The National Stock Exchange (NSE) of India hasn’t budged from its No. 1 position in the equity cash segment as well as its near-monopoly position in the equity derivatives segment. But things have clearly heated up for the exchange after the entry of MCX Stock Exchange (MCX-SX) in the currency derivatives segment as well as the induction of a new management at the Bombay Stock Exchange (BSE).
One of the main pressures NSE has faced is the string of allegations that it is abusing its dominant position in the exchange space. MCX-SX has alleged that NSE’s policy of waiving fees in its currency derivatives segment amounts to predatory pricing. It first approached market regulator Securities and Exchange Board of India (Sebi) and then lodged a complaint with the Competition Commission of India (CCI).
Simultaneously, BSE has made a number of complaints to Sebi that NSE is deliberately going slow in approving multi-exchange algorithms, with a view to protect its turf in the equity cash and derivatives segments. Sebi finally intervened and came out with a framework for smart order routing, an algorithmic trading strategy that involves two or more exchanges. BSE also protested NSE’s policy of allowing members using co-located servers access only to its own trading platform. These members weren’t allowed to access BSE from their co-located servers, which according to BSE was a monopolistic practice.
While Sebi has intervened in some of these cases, MCX-SX’s complaint to CCI was the first time that a formal charge was made under India’s competition law. As such, the order by CCI was eagerly awaited. Unfortunately though, the majority order by the Commission released late last month is a let-down. The report concludes that NSE abused its dominant position, but it doesn’t appear to be backed by rigorous analysis. What’s more, the order is silent about a dissent note by two members, reflecting a lack of transparency that is unbecoming of a regulator.
It was only after a direction from the Delhi high court that the dissent note was released late last week. The dissent order goes so far as to say that “the approach in regard to the analysis of some of the issues in the majority order does not seem to be in tune with the scheme of the Competition Act”. It questions why the majority order doesn’t consider the conduct of United Stock Exchange (USE), the third competitor in the currency derivatives segment, and also why it ignores the fact that USE didn’t make similar claims of abuse of dominance.
Also read | Mobis Philipose’s earlier column
It’s not that the dissent order is far superior, though it must be said that it has been drafted much better. Rahul Singh, an expert on Indian competition law and economics, says, “Both the majority and minority orders point to the fact that the commission is on a steep learning curve. The steps used to analyze the case are not rigorous and don’t reflect sound economic principles. Besides, members seem to be enamoured by rulings in overseas jurisdictions, instead of applying provisions of the Competition Act, 2002.”
Singh, who is currently on a sabbatical from National Law School, Bangalore, points to the analysis used to define the relevant market, which is an essential principle in competition law to determine the market in which the competition is taking place or not. There are six provisions in the Competition Act with reference to determining the relevant market. But neither the director general’s report, nor the majority and minority orders, apply these provisions systematically to determine the relevant market in the NSE case.
The orders also suggest certain biases. The majority order states that Financial Technologies Ltd and Multi Commodity Exchange of India Ltd together own 5% in MCX-SX. The dissent order states that they own 90%. Both statements are factually incorrect—including warrants that are convertible into equity shares, the two promoters have an economic interest of around 71% in MCX-SX.
Given these loopholes, there is a good chance that NSE would be able to successfully challenge CCI’s order at the Competition Appellate Tribunal. The Tribunal, of course, wouldn’t engage in an investigation all over again and would only review whether CCI’s report adheres to the provisions in the Act.
Of course, these events would occur some time in the future. For now, the takeaway from case is that CCI has established abuse of dominance by NSE. There would be attempts to use this judgement to buttress the argument that there is a need for greater competition in the exchange space. While this column has argued for a few years now that there is a strong case for greater competition, it would be unfair to use the CCI order as a crutch, considering that it isn’t a well reasoned order.
One danger of using the CCI order to shore up the argument for greater competition is that it’ll give the impression that Indian markets are desperately in need for more competition and that this objective should be achieved at any cost. But while competition is good, it isn’t the ultimate objective from a policy perspective. The main objective from a policy perspective is to achieve a well functioning and robust market place. True, healthy competition can further that cause, but encouraging competition at any cost certainly wouldn’t.
As pointed out in this column’s response to the Jalan committee report, the policy response should take on board the governance role of exchanges as well as the need for greater competition in the space.
Illustration by Shyamal Banerjee/Mint
Mint’s publisher HT Media Ltd has 0.2% stake in MCX, the promoters of MCX-SX.
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