15-01-2013, 04:04 PM
MCX Stock Exchange Ltd. v National Stock Exchange of India Ltd. & Ors.
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Background:
MCX has been recognized under section 4 of the SCRA, 1956 with its initial recognition extended from time to time by SEBI vide gazette notifications. MCXSX has regulatory approvals to operate an exchange platform for trades in CD (Currency Derivative) segment. Financial Technologies of India Ltd (FTIL) is the promoter of MCXSX, it is engaged in the field of developing and studying software for financial and securities market. FTIL is also the principal provider of software solutions for brokers and other market intermediaries for use in their front office, middle office and back office for the purpose of dealing in securities through exchanges. The main software product of FTIL is marketed under the brand name `ODIN’ and is used by many members of NSE, BSE and IP Company.
Allegations of Informant (MCX):
The informant (MCXSX) had filed information under section 19(1) (a) against NSE, DotEx and OMNESYS alleging anticompetitive behaviour and abuse of dominant position by NSE aimed at (i) eliminating competition from the CD segment (ii) discouraging potential entrants from entering the relevant market for stock exchange services and (iii) achieving foreclosure of all competition in the market for stock exchange services.
1. The informant submitted that NSE has provides transaction fee waiver in respect of all currency future trades executed on its platform in spite of the fact that the CD segment is mature where trading has become high volume and potentially profitable . It is alleged that the due to such a waiver the informant too had to waive transaction fee for transactions for CD segment which resulted in losses.
2. The informant also submitted that NSE was charging no admission fee for membership in its CD segment as opposed to its equity, F&O and debt segments. NSE also did not collect annual subscription charges and advance minimum transaction charges in respect of its CD segment. The cash deposits required to be maintained by a member in the CD segment too was at a very low level compared to its other segments.
Report of the Director – General:
The Director – General (DG) went into the question of relevant market and concluded that there exists a supply side substitutability in between the segments of the stock market and therefore considered the entire stock exchange market to be a single relevant product. From the demand side, the DG concluded that CD and equity derivative segment s have common characteristics and the CD, equity segment and F&O segment are substitutable and that the F&O market and CD market are used by similar type of participants, i.e. speculators and hedgers. The DG also concluded that as product differentiation in segments is not of much consequence due to traders engaging in multiple markets and all securities having a common purpose of profiteering. Thus the DG concluded that stock exchange services in India including equity, F&O, WDM and CD but excluding OTC market as relevant market for the purpose of section 19(6) and (7) read with 2(f) and (t).
Contentions of Opposite Parties:
The NSE objected to the DG report by alleging that determination of relevant market, assessment of dominant position and leveraging its dominant position by the DG was erroneous in nature.
The primary contentions made by the OPs were:
1. That there were methodological inconsistencies and errors made by the DG report,
2. As a result of incomplete investigation, the findings of the DG were erroneous,
3. That the possibility of supply side distribution has wrongly been taken into account in the market definition,
4. That the DG has erred in holding that the SSNIP test should not be applicable to the present case,
5. That the relevant market based on legal and economic analysis is the “CD segment and OTC currency forwards”,
6. That the findings of dominance are flawed,
7. That the DG has failed to provide objective basis for determining that NSEs conduct was with a view to reduce competition or eliminate competitors,
8. That the DG has failed to analyse whether the CD Segment is in a nascent stage and whether NSE was objectively justified in waving fees.
9. That the act of cross-subsidization by the NSE is not an abusive act.
Conclusion:
To sum up NSE has abused its dominant position in terms of Section 4(2)(a)(ii) and 4(2)(e) of the Competition Act. The discussion made above show that the intention of NSE was to acquire a dominant position in the C.D. segment by cross subsidizing this segment of business from the other segments where it enjoyed virtual monopoly. It also camouflaged its intentions by not maintaining separate accounts for the C.D. segments. NSE created a façade of the nascency of market for not charging any fees on account of transactions in the C.D. segment. The competitors with small pockets would be thrown out of the market as they follow the zero transaction cost method adopted by the NSE and therefore in the long run they will incur huge losses. The past conduct of NSE and the conduct in the C.D segment shows a longing for dominance in any segments in which the NSE operated by dominating its competitors.