The squabble between the country?s newest stock exchange, MCX-SX, and the dominant player, NSE, has reached the domain of the competition regulator, with MCX-SX lodging a compliant with the watchdog. The Competition Commission of India has embarked on an exercise to unravel the intentions of NSE through rigorous data collection and analysis, official sources privy to the matter told FE.
To prove MCX-SX?s allegation that NSE is resorting to predatory pricing in the currency futures market by not charging a transaction fee is a tough job, Commission sources told FE. ?Figuring out the intentions of a large player with deep pockets is tough, but we are in the process of collecting the data for this purpose,? said an official.
But the regulator can take unprecedented steps to establish whether a market player is sacrificing returns now to cripple a rival so that it could gain later, say lawyers. ?CCI has the power to ask an accused to produce internal documents and communication that would reveal business plans adopted to ensure that there is no effective competition. Such documents can prove to be a smoking gun,? said Suhail Nathani, partner in Economic Laws Practice, a law firm.
CCI chairman Dhanendra Kumar confirmed to FE that the regulator is examining the case but declined to comment on the probe, saying CCI?s policies do not allow talking about pending investigations, which are best done away from public glare.
MCX-SX approached the regulator saying its rival was abusing its dominant market position by offering fee-less transactions in currency futures. But NSE stated it does not levy transaction charges on many of its products in the developmental stage.
Experts said the regulator will ascertain whether NSE has the capacity to absorb the extra demand that it might extract from the rival through undercutting. One cannot be a successful predator without the capacity to meet the extra demand arising from the competitor?s extinction or reduced market share. NSE?s ability to go on providing fee-less transaction would also be reckoned as it would indicate the extent of sacrifice it can make now for the future gains that MCX-SX suspects its rival is going to make.
A leading investor protection agency, Society for Consumer?s & Investors Protection (SCIP), argued earlier this month that NSE?s gross profit margin of 67% and earnings before interest, taxes, depreciation, and amortisation of 74% show it is making super-normal profits that less than 50 Indian listed companies make.
Besides, it would also be crucial for the regulator to establish the intention to recoup in the future the revenue foregone now in the alleged attempt to capture the market, said a New Delhi-based competition lawyer who did not wish to be named. CCI is expected to study the currency futures market and how easy or difficult it may be for a new player to come in and offer fee-less transaction the moment NSE may decide to levy a charge.
The competition law, however, allows legitimate efforts to meet competition. Vinod Dhall, a competition law expert who advises MCX-SX said, ?Under competition law, a dominant firm is allowed by the law to compete, even aggressively; the law seeks to protect not a competitor but the process of competition. However, a dominant firm (NSE, in this case) is considered to have a special responsibility, and it is not permitted to eliminate competition or an equally efficient competitor (e.g. the MCX-SX, in this case) inter alia through predatory pricing.?
According to Dhall, ?Under section 4(2)(a) of the Competition Act, the offence of predatory pricing has three essential ingredients: the firm must be dominant as defined in the Act; the price must be below cost, usually ?average variable cost? (zero pricing would be below cost); and there must be intent to eliminate or reduce competition. Once these ingredients are shown to be present by the alleging party/CCI, the violation is complete.?
