The Competition Commission of India?s (CCI) investigation wing has found ?predatory pricing? by National Stock Exchange (NSE), the country?s largest and most diversified exchange, in the over two-years-old currency derivatives segment. According to an official source, the CCI director-general?s probe on a complaint by rival MCX-SX clearly established that NSE enjoyed a dominant position in the exchange market by virtue of its presence across verticals, and it abused this privileged status by waiving transaction fee in the fledgling currency futures segment.

Predatory pricing is an anti-competitive behaviour that is punishable under competition law.

The CCI probe agency?s adverse report could not have come at a worse time for NSE. Less than a fortnight ago, MCX-SX, which has long alleged that NSE used its clout in the market regulator Sebi to keep competition at bay, filed a writ petition in the Bombay High Court against Sebi?s September 23 order, rejecting the bourse?s plea to be allowed to function as a full-fledged stock exchange.

As directed by CCI, NSE has already filed its response to the probe findings. The commission will now hear both parties in the light of all this and take a call on whether action needs to be taken against NSE, the source said.

When contacted, CCI chairman Dhanendra Kumar declined to comment. ?The Competition Act debars the commission from going public on pending cases,? he said.

If the commission finds NSE?s behaviour actionable, it will have many options. At the least, the regulator can direct the firm to desist from its anti-competitive behaviour forthwith. It can also impose a 10% fine on the firm?s turnover and even force a ?division of the enterprise? or issue any other order it deems fit.

NSE handles a trading volume of around Rs 2 lakh crore a day across market segments. About 70% of the equity market transactions and 99% of trade in equity derivatives in the country take place on NSE platforms. MCX-SX, with trading volume of hardly Rs 15,000 crore a day which is restricted to the currency futures, is an unequal competition to NSE. MCX-SX alleged that NSE was using its unique status among the country?s stock exchanges as one with the economies of scale and deep pockets to indulge in predatory pricing in the new area of currency derivatives. This allegation has been endorsed by the CCI director general.

MCX-SX currently offers trading only in currency futures. It is keen to enter the all-important equity segment along with other areas but is frustrated by an obstinate Sebi. In its recent order, the regulator cited excessive concentration of economic interest in the stock exchange in the hands of the two promoters ? MCX and Financial Technologies? and their lack of honesty among the reasons for not letting the firm diversify into more lucrative areas.

NSE launched its currency derivatives platform in August 2008 and MCX-SX followed a couple of months later. While NSE and United Stock Exchange ? the third player promoted by BSE ? are allowed to offer trading in both currency futures and options, MCX-SX is only in the futures segment. MCX-SX has a 45% share of the currency derivatives segment which is now reporting a trading volume of Rs 30,000 crore a day, followed by NSE which has 35%. ?While our entire revenue comes from currency futures, the currency derivatives segment accounts for just 5% of NSE’s turnover. We have already suffered a loss of Rs 100 crore due to waiver of transaction fee by NSE,? said MCX-SX managing director & CEO Joseph Massey. He, however, declined to comment on the CCI findings. ?It is inappropriate to comment as the matter is still before the CCI,? he said.

NSE, however, argues that waiver of transaction fee for new products at the development stage is policy which it had adopted in the past also. Market watchers however say that NSE’s price discounts in the past lasted for not more than a few months, whereas it is yet to stop fee-less transactions in currency futures introduced over two years ago.