Nanda, Advocates for R-2Shri Balbir Singh, Advocate with Shri Abhishek Singh Baghel,

Ms. Monica Benjamin, Advocates with Ms. Shabistan Aquil,

DD(Law) for CCI

ORDER

PER MR. JUSTICE V.S. SIRPURKAR, CHAIRMAN


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Section 19(1)(a) of the Act was also against the Omnesys Technologies

Pvt. Ltd. (OMNESYS). It was urged that MCX-SX and NSE were

providing currency futures exchange services. It was pointed out that

NSE through its circular dated 26.8.2008 announced a transaction fee

waiver in respect of all currency future trade (Currency Derivatives)

executed on its platform and then it continued to extend its waiver

programme from time to time and even on that date when Section 4 of

the Act came on the anvil on 20.5.2009. Further information was

provided that due to this transaction fee waiver by the NSE, MCX-SX

which was the only other player in the field in respect of currency

derivatives had also to waive transaction fee on its platform for CD

Segment from the date of its entry into the stock exchange business and

which was somewhere in the month of October, 2009 and thus MCX-SX

was suffering huge losses as it had no income through its CD Segment

and the MCX SX had the license only for dealing in the CD Segment. This

CD Segment seems to have been introduced by the recommendations of

RBI and SEBI in August, 2008 the date from which the NSE started its

operation in CD Segment. It must be noted that the MCX-SX got the

license for operating only in the CD segment. It did not have the license

to operate in any other segments like Stocks Future and Options (F&O),

W.D.M. etc. It was pointed out in the information that NSE was charging

no admission fee for membership in the CD Segment though it was so

charging in the equity, F&O and debt segments. It also did not collect

the annual subscription charges and an advance minimum transaction

charges only in respect of CD Segment. It was urged that the cash


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deposits to be maintained by a member in the CD segments were also

kept at a very low level as compared to the other segments.

4. It was further urged that NSE was not charging any fee for

providing the data feed only in respect of CD segment ever since its

commencement the segment on 26.8.2008 and continued not to charge

any fees in respect of the CD Segment. It was, therefore, urged that

MCX-SX was unable to charge anything on account of the transaction

fees, admission fees for membership, annual 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 of the NSE CD Segment, was the product "NOW"


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developed by DotEx and OMNESYS, in place of ODIN. It was urged that

NSE was using "NOW" on a separate computer terminal for accessing its

CD Segment. It was further urged that the main advantage of the ODIN

software was that a trader could view multiple markets using same

terminal and take appropriate calls. The shifting between different

terminals (NOW and ODIN) severely hampered the traders ability to do

so, thus the expected response from a common trader was to confine to

one terminal which connected to the dominant player only i.e. to use the

"NOW" terminal (free of cost) and confine itself to the NSE CD Segment.

It was therefore urged that on this count also the NSE had abused its

dominance and so had OMNESYS.

7. It was further urged that the losses suffered by informant in the CD

Segment were much higher than the loss suffered by the NSE (due to the

waiver of the transaction fees and other fees) as the NSE enjoyed the

economies of scale and has the ability to cross-finance the losses from

the profits made in other segments wherein it was dealing and thus it

has the financial strength to fund its predatory practices based on

massive reserves built through accumulation of monopoly profits over the

years. In contrast, MCX-SX was dependent solely on the revenues from

the CD Segment and its losses were mounting in view of its transaction

fee waiver, the continuation of which was compelled by the NSE's

decision to continue with the total fee waiver.

8. It was also urged that NSE's fee waiver would not only eliminate

the business of the MCX-SX in CD segment but also eliminate the

potential and efficient competitors from the entire stock exchange

services. It was urged that the policy of fee waiver was adopted by NSE


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as an exclusionary device to kill competition and competitors, and to

eliminate MCX-SX from the market as a supplier of stock exchange

services (CD Segment) and thus NSE had, therefore, used its dominant

position in the relevant market to eliminate competition and competitors.

It was also urged that NSE along with DotEx and OMNESYS had violated

provisions of Section 4of the Act by denying the integrated market watch

facility to the consumers by denying access of Application Programme

Interface Code (APIC) to the promoter of MCX-SX.

9. It was further urged that the various fee waivers and 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 4of the Act byNSE;

(b) To direct the NSE to discontinue transaction fee, data-feed fee and the admission fee waivers in respect of theCD segment and to impose transaction fees, data-feedfee and admission fee in the said segment equal to thatin the other segments of NSE;

(c) To order NSE to require its members to maintaindeposits for the CD segment at a level that is consistentwith the levels of other segments;

(d) To grant an injunction restraining the NSE from

continuing the transaction fee, data-feed and admissionfee in respect of the CD segment in line with those inother segments; and (iii) mandate NSE to collectdeposits from members at a level on par with those inits other segments, pending final disposal of thecomplaint;

(e) To order NSE to pay all of the complainant' costs andimpose the highest level of penalties on the NSE inaccordance with the Act, so as to have deterrent effectand ensure free and fair competition in the relevantmarket; and


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(f) To pass such other order as the Commission may deemfit to ensure free and fair competition in stock exchangeservices market.

10. On this basis the CCI entertained this information and took a prima

facie view that this information deserves to be investigated by the

Director General (D.G.for short) and ordered accordingly.

11. MCX-SX had also filed an application dated 6.7.2010 for interim relief

under Section 33, According to which it was complained that if NSE

continued to offer its services in the CD segment free of cost despite a

significant increase in the turn over, the MCX-XS couldsuffer combined

loss of around Rs. 100 crores. It was urged that since the CCI

had already formed a prima-facieopinion in this matter and had sent the

matter for investigation to the Director General, MCX-XS would be

required to exit the market. The CCI, however, refused to pass any order

under Section 33 particularly in view of the fact that the investigation by

the D.G. ordered by it, was near completion.

We need not go on that issue whether the CCI was right in refusing

the interim relief.

We also need not consider the question about the APIC and the

alleged tactics played by DotEx and OMNESYS in respect of ODIN and

NOW for the reasons which we would elaborate at the end of this

judgment. The parties also did not address us on that issue for the

obvious reasons that that question was already closed between the parties

by a compromise affected before the Bombay High Court.

12. The matter was investigated by the DG which investigation included

examination of the financial statement of NSE, details of fees and charges,

and other costs incurred in different segments.


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13. In addition, the D.G. also studied several reports of regulators and

circulars of Expert Committee as also regulations/circulars issued by SEBI

to understand the mechanics of various charges imposed by the stock

exchange services.

14. The D.G. while considering the relevant market came to the

conclusion that the stock exchange business as a whole constituted the

relevant market. He took this view as according to him the product

differentiation 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 contention, NSE further argued that if at all there was

the question of interchangeability or substitutability arose the CD market


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could be seen as a substitute of OTC segments. Thus according to the

NSE the CD market and the OTC market was the relevant market. This

position was taken by the NSE also before us also. The DG, however,

held the related market to be the stock exchange business as a whole.

In that he considered the following five segments to arrive at a relevant

product. They were :-

(i) Equity segment

(ii) Equity F&O segment(iii) Debt segment(iv) CD segment; and(v) OTC market for trades in foreign currency.

The D.G. noted the provisions of the Securities Contracts (Regulation)

Act, 1956 (SCRA) and after the issue of regulatory framework, both

Bombay Stock Exchange and NSE could commence the trading in CD

segment immediately, which fact indicated that CD segment was a part of

the stock exchange market services. According to the DG report, since

any exchange could easily start operations in any of the segments of

capital market, there was supply side substitutability between the

segments. Therefore, according to the DG report, the entire stock

exchange market service was a single relevant product.

17. The D.G. also came to the conclusion that it was not possible to

ascertain substitutability between CD and the other segments of stock

exchange services. The D.G. relied on several cases from international

jurisdictions such as Case Nos. 351 US 377 (1956), ECR 1973 0215, ECR

1980 page 03775, ECR 1983 page 03461, ECR 1991 page I - 03359, ECR

1994 page II - 00755, ECR 1996 page I - 05951, ECR 1998 page I - 0779

and others. Hence he held that in all these judgments, the courts have

relied on the requirement of interchangeability in contrast with


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substitutability. It was also noted that the courts had placed greater

reliance on the characteristics of the product for the purpose of satisfying

constant needs.

18. He concluded that from the very definition of futures contract, it

was clear that the basic characteristics of the product were similar to the

equity futures contract and therefore CD and equity derivative segments

had common characteristics. He held that "equity segment including

equity F&O and CD segment which mainly comprise the stock exchange

services market are substitutable on the product characteristics 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.


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24. While considering the size and resources of the enterprise also on the

basis of the statistics available, the DG came to the conclusion that NSE

had total income of Rs. 1042 crores with profit before tax of Rs. 689 crores

which indicated a sound financial position of the NSE. While considering

the third factor of size and importance of the competitors, the D.G.

concluded that in comparison with NSE which had commenced the trading

in November, 1994 the remaining 19 original exchanges started collapsing

due to intense competition from NSE. This included even the BSE which

was one sound player found that though MCX-SX entered the arena only

on 14.8.2008, it ended the first year with the carry forward loss of Rs.

298.7 million. The D.G. also took into consideration the economic power of

the enterprise and found that there also NSE had presence in 1486 cities

and towns and majority of investors, brokers etc. were connected with NSE

with its extensive infrastructure and also found that 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 the 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.


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27. On entry barriers, it was noted by the D.G. that stock exchange

services was an area of high regulatory barriers. He also considered the

high capital cost of entry, financial risk, marketing and technical entry

barriers further strengthens the already dominant position of NSE. Thus

the D.G. concluded that the NSE was a dominant player in the market.

28. On the question of abuse of dominant position, the D.G. examined

the abusive behavior on account of four factors :-

A. Transaction fee waiver;B. Admission fee and deposit level waivers;C. Data feed fee waiver; andD. Exclusionary denial of "integrated market watch" facility.

29. The D.G. noted on the first aspect of transaction fee waiver that the

NSE had issued a Circular No. NSE/CD/11188 dated 26.08.2008 whereby it

announced transaction fee waiver in respect of currency futures trades

executed on its platform. It thereafter issued three circulars (1) on

26.09.2008, which was to be valid upto 30.09.2008; (2) a circular dated

28.11.2008, valid upto 31.03.2009; and (3) a circular dated 30.03.2009,

which was to be valid upto 30.06.2009. It is obvious that out of these four

circulars, three related to the pre 20.05.2009 period. Considering that

section 4 was activated w.e.f. 20.05.2009, it is the last circular dated

30.03.2009, which would be a relevant circular, as it covers the date

20.05.2009. Thereafter, no circulars came to be issued right till the date

when the impugned order of CCI was passed. Thus, right w.e.f.

20.05.2009 the NSE continued not to charge any fees in respect of the CD

segment.

30. The D.G. has referred to the defence of NSE that the waiver was

done to encourage larger participation as the CD segment was at a nascent


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stage. According to the NSE, this policy was influenced by report of the

High Powered Study Group on Establishment of New Stock Exchanges. It

was also stated that the Pricing Committee was constituted by the Board of

NSE to guide and decide all pricing matters and the waiver of transactions

fee was the decision of that Pricing Committee. (We shall have the

occasion to refer to the decisions of this Pricing Committee in the

subsequent part of this judgment)

31. The D.G. then examined the transaction charges levied by NSE in

other segments and noted that turnover of NSE was Rs. 1078 crores in

comparison to the BSE turnover of Rs. 2.52 crores. The D.G. noted that

NSE did not have the historical philosophy of waiving fee to develop a

nascent market for which he based his findings on the transaction fees

levied on WDM segment and the other segments. The D.G. also gave

additional reasons to refute the theory of NSE of nascent market. The D.G.

found that in Gold ETF segment the transaction charges were levied from

March 2007 till August 2009, 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.


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(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

20thMay, 2009, it was expected to take into account the effect of the zero

pricing, particularly because it was then not the only player in the market

and the only other player in the market was the MCS-SX, which had no

other business to do excepting the CD segment. Very strangely the Pricing

Committee does not seem to have taken this into consideration).

32. The D.G. also examined the pattern of the fees charged by way of

admission fee and deposit level waivers. It is already noted that for CD

segment there was no admission fee or deposit level waivers or

requirement of making any deposit. The D.G. noted that the NSE was

charging this admission fee for all other segments. As regards the deposit

level waivers, the D.G. noted the arguments by NSE that the requirement

of deposit levels was made keeping in line the nature of the segment in

terms of the risk associated and the other factors. The D.G. noted that

earlier deposit required for CD segment could not be said to be

unjustifiably low. It was found by the D.G. and observed that NSE had

reduced deposit structure w.e.f 28.11.2008, which was of necessity

followed by MCS-SX from January 13, 2009. Thus, it was in this sector also

that the NSE had initiated the lowering down of the deposit levels.

33. As regards data feed fee waiver, the D.G. noted that this was waived

right from the beginning. Consequently, MCX-SX was also not in a position

to charge the fee. The D.G. noted that the same reasons were forwarded

by the NSE in respect of this waiver also. The NSE had tried to justify that


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its subsidiary DotEx was providing data feed service in various forms and

was not charging any fee for the CD segment and therefore NSE did not

charge its clients. The D.G. noted that in respect of other segments, the

NSE was charging a substantial fee for data feed. On this backdrop, the

D.G. concluded that DotEx had waived the fee with the purpose of

capturing the market. It was noted by the D.G. that the DotEx was 100%

subsidiary of NSE. The D.G. also noted that the waiver of data feed was

not discussed during any of the board meetings over the initial 16 months

from the date of commencement of trading in CD segment and it was first

time discussed only later on.

34. The D.G. went on to analyze the predatory pricing by NSE. In this

the D.G. took into consideration the definition of predatory pricing and the

2009 Regulations for determination of cost production, which can be

referred to as cost regulations. After considering the implication of

various terms like costs in Regulation 3(1), the DG took stock of the

argument by 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


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variable cost under the circumstances was zero and since this cost was

zero (approximately) therefore, no pricing policy, could not be said to be a

predatory pricing policy. The D.G. observed that the NSE could run

operations in the CD segment only due to substantial fixed cost, which it

has already incurred for all the segments. If the pricing of any segment is

to be linked only to the variable cost, NSE would have zero pricing for all

the segments, because none of them would have any variable costs. The

D.G. held that the investigation had already established that this claim of

NSE was not substantiated by the facts. The D.G. had also referred to the

report of the RBI SEBI. The DG also took into account the statement of

Director (Finance and Legal) that additional expenditure was incurred for

machinery, manpower, IT support, disaster recovery etc. in respect of the

CD segment system. It was also admitted that surveillance system for the

CD segment was also set up. It was also admitted that there were many

dedicated employees for the CD segment and NSE paid substantial amount

to these employees and therefore, the D.G. came to the conclusion that

the contention of NSE that none of these costs constitute variable costs

could not be accepted. Various views taken by the international

jurisdictions were considered by the D.G. including the US Department of

Justice, DG Competition of European Union etc. Various other discussion

papers on EC Exclusionary Abuses were also taken into consideration. All

the concepts like average variable costs, AAC, long run average

incremental cost were taken into consideration by the D.G. The D.G. relied

on the following observation of the European Commission :-


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If the price 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.

The D.G. then went on to hold that there was a strong justification for

following ATC or at least AIC in the instant case for determining predatory

pricing in the relevant market of stock exchange.

35. Undoubtedly, the NSE had been asked about the details of allocation

of all fixed and variable costs for the CD segment for the last two years.

However, very significantly NSE submitted that it did not prepare accounts

in which separate profit and loss account statements are provided for

either the CD segment or any other segments. The NSE tried to justify this

stand by saying that there were difficulties in allocating common costs

across a multiple products firm. However, the D.G. examined certain

trends in the balance sheets and provided a profit and loss accounts of

NSE. From the investigation, it was pointed out that there was a quantum

increase in fixed 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


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pro-rata basis for all the segments that the NSE was dealing with. The

D.G. also estimated the depreciation of Rs.5.63 crores during 2009-10.

The D.G. also noted that NSE had conducted several seminars, workshops

and road shows for promoting operations in CD segment including 1163

promotional activities in 103 locations across India, the expenditure of

which was not provided in the details of expenditure.

37. The D.G. also examined the pattern of clearing and settlement

charges incurred by NSE. These activities were executed by the NSE

through NSCCL, which is wholly-owned subsidiary of NSE. It was found

that for other segments like F&O and equity, the NSCCL was charging NSE

at 15% of the transaction charges in equity charges. The D.G. therefore,

held that transaction charges amounted to a variable cost linked to the

volume of transaction. The D.G. also observed that the NSE Board by a

resolution in June 2010 enhanced clearing of settlement charges in the

F&O segment, showing the clear strategy for loading the settlement

charges for the CD segment on to the F&O segment. After considering the

issue of notional clearing and settlement charges for the CD segment at

15% of transaction charge, the D.G. came to the conclusion that the

expenditure could be notionally Rs.13.74 crores, payable to the NSCCL for

the periods from August 2008 to April, 2010. The DG also came to the

conclusion that MCX-SX was operating only in the CD segment and its

operating expenses could be no different from the expenses of NSE. The

D.G. on this basis rejected the theory of NSE that it did not incur any

variable costs. The D.G. also relied on the judgment of Ontario Supreme

Court of Canada in Regina vs. Hoff Mann La Roche Ltd. On this basis, the

D.G. concluded that the waiver of transaction charges, data feed charges,


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admission fees and the reduction of deposit levels by NSE amounted to the

actions violating section 4(2)(a)(ii) of the Competition Act.

38. In addition to above, the D.G. held that NSE had used its dominant

position for leveraging and thereby it is guilty of contravention of section

4(2)(e) of the Act. For this purpose, the D.G. took into consideration the

share of NSE in F&O, the equity and WDM segment, which were 100%,

75% and 90% respectively. The D.G. held that NSE was using this profit,

which it earned to leverage this position in the CD segment, wherein MCX-

SX was competing with it and this it was doing by not charging transaction

fee, data feed fee etc. The D.G. seems to have relied on few cases like

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.

On these accounts, the D.G. found NSE guilty of contravention of section

4(2)(e) of the Act.

39. 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.

40. 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


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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.

41. The Opposite Parties No.1 and 2 filed their main reply along with

annexures. Thereafter several letters and submissions were filed on

various dates. The Informant also filed their preliminary submissions as

regards to the D.G. report. Further written submissions were also filed by

the Informant, while the Opposite Parties No.1 and 2 also filed additional

written submissions.

42. The Opposite Parties relied on the reports submitted by the Genesis

Economics Consulting Pvt. Ltd. (Genesis) and Prof. Richard Whish,

Professor of Law at Kings College. Similarly, the Informant relied on the

reports of their economic consultants, LECG Ltd.

43. The CCI has neatly and in great details noted the contentions raised

by the Opposite Parties No.1 and 2 as also the objections to D.G.s report.

So also it noted the legal and economic objections raised by Opposite

Parties No.1 and 2. It took into account its details and noted the same in

the impugned order. The CCI also noted the counter submissions of the

Informant on D.G.s report and the submissions of NSE on the D.G. report.

We need not deal with them as the further part of the judgment would be

devoted to consider those objections, which were not only raised before

the CCI, but before us also. Shortly stated on the basis of the rival

contentions, the CCI came to frame the following issues :-

(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?


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(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?

44. In its final judgment, however, there was a division of opinions. The

Chair-Person with three other learned Members has passed the final order

holding NSE guilty of the breach of section 4(2)(a)(ii) and 4(2)(e) and has

inflicted the penalty @ 5% of the average turnover of Rs.1110 crores

amounting to Rs.55.50 crores. On the other hand, the two learned

Members have written a separate order disagreeing with the conclusion

drawn in the majority order and have held that no violation of any of the

provisions of section 4 has been established against the NSE. Thereby, the

two learned members have completely exonerated the NSE. In addition to

inflicting of the penalties, the majority order has also issued certain

directions under section 27(a) as also under section 27(g). These

directions are :- (1) to cease and desist from unfair pricing, exclusionary

conduct and unfairly using 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


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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 Honble Bombay

High Court. The parties also did not address us in respect of this aspect.

45. 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

46. According to the D.G. the geographical relevant market was India,

the product market was the services offered by the stock exchange.

There is no difficulty about the geographical market being of India, as both

the sides, as also the two deferring judgments by the CCI agreed on that

proposition. The question is about the product market. According to the

NSE, this market should be the market of currency futures as also the Over

The Counter (OTC) market. It is a common knowledge that the OTC

market is used by the hedgers, who want to cover their risk. The hedgers

include those who have to satisfy the claims in foreign currency

immediately or in future. Even the banks cover their risk by hedging on

the OTC market. Shri Sibal, arguing for the appellant very forcefully

submitted that in order to start a new segment of capital market in India,

namely exchange traded currency derivatives segment, a report was

brought into existence, which is RBI-SEBI Standing Technical Committee

Exchange Trade Currency Futures report (RBI-SEBI report) in 2008. Shri

Sibal very heavily relied on the following excerpt in this report :-


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Exchange traded futures as compared to OTC forwards serve the

same economic purpose, yet differ in fundamental ways. The

counter party risk in a future contract is further eliminated by the

presence of Clearing Cooperation. Further in an exchange traded

scenario where the market lot is fixed at a much lesser size than the

OTC market, equitable opportunity is provided to all classes of

investors whether large or small to participate in the futures

market.

Shri Sibal therefore, argued that since the exchange traded currency

futures and OTC, serve the same economic purpose, the relevant market

should be the market of the currency future along with OTC. The CCI in

both the judgments did not agree with this contention. In so far as the

OTC market is concerned, the CCI discussed it thoroughly. The CCI

pointed out that the CD market was futures derivative market where

underlying securities are the currencies. OTC market, however, includes

various products such as forwards, swaps and options for hedging the

currency risks. Functionally, the products may be considered as similar,

but according to CCI they are quite different in terms of characteristics as

well as participants. The CCI found that there was differentiation from the

OTC market in terms of 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


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importers and exporters having contractual exposures and who try to

hedge their risks emanating from fluctuations of exchange rates. The CCI

also noted that OTC products are not traded on exchanges and only

specified entities can participate in this market and since the CCI was

looking at a case where the Informant and the Opposite Parties are both

providing stock exchange services, a product that is not being traded,

cannot be said to be a part of any market the two are operating in. The

CCI also considered the SSNIP tests and found it to be unnecessary in the

circumstances. For this purpose, the CCI relied on the US Horizontal

Merger Guidelines 2010, which has held that the SSNIP test was solely a

methodological tool for performing hypothetical monopolist test for the

analysis of mergers. The CCI also referred to the Official Journal by

European Commission and came to the conclusion that the reliance on the

test was unnecessary. In that the CCI also referred to the small and

insignificant transaction fees and other fees. The CCI also refused to go

into the interchangeability or substitutability of the products. The CCI

therefore, rejected the plea that the OTC market should be included in the

relevant market.

47. Shri Sibal, the learned counsel appearing for the appellant, very

seriously urged that if the SSNIP test is to be considered as the applicable

test, then 5-10% increase in price for the service of CD is unlikely to drive

purchasers of CD contracts to purchase equity. However, in the very next

breath Shri Sibal urges that such a price increase could, however, drive

users of the CD segment to the OTC segment. Now these are the

contradictory arguments. Particularly when all the speculators and the

players in the CD market are not interested in the OTC market in which


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only the hedgers and arbitrageurs are interested and all the speculators

cannot be imagined to be the hedgers and arbitrageurs. Shri Sibal,

therefore, urged that the CD and OTC segment form part of the same

relevant market. When we consider the Genesis report as also the opinion

of Prof. Richard Whish, which were heavily relied upon by him, we find the

thrust of that report is not so much on OTC market, as it is to canvass that

all the stock exchange services like CD futures, F&O, WDM and securities

cannot be covered under the relevant market. The Genesis report as well

as Prof. Richard Whish have laid considerable stress only on that point.

There does not appear to be any relevant discussion about the OTC market

being the part of the CD market. We therefore, reject these reports at

least in so far as the first question is concerned, as to whether the OTC

market could be included in the CD market. It has already been

considered by the CCI and we also consider that the two have a complete

different complexion apart from the platform where the OTC and CD are

traded. The OTC market essentially comes under the regime of the

banking laws and would be restricted to the hedgers and arbitrageurs.

There would be no scope from the speculators in that market. We

therefore, uphold the finding of the CCI that OTC market cannot be a part

of the market for CD segment.

48. 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


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CD segment must be separate, as also the membership of the segment

must also be separate and the CD segment must have a separate

governing council. It also recommended a rigid arrangement to the effect

that no trading/ clearing member should be allowed simultaneously to be

on the governing council of the CD segment and the cash/ equity

derivatives segment. The CCI also referred to Chapter 7, where it was

mentioned to begin with, FIIs and NRIs would not be permitted to

participate in currency futures markets. After mentioning about the entry

of MCX-SX in the market and the fact that MCX-SX was only permitted to

operate in the CD segment, the CCI deduced three factors (1) that in the

minds of policymakers, the CD segment was not only completely different

from other segments but also differed from OTC in fundamental ways, and

therefore the policy recommended strict segregation of the CD segment;

(2) till 2008 the exchange capital market in India did not have exchange

traded currency forwards segments; and (3) competition concerns, if any,

have to be examined in the segregated and new market where the

Informant is operating. The CCI therefore, held that the exchange traded

CD market was fundamentally distinct from other segments of the capital

market. In fact, it did not exist prior to August 2008. The CCI therefore,

deduced that a market which earlier did not exist and which was

consciously created by the policy makers as a new and distinct market,

cannot be said to be part of a market that existed. Ultimately, it came to

the conclusion that the CD segment being a distinctive and separate

market, the relevant market in this case should be the services offered in

CD segment.


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49. When we consider the findings of the minority order on this issue, we

find that the minority order has referred to section 2(r), 2(s) and 2(t). The

minority order has also in its determination and more particularly at para

7.6.1 noted that the exchanges only provide the infrastructure (platform)

for such products to be traded subject to regulations, rules, by-laws and

operative procedures. It concluded, therefore technological support and

the facilities provided by the exchanges, which results into easy execution,

lower cost of transaction, efficient risk of management, fail-proof

settlement mechanism. It mentions that a robust infrastructure

mechanism with enhanced technological support definitely adds volumes

necessary for the development of the market. It however, mentions that

merely because several products are traded in different segments of the

same stock exchange and are categorized as exchange traded products,

they do not lose their product differentiating features or their identity as

representing different asset classes with different target customers/

consumers. It, therefore, held that both the exchanges and the securities

traded are the external trappings while, the real substances lies in the

classes of assets that are traded as underlying. It then jumped to the

conclusion that the relevant 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


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Informant operating only in the CD market is irrelevant. After all when the

judgment was written in June 2011, a third player had also been added

right from September 2010, that was United Stock Exchange (USE).

Though it had lesser market share as compared to NSE and MCX-SX, in

fact USE has started in September 2010 with highest market share of

45.53%. It started losing its market share gradually with sporadic gaining

the market share upto June 2011. Again nothing depended upon the

Informants being engaged only in CD segment. In our view, the CCI

committed an error in relying on this factor. There was after all no

guarantee that the other exchanges would not step into and it actually

happened much latter when even Bombay Stock Exchange also joined the

CD segment, somewhere from November 2013, during the pendency of

this Appeal. When we consider the second factor that the CD segment

started only in 2008, that in our view again would be an irrelevant factor.

Merely because the CD segment started in 2008, would not make it a

distinct market. Lastly, even the first factor about policy, to say the least is

inconsequential factor. The policy did not show that CD segment was

totally and completely different. All that it says in para 5.2 that a

recognised stock exchange where other securities are also being traded

may set up a separate currency futures segment. It has then suggested

the three factors (1) the trading and the order driven platform of

currency futures should be separate from the trading platforms of the other

segments; (2) the membership of the currency futures segment should be

separate from the membership of the other segments; (3) the currency

futures segment should have a separate Governing Council on which the

representation of Trading/ Clearing Members of the currency futures


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segment should not exceed 25%. Further 50% of the public

representatives on the Governing Council of the currency futures segment

can be common with the Governing Council of the cash/ equity derivatives

segments and the Exchange; (4) The Chairman of the Governing Council of

the currency futures segment shall be a member of the Governing Council.

If the Chairman is a Trading Member/ Clearing Member, then he shall not

carry on any trading/ clearing business on any Exchange during his tenure

as a Chairman; (5) No trading/ clearing member should be allowed

simultaneously to be on the Governing Council of the currency futures

segment and the cash/ equity derivatives segments We have gone

through practically the reports supplied to us, para 5.3 describes the

eligibility criteria for Clearing Corporation of the currency futures segments,

while para 5.4 speaks about the separation from other segments of the

Clearing Corporation. In our view this report merely considers the safety

aspect and the insulation of possible disputes due to the interlinked

interests of the exchanges and/ or the officials. In fact, the report and

more particularly para 1.2 specifically hints at the difference between OTC

and the currency futures. The report is a 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.


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50. We have now to consider whether the CD market by itself could be a

separate and distinct market. We must here note that a fundamental error

committed in treating the CD segment as a product by itself. In fact, at

one place the majority order had defined the relevant product market as

stock exchange services in respect of the CD segment. Now, if the stock

exchange services were common, then there was no need to restrict these

stock exchange services in respect of CD segment alone. The fundamental

error that was committed by the majority and minority order was that it

says that it assess the relevant market focused on the products being

traded on stock exchange as opposed to the services, which are offered by

the stock exchanges. It must be understood here that a stock exchange

does not manufacture, offer or sale any product. It simply offers a trading

platform and associated services for brokers to use. The market for

assessment therefore, has to be the services offered by stock exchange

independent of the product being traded on that exchange because a stock

exchange does not sell a product. It must be borne in mind that a stock

exchange does not create products like WDM, F&O, securities and currency

derivatives. It merely offers the services. The competition assessment has

to be therefore, only in respect of the services offered by the stock

exchanges irrespective and independent of the products traded on the

stock exchange. The learned counsel for the MCX-SX rightly argues that

SEBI allowed the trading on stock exchanges of (1) equity; (2) debts; (3)

futures; (4) options; and (5) currency derivatives. All the stock exchanges

provide trading services in respect of these products, though at the

relevant time, the MCX-SX was providing the service only in CD segment.

When the competition question comes, it would have to be understood, as


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to in what manner and what conditions these services were offered by

various stock exchanges including NSE and MCX-SX. The very existence of

the institution of stock exchange is for providing services to the

speculators, brokers and all those interested in those products. Therefore,

what is important is a service not the segments in which the stock

exchanges deal. A beautiful example came to be cited by Shri Haksar. He

compared the stock exchanges with the firm doing the business of dry-

cleaning. He pointed out that in a competition between the two dry-

cleaners, the only relevant factor would be the services given by the dry-

cleaners in dry-cleaning the clothes, whether it be shirts or coats or pants.

According to him, it cannot be imagined that one dry-cleaning firm is

cleaning only shirts, or only pants, or only coats. The example is extremely

apt. It must be realized that the nature of the product does not affect the

services, and the competition law assessment can and should be done only

with respect to the services being offered, especially when the enterprises

concerned do not have any control over the products being traded because

the products do not belong to them or nor 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


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two proprietors of the card room would, therefore, be based only on the

services offered by each of them and not based on the card games that the

players playing inside each of the card rooms. What the players wish to

play at any time is determined by the players, not by the proprietor of the

card room, and the similar things take place at the stock exchanges. A

stock exchange provides certain services to the participants (i.e. broker) on

its platforms. Whether a broker uses its services for trading in shares or

currency derivative, does not affect the nature of services provided by a

stock exchange for competition law assessment. In our opinion the

argument is infallible.

51. It was also heavily argued by NSE that considering the definition of

section 2(t), the relevant product market must comprise of all those

products/ services, which are viewed as an interchangeable/ substitutable

by the consumer. According to him, this implies that only demand side

substitutability, namely what consumers consider as interchangeable, that

according to him is the only relevant consideration for determining the

relevant product market. He further argues that what suppliers found to

be substitutable (i.e. supply side substitutability) is not a factor to be

considered in determining relevant market for the purpose of the

Competition Act. He has given the example that a person going to Mandi

to purchase onions will not find wheat seller at the Mandi to provide an

adequate substitute. He therefore, argues that as long as onions are not

substitutable for equity/ F&O/ WDM, the products (and consequently their

service) cannot form part of the same relevant market. According to him

in paragraph 10.24 of the majority order seems to have agreed with this

argument. Before proceeding further, we must hold that what the


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consumer wants from the Mandi seller, is a definite product like onion or

potatoes or grains. He does not go to the shopkeeper for his services. He

has a definite product in mind. Such product is absent in the present

scenario. If a person wants to purchase or deal in shares, he only uses the

services of the stock exchange. He may in the process purchase few

shares, but those shares are not the products. The product is the service

offered by the stock exchange for getting either shares or F&O or WDM or

CD derivatives. Therefore, the example is incorrect. There is tangible

product in this example in shape of onions or potatoes or grains. Such

tangible product is absent here. This is apart from the fact that a person

purchasing CD need not restrict himself only to CD, he may have a choice

to deal with the securities or WDM or F&O. It is always a broker, who

deals and broker need not restrict himself only to the product of CDs. He

can deal with any other product, provided he has the license to that effect.

It is, therefore, that we say that the argument about supply side 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


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stock exchange in all the sectors, which would be a relevant market. The

learned counsel has also relied on the percentage, the 7.6% of the trading

volumes of the CD segment. In our opinion, this argument must be

rejected as inconsequential. The learned counsel also argued on the basis

of SSNIP test and contended that if there was non-transitory increase in

price of 5-10%, it was unlikely to drive the purchasers of the CD contracts

to purchase equity. In the same breath, however, the learned counsel

urges that such a price increase could, however, drive users of the CD

segment to the OTC segment. We do not agree. It may be that if a

transaction fee was charged by the NSE in CD sector, the concerned broker

might stop dealing in the CD sector altogether and might turn to the other

segments as he has to remain in the business. Therefore, in our opinion,

SSNIP test would be of no consequence. We must again realize that in

section 2(t) there is a separate mention of the products or the services.

Therefore, the two concepts cannot be confused with each other. What

are we concerned here, are not the CDs, futures derivatives for CD or the

shares or the WDM or F&O. We are concerned with the price of a service,

which is offered by NSE. The real issue was as to whether the NSE in

offering the service had abused its dominance. While interpreting section

2(t), we cannot ignore section 2(u), the definition of service, which

suggests as under :-

2(u) service means service of any description which is made

available to the potential users and includes the provision of services

in connection with business of any industrial or commercial matters

such as banking, communication, education, financing, insurance, chit

funds, real estate, transport, storage, material treatment, processing,


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supply of electrical or other energy, boarding, lodging, entertainment,

amusement, construction, repair, conveying of news or information

and advertising.

The latter part of the definition though restricts itself to the factors

mentioned, it cannot be ignored that basically service means 'service' of

any description. The only condition is that 'service' must have been made

available to the potential users. In this case the 'service' is used by the

brokers, speculators and other players of the stock exchanges, which the

stock exchanges offer. It provides the platform to such person for giving

the service. Now, it is not as if a person dealing in the stock exchange

service for CD, he would not utilize that service in the other sectors, that

only depends upon on his will. Therefore, what is relevant here is the

service. It cannot be further restricted to what the CCI has done by

treating service only to the CD segment. That is clearly impermissible.

52. 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.

53. Second example given was Australian Stock Exchange and SFE


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merger, the law laid down will not be applicable to the present case, where

the relevant product is a service offered by the security exchange. After all

a service offered by NSE was complained of, as they refused to charge

anything for that service and thereby had tried to bleed MCX-SX slowly,

since MCX-SX did not have a license for any other segment except the CD

segment. If the services offered by NSE without charging anything was

the cause of the complaint by MCX-SX, then we would strictly have to take

into consideration the service aspect. The service offered by NSE in the

matter of currency derivatives, would be no different than the service

offered in the other segments in which it was operating. It has already

been shown that it was not necessary that a person taking the service in

currency derivatives would not take that service in the other segments. On

the other hand, it was clear from the statistics that there were number of

persons, who were utilizing the service in the other segments also. In fact,

it is 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.

55. 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


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relevant market, each service has to be compared with the competitors

service, so that a single player does not start to dominate after getting

merged with another entity. In our opinion, therefore, it would be

irrelevant to rely on the decision holding the relevant market for merger

cases for being used in the case under abuse of dominance. A holistic

picture would have to be taken into consideration and in our opinion the

D.G. has correctly held the relevant product market to be the services. It

must also be noted that the merger analysis is an ex-ante review of the

proposed merger and to examine whether the proposed merger will

significantly alter the structure of the market and impact the participants in

the market in the futures. It is an assessment frequently based on an

assessment of probabilities and likelihood of certain types of behavior

arising from the merger. Therefore, it is natural that the definition of

relevant market for assessment becomes as narrow as possible to evaluate

the impact of merger in the future. The consideration is that if the

proposed merger does not significantly and adversely alter the structure of

the narrowest possible relevant market, then it can be justifiably concluded

that the proposed merger may not have an impact on competition in

future. This is in sharp contra distinction with a review in connection with

abuse of dominance case, which is an ex-post facto review. The

competition authorities in an abuse of dominance case review and assess

the conduct of an enterprise in the past of an event, which has taken place

already or is continuing as on the date of investigation/ order. This,

therefore, becomes a static analysis of an event, which has occurred

between the two points in time. Thus, a merger analysis is a prospective

assessment, while the abuse of dominance position assessment is


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effectively an assessment of the conduct that has already taken place. Shri

Haksar very earnestly urged this proposition for which he relied on extracts

from Bellamy and Child. Shri Haksar also analyzed the aforementioned

cases cited by NSE and contended that in the case of merger of TSX Group

Inc. and Bourse de Montreal Inc., the Canadian Competition Bureau had to

define the relevant market as services offered in respect of each segment

to assess any potential overlaps that may raise competition concerns. This

depended on the specialization agreement, which played critical role in this

assessment. He also commented that in Deutsche Borse AG, Euronext NV

and London Stock Exchange, the assessment focused on services offered in

the equity segment because the target enterprise i.e. London Stock

Exchange operated primarily on the equity segment and the 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

idemon the narrow market definition.

56. 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


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contract. He only gets the difference in cash which is common

for F&O and CD. F&O and CD contracts are very similar as

borne out by following.

(ii) A consumer in either segment does not have any ownership

right to an underlying security or currency, but only gets a

contractual right to the difference in prices.

(iii) CD & F&O Contracts are unique to the exchange which have

launched it and can be closed out only on the same exchange;

unlike securities purchased in Equity Segment, which can be

sold in any other exchange.

(iv) Nature of derivatives contracts available for trading in both

segments are very similar futures and European style options.

(v) F&O segment regulations adopted as it is for CD segment by

NSE, pursuant to a specific permissive clause in Chapter VII of

RBI-SEBI Technical Committee Report.

(vi) SEBIs Master Circulars issued on December 31, 2010 clearly

club F&O and CD segment contracts in single circular, while

Equity is segregated in a separate Master Circular of same date.

(viii) Consumer view: Statement of a very sophisticated global

consumer i.e., Bloomberg, as extracted in page 81 and 82 of

DG Report.

(ix) Trading member, clearing member classification only relevant

for F&O and CD segments.

(x) Trading parameters, margins and settlement modes for

derivatives (similar for both F&O and CD) are very different

from those for cash trades.

57. Shri Haksar, therefore, urged that if at all CD market is to be

considered as a separate relevant market then it should also be considered

along with F&O market, in which obviously the NSE has a forceful

presence. It is not necessary for us to go to this aspect, as we are

convinced that the relevant market in this case is that of the services

offered by the stock exchanges. In that view, we confirm the finding of


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the D.G. on this issue. We would not, however, comment on both the

majority and minority orders, which has accepted the CD segment as the

relevant market, for the simple reason that even if that market is to be

held as a relevant market, in our opinion, the majority order was correct in

deducing that the NSE is a dominant player in that market.

58. It need not detain us, if the relevant market is taken to be the

services offered by the security exchanges then there would be no

question of the NSE not being a dominant player. We would separately

consider the arguments of the parties on the aspect that the relevant

market was the CD segment alone and the NSE was a dominant player,

even if that market alone is considered as the relevant market.


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59. This 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 record that

the CD segment primarily for speculators of currency values and short term

hedgers, who want to cover their economic exposure, but require greater

liquidity. Then the CCI in its majority order went on to reject the SSNIP

test, holding that it was merely a methodological tool for performing

hypothetical monopolist test for the analysis of mergers. It then referred

to the Cellophane Fallacy. The majority order also refused to go into the

extended debate to distinguish the words interchangeable or

substitutable, considering the facts of the case and different aspects of

capital market in India. The CCI held this to be unnecessary and not


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useful. It acknowledged that equities and currencies were entirely

different and consequently related derivatives were also different. It

therefore, went on to hold that the currencies and equities were related to

the different market. It acknowledged that from any practical point of

view, a product over CD segment exchange could not be said to be either

interchangeable or substitutable by a product in segments like equity and

F&O. We have also indicated above that we do not subscribe to this view

because, this view is predominantly a view treating equities and currency

derivatives to be the products, which itself is not a correct notion. The

majority judgment then went on record to say that the stock exchange

services in respect of the CD segment is clearly an independent and distinct

relevant market. Though, the majority order in para 10.24 agreed that the

DG had found a high degree of commonality amongst the members of the

MCX-SE and NSE and held that this itself had no bearing on

interchangeability or substitutability between various segments of stock

exchange services. It wrongly gave an example of wholesale traders of

grains and wholesale trading of vegetables, completely ignoring that in that

example, the products were tangible products of grains and vegetables. It

is on this basis that the majority order came to the conclusion that relevant

market was CD segment in India.

60. Though, we do not see this as an absolutely correct finding, all the

same we will have to consider, as to whether the majority judgment was

correct in holding the NSE as a dominant player in the narrow market of

CD segment. The following factors, which were found by the DG or

mentioned in the majority judgment are stated as under :-


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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 segment.

j. NSE has high degree of vertical integration ranging from

trading platform, front-end information technology, data

information products, index services etc.

k. Stock exchange services in India are highly regulated

and require approvals of SEBI to start a new exchange.

61. According to the majority judgment, these factors which were

undisputed created a complete picture of players in the capital market in

general and in the relevant market of currency derivatives. The order then


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touches upon history relating to the first half century of independent India,

in which BSE was way ahead of all the regional stock exchanges, but only

before the entry of NSE on the scene, which soon became the market

leader. The CCI then referred to the entry of MCX-SX and USE in the CD

segment and noted that by the time these two players made entries, NSE

had already occupied an overall position of strength. The order then notes

that there were only three players in the market, i.e. NSE, MCX-SE and USE

and referred to their current percentage, to be 34% MCX-SX, 30% NSE

and 36% with the latest entrant USE as of October 2010. The judgment

then mentions that it is these three players which would have at least

some ability to affect its competitors or the relevant market in its favour,

even if it is not capable of operating completely independent of competitive

forces or affecting consumers in the relevant market. The CCI majority

judgment then went on to refer to section 19(4). It mentioned in this

behalf that the position of strength has to be arrived at after rational

consideration of relevant facts, holistic interpretation of seemingly

unconnected statistics or information and application of several aspects of

the Indian economy. It mentions that what has to be seen is whether a

particular player in a relevant market has clear comparative advantages in

terms of financial resources, technical capabilities, brand value, historical

legacy etc. to be able to do things which would affect its competitors, who

in turn would be unable to do so or would find it extremely difficult to do

so on a sustained basis. The reason is that such an enterprise can force its

competitors into taking a certain position in the market which would make

the market and consumers respond or react in a certain manner, which is

beneficial to the dominant enterprise but detrimental to the competitors.


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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.

62. 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.

63. The second aspect that came for consideration was whether there

was any indication that the conduct of NSE showed that it was aware of its

capability? The CCI noted that NSE had not followed Accounts Standard 17

(AS17), which stipulated the segment reporting. The CCI in the majority

order rejected the facile explanation that the so called detachment of profit

motive was with the desire to develop the CD segment for the larger good

of the capital market in India. The CCI rejected this explanation as

unpalatable. It then mentioned it is unthinkable that a professionally

managed modern enterprise can afford such financial complacency in the

face of competition unless it is part of a bigger strategy of waiting for the

competition to die out. This complacence can only point to awareness of

its own strength and the realisation that sooner or later, it would be

possible to start generating profits from the business, once the competition

is sufficiently reduced.

64. The third aspect, which was considered was whether in the absence

of above strengths, would NSE be able to or want to continue with zero


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pricing indefinitely? The majority order answered this question holding

that had NSE not got the undeniable advantages arising out of its

operations in other markets, it would not have been able to or wanted to

charge nothing for providing stock exchange services for the cash

derivatives forwards market. It also noted that in this behalf MCX-SX or

any other current or future competitor did not have similar advantages.

From this, the majority order deduced that NSE enjoyed a position of

strength in the relevant market, which enabled it to affect its competitors

in its favour. It mentions that for arriving at this conclusion, the CCI have

taken into account relevant aspect 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 majority order said

that it had also given consideration to some important cases from

international jurisdiction, such as AKZO, [1978] ECR 207, United Brands

[1991] ECR I-3339, Du Pont. From this, the majority order came to the

conclusion that NSE had the position of strength and therefore, enjoyed

dominant position in the relevant market.

65. In this behalf, when we consider the minority order, reference is

made to the finding of D.G. that NSE held absolute dominance, even if CD

market is assessed in isolation with other segments, on account of its

incomparable economic power, size, resources, higher degree of vertical

integration, absolute dependence of consumers and large degree of

economies of scale in operating different segments with adequate scale in

each of those segments. The minority order then went on to consider the

argument by NSE that while it started with 100% of the CD segment

market in October 2008, it did not enjoy the first position in terms of


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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 30thOctober, 2010. The minority order

then went on to analyze the market shares. It deduced

Compat order vs NSE for MCX

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