5 reasons why Competition Commission is wrong on NSE

Question: When is a dissent note more important than a majority verdict?

Answer: When you are the country’s largest stock exchange and a decision of the Competition Commission of India (CCI) goes against you.

On 25 May, the CCI had issued a show-cause notice to the National Stock Exchange (NSE), the country’s premier bourse, for abusing its dominant position in the equity and equity derivatives market to lock out competition in the currency derivatives market, where it charges no fees.

Having found the NSE guilty of violating section 4 of the Competition Act, CCI could fine the exchange upto 10% of its average profits over three years. The verdict follows a complaint from rival MCX, the Multi-Commodity Exchange, which alleged that the NSE was adopting predatory pricing strategies to kill off the competition. The NSE said no, and it was merely waiving fees as a form of introductory pricing.

But while five of the seven members of the CCI found in favour of MCX, the other two didn’t. This is why the NSE moved the Delhi High Court to get the dissent notes released. They are now out, and the NSE is banking on these two to bail itself out. It hopes to use their arguments when it takes the fight to a higher court.

The two dissenters, Geeta Gouri and Anurag Goel, did not find any abuse of monopoly by the NSE and, in fact, said that any meddling by the CCI would not help the consumer. According to Business Standard , the dissenters criticised the majority order for its “adversarial approach” which was not quite in the spirit of the competition law.

Firstpost looked at the numbers and the evidence and believes that the minority report makes more sense than the majority finding. For five reasons:

One, there is no evidence of competition being affected by the NSE’s zero pricing in currency derivatives. Currently, the NSE, MCX and the United Stock Exchange (USE) are in keen competition, sharing the Rs 45,000 crore daily turnover three ways. MCX is marginally ahead of the other two. According to another report, MCX had an average daily turnover of Rs 16,924 crore, the NSE 15,759 crore and the USE Rs 13,191 crore since May 2011.

Two, when “free” is bringing in huge turnover and benefiting consumers, where is the logic in forcing transaction fees onto all exchanges? As the dissenters pointed out, the late entry of the USE did not in any way affect its ability to garner volumes. Predatory pricing has, in fact, expanded the market. This is what happened in telecoms and there is no reason why it should not happen with exchanges.

Three, the majority verdict assumes that profits from one segment (equity, in this case) should not be allowed to subsidise operations in another (currency derivatives). But this is exactly how the real world operates. Markets expand when companies use profits from one product segment to promote another till that one is ready to bear pricing.

Four, the government itself does the same thing. By underpricing fuel and cooking gas supplied by the public sector oil marketing companies, it has driven Reliance out of the market, thus reducing competition. But this is being lauded as a triumph of people-based policies.

Five, MCX is the champ in commodity futures, thanks to its huge lead in metals and energy futures. There is nothing to stop it from cross-subsidising currency derivatives using profits from here.

So why are NSE and MCX scrapping like kids?

Answer: the rivalry had its roots in the fact that MCX’s promoter, Financial Technologies, provides the software that traders use to interface with the exchange. The relationship was fine till MCX challenged NSE in commodities (NCDEX) and beat it to No 1. Once that happened, the NSE rightly assessed the threat from MCX as major and has been taking pre-emptive action in new segments like currency futures.

This is what one would expect a market leader to do. And from all accounts, the NSE has not exactly kayoed the MCX even in currency derivatives .

In fact, the real problem is that Sebi has not allowed MCX to get into equity. It is being muttered that Sebi blackballed MCX because it was a competitor to NSE (Sebi’s partiality to NSE apparently stemmed from its former chief CB Bhave’s close links to the original boss of NSE, who made him head of the National Securities Depository Ltd, which manages the country’s book-keeping for dematerialised shares and many other things. But this can never be proven).

The battle will end the day MCX gets the go ahead in equities. That’s what Sebi and CCI should be focused on. The Competition Commission would be better off focusing its efforts in other areas. The NSE-MCX fight is not the right area to flex its muscles.