Beware Someone is Watching

Zerick Dastur of J. Sagar Associates discusses the recent order of Competition Commission of India passed in connection with information filed by MCX Stock exchange Limited against National Stock Exchange..The country’s competition regulator has been actively engaged in enforcing the substantive provisions of the Competition Act. The thrust of the Competition policy is directed against anti competitive agreements having an adverse effect on competition and abuse of dominance by an enterprise. Investigations have been launched into industries operating in various sectors including civil aviation, private sector banks, film producers, housing finance companies and DTH service providers with a view to identify and bring to an end, activities which have an adverse effect on competition. The Act inter alia prohibits an enterprise which enjoys a dominant position from abusing such a position and taking an unfair advantage. The Competition Act as it currently stands does not frown upon dominance per se. However, the Commission is empowered to impose stringent penalties on parties who abuse their position of strength..The recent order of the Competition Commission of India passed in connection with the information filed by MCX Stock Exchange Limited (MCX) against National Stock Exchange (NSE), addresses competition concerns arising in the stock market services in India. In its order, the Commission has arrived at a conclusion that the intention of NSE was to acquire a dominant position in the currency derivative segment of stock exchanges by cross subsidizing this segment of business from the other segments like the equity segment futures and options where it enjoyed a virtual monopoly. NSE has been directed to cease and desist from unfair pricing, exclusionary conduct and unfairly using its dominant position in other markets to protect its position in currency derivative market. A penalty of Rs. 55.5 crore has also been levied..The information filed with the Commission inter alia alleged that NSE had announced a transaction fee waiver in respect of all currency future trades executed on its platform. The waiver was extended from time to time despite the fact that the said segment was now matured and trading in the currency derivative segment had become high volume and potentially profitable. It was alleged that due to the transaction fee waiver practiced by NSE, MCX was also forced to waive the transaction fee for transactions on its platform right from the date of entry into stock exchange business which had resulted in huge losses. The losses suffered by MCX were much higher than NSE because NSE had the ability to cross finance the losses from profits made by it in other segments. It was also alleged that NSE had the financial strength based on massive reserves built over a number of years which gave it the ability to absorb the losses..In arriving at a conclusion the Commission had to answer a number of questions viz what would be the relevant market for the purpose of the issue at hand, whether NSE was in a dominant position and finally whether NSE had abused its dominant position so as to adversely affect the relevant market. On a detailed analysis the Commission held that stock exchange services in respect of currency derivatives segment is a clearly independent and distinct market. The stock exchange services provided for the currency derivative segments, though similar to those provided for other segments of the stock exchange, cannot be said to be interchangeable or substitutable. It was also observed that NSE was a dominant player and that by virtue of the practices followed by NSE it could be concluded that NSE had used its position of strength in the non-currency derivative segment to protect its position in the currency derivative segment. It appears that the Commission intends to send a strong signal by inflicting severe monetary penalties to prevent practices which it perceives as being adverse to fair competition..The Act provides that an order passed by the Commission may be appealed before the Competition Appellate Tribunal within 60 days of the receipt of the order. NSE has filed an appeal before the Tribunal challenging the order passed by the Commission. An order passed by the Competition Appellate Tribunal may be challenged before the Supreme Court. Recent times have indeed witnessed a number of proactive measures adopted by the Commission to give effect to the legislative intent of sustaining free and fair competition in the market which the Commission is duty bound to protect..Zerick Hosi Dastur is a Senior Associate at J. Sagar Associates, Advocates & Solicitors. His practice covers diverse areas of Corporate Commercial and Securities law and he is also a part of the firm’s Competition law practice.