Competition law and the war of exchanges

By Anahita Irani and Prachi Loona, Juris Corp

Globalization, and relaxation in India’s foreign investment policy, have resulted in strong competition for the local market, which in turn has mandated higher standards of practice among market participants. With this desirable outcome in view, the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969, was repealed and replaced by the Competition Act, 2002. Although certain provisions of the Competition Act are yet to be notified, the Competition Commission of India (CCI) has already come into operation and replaced the MRTP Commission.

Anahita Irani Senior associate Juris Corp
Anahita Irani
Senior associate
Juris Corp

The CCI has been granted the power to independently inquire into anti-competitive agreements or abuses of dominant position, i.e. an enterprise’s position of strength in a market which enables it to operate independently of competitive forces, or to affect its competitors, consumers or the market in its favour.

Dominant position itself is not defined under US or UK laws. In the US, any attempt to monopolize a market is illegal and the basic criterion for determining if this has occurred is whether a company actually has dominant power or control.

Although an exact figure has not been specified, market control in the area of 10% to 20% generally raises the suggestion of illegality. In the UK, the concept of dominance of an undertaking becomes linked to monopoly when the extent of a company’s control reaches one-fourth of the market. This is similar to the position under the MRTP Act.

No fixed limits have been set under the Competition Act to determine the issue of dominance, as under the MRTP Act. Instead, several factors – including market share and various economic factors – are considered in judging whether an enterprise holds a dominant position.

Trading in currency futures on the floor of the exchanges, which was introduced in October 2008, opened up yet another avenue for investors in the Indian capital markets. The National Stock Exchange of India (NSE) and its rival Multi Commodity Exchange (MCX) have since been vying for a piece of this new pie.

Recent news articles suggest that MCX has filed a complaint with the CCI against NSE for anti-competitive behaviour, which would be a “first of its kind” event for the Indian capital markets. The grounds apparently cited by MCX include NSE’s decisions to waive transaction fees and collect only minimal security deposits from its customers. There is no doubt that NSE and Bombay Stock Exchange (BSE) occupy dominant positions in the exchange market, as they handle more than 70% of the transactions in securities in India. More specifically, NSE is in a dominant position with regard to trading in futures and options (with stocks and indices as underlying security). In contrast, MCX was incorporated only in 2003 and is competing with NSE for business in the currency derivatives segment.

Levying low charges may not by itself amount to being anti-competitive given that dominance is in all likelihood achieved by adopting practices and processes that lead to greater efficiency, better products and services and lower costs. Notably, under the MRTP Act, the definition of “services” excluded those services which were rendered free of charge! However, there is no such exclusion under the Competition Act.

Prachi Loona Associate Juris Corp
Prachi Loona
Juris Corp

Historically, there have been many instances where market participants have charged “predatory” prices to gain business which has affected competitors in oligopoly. The Competition Act defines predatory pricing as the sale of goods or provision of services at a price which is below the real cost, with the intent to reduce competition or eliminate competitors.

At this point, regulatory intervention may well be expected, to protect the interests of the free market economy and safeguard competition, in the larger interest of society. However, it is difficult, if not impossible to determine the “real cost” of rendering many services.

In addition, under the MRTP Act, bad intent had to be established in cases where predatory pricing was alleged, and this is still true in foreign jurisdictions.

Utilizing a dominant position in one market to enter or protect another market also qualifies as an abuse of a dominant position. This includes the case in which a company, which is dominant in one product or service area, cross-subsidizes another product or service to below-cost level. A well-known example is Microsoft, which in the 1990s used its dominant position in disk operating systems to dominate the browser market and eliminate its main competitor, Netscape.

Arguably, NSE has used the cross-subsidization tactic at times when it has introduced new products. For example, a transaction on the wholesale debt market of NSE, which experiences low liquidity and volumes, does not carry any transaction charge. If the CCI finds that that NSE is abusing its dominant position, it can order NSE to impose transaction fees at an acceptable, competitive market rate.

Although the MRTP was in force for over 30 years, antitrust law remains in its nascent stages in India. It will therefore be very interesting – especially for observers of the capital markets scene – to hear the final order of the CCI in relation to MCX’s complaint against NSE.

Anahita Irani is a senior associate and Prachi Loona is an associate at Juris Corp. The firm is based in Mumbai and specializes in banking and finance, foreign investments, private equity, direct tax, bankruptcy and restructuring, M&A, insurance, energy and infrastructure, dispute resolution and International arbitration.

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