THE NATIONAL STOCK EXCHANGE OF INDIA LIMITED V.

COMPETITION
COMMISSION OF INDIA AND MCX STOCK EXCHANGE LIMITED [APPEAL
NO. 15 OF 2011]

BRIEF FACTS

Two orders were passed by the Competition Commission of India [“CCI”].The majority
order held that the National Stock Exchange of India Limited [“NSE”] had abused its
dominant position. On the other hand, the minority order exonerated NSE of any liability
under Section 4 of the Competition Act, 2002. Information had been filed by MCX Stock
Exchange Limited on the ground that NSE had introduced predatory pricing pricing by
waiving transaction fee altogether in the newly establishedCurrency Derivatives [“CD”]
Segment. It was also argued that NSE was using its dominance in the non-CD segments to
enter into CD segments.

ANALYSIS BY COMPETITION APPELLATE TRIBUNAL [“COMPAT”]

1. Predatory Pricing

RELEVANT MARKET

COMPAT held that the relevant geographical market would be India. With respect to the
relevant product market, it was held that the Over the Counter[“OTC”] market essentially
belonged to the banking regime and was restricted to hedgers and arbitrageurs. Moreover,
there was no scope for regulators in this market. Thus, it was held that OTC market could not
be a part of the market for CD segment.

The CCI was of the opinion that since a stock exchange did not manufacture any product but
only provided a platform for trading, the market forassessment was the services offered by
stock exchange independent of the product being traded on that exchange.

The arguments with respect to demand side substitutability were rejected on the ground that
the stock exchanges were only providing services and not products and only the price of the
service was relevant.

Thus, the relevant market was held to be the services by the stock exchange.

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DOMINANT POSITION

The COMPAT found that till March 2014, NSE was leading in terms of market share. Even
in terms of size and resources, NSE was found to be the largest. In terms of vertical
integration too, NSE was found to be the strongest.

It was argued that even if even when NSE did not charge for the transaction fee,
itscompetitors were able to match and successfully outmanoeuvre NSE and as a result the
market share of NSE fell from 100% to 33.6%.1 COMPAT rejected this argument on the
grounds that market share was not the only relevant factor and that even if CD segment was
held to be the relevant market, NSE was the leading entity for the maximum time period. The
COMPAT also refuted this argument on the ground that MCX was not able to successfully
compete and that it suffered huge losses due to being forced to offer zero transaction fee.

Thus, COMPAT finally concluded that NSE was in a dominant position.

ABUSE OF DOMINANT POSITION

It was argued by the appellant that the “test for predatory pricing through the Cost
Regulations ensure thatparties who are pricing low (a consumer benefit) are doing so in a
way that an equally efficient competitor could also provide the same product at such low
cost.”2

“Average variable cost means total variable costdivided by total output during referred
period”3 On the basis of this definition COMPAT concluded that the average variable cost
could be zero only ifthe total variable cost was zero. Since the total variable cost had not been
shown to be zero, it was held that NSE’s average variable cost was not zero.

Next, COMPAT observed that the minutes of the Pricing Committee meeting showed that the
effect of Section 4 of the Competition Act was never discussed despite the fact that there
were only two players in the market. It was therefore clear that if the zero transaction fees
was continued by the NSE, MCX-SX would have no other alternative but to also follow the
suit, which would eventually cause MCX to bleed out. It was found through the data that the
pricescharged by NSE had the potential to foreclose MCX-S which did not have the strength
to compete with NSE.

1
COMPAT Order, page no. 61.
2
COMPAT Order, page no. 68.
3
Determination of Cost of Production Regulations, 2009, Regulation 2(1)(b).

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Thus, NSE was found to have resorted to predatory pricing to abuse its dominant position.

2. Allegations of entering into the CD Segment by using dominance in non-CD Sector

The allegations under Section 4(2)(e) of the Competition Act, 2002 could not be proved as
the requirement of two markets was not met. There was only one relevant market in this case,
which was the services by the stock exchange.

ORDER GIVEN BY COMPAT

1. Penalty was to be levied on NSE at 5% of the average turnover.

2. The CCI order was set aside to the extent that NSE would not be required to maintain
sgment wise accounts

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