The first email service I used was Sabeer Bhatia’s Hotmail. Finding that to be clunky after Microsoft bought the company in December 1997 for $400 million, I moved to the cooler, hipper Yahoo Mail in October 1999. Then came Google and its fall-in-love service Gmail, to which I moved in January 2005. Six years after I used it, in March 2011, I finally paid $5 (Rs 225) to get 20 GB of extra storage space. Yahoo, like dozens of other email providers, knew that Hotmail was offering free email and got into the business. Google knew that the email business had proliferated — and was free — and it got into the business.
Had the Competition Commission of India (CCI) looked at this phenomenon, here’s what could have happened. One, Microsoft could have been accused of predatory pricing and would have had to pay Yahoo $3 billion (Rs13,600 crore) in damages. Later, Yahoo could have been faced the same charge and would have had to pay Google $333 million (Rs1,500 crore). Tomorrow, if I decide to start a free email service, Google will have to pay me $1.2 billion (Rs 5,600 crore). And two, as a consumer, I would have had to pay for using an email service much earlier.
This, essentially, is the spirit of CCI's 170-page, June 23 order in the fight between National Stock Exchange (NSE) and MCX Stock Exchange (MCX-SX). “There was a clear intention on the part of NSE to eliminate competitors in the relevant market,” the order states and imposes a penalty of 5% of NSE average three-year turnover that adds up to Rs 55.5 crore. NSE is likely to appeal the order in the Competition Appellate Tribunal, while MCX-SX will “claim compensation for the losses and damages that we have incurred till now”. What NSE or MCX-SX do is their business, their fight. But we need to be concerned about the bigger implication of this order.
The CCI, without any application of mind or seeing the order through, has given legal sanction to the creation of cartels that serve corporate interests and harm consumers. “…NSE is directed to modify its zero price policy in the relevant market and ensure that the appropriate transaction costs are levied,” the order says. This means, in the currency derivatives market of three players — NSE, MCX-SX and United Stock Exchange (USE) — where costs today are zero, NSE will have to charge a price that is “appropriate”.
But “appropriate” for whom? The answer: MCX-SX, which according to CCI is “bleeding to death”, a strange concern by a regulator for a company. In other words, NSE will have to charge a price such that its competitor MCX-SX stops bleeding. Meaning, until MCX-SX is satisfied with the price, NSE will have to continue raising it. This is nothing but the legitimisation of cartelisation by CCI, in favour of corporations and against consumers. The “dissent order” almost articulates as much, saying that the market operates freely and competitively and “…any intervention by the Commission would, in fact, cause consumer harm.”
Further, the order states that NSE is the dominant player and is abusing its dominance. That dominance is not in the currency derivatives market, around which this case has been fought — the dissent order shows how NSE’s marketshare has fallen to 33.2% in October 2010 from 100% in August 2008, and MCX-SX the clear leader with a 38.8% marketshare (USE’s share is 28%). So, the No 2 player been charged with abuse of dominance, a world’s first. Why? Because according to CCI, NSE’s dominance is being viewed from the prism of its marketshare in equity, futures and options and wholesale debt market; and its financial size — not currency derivatives. Which takes us to the Hotmail-Yahoo-Google situation. In fact, as Google launches its new social networking site today, CCI could get Facebook to pay compensation to Google.
The real competition today is not between exchanges but between exchanges and the bigger over the counter (OTC) market where exporters talk to banks. This OTC market has a share of 80% of the total market with just 20% being traded on exchanges. There is no doubt that at some point, the exchanges will start charging a fee for the currency derivatives segment. But right now, since liquidity is an essential component of being able to charge, they are in the market-making mode.
The USE managing director and CEO TS Narayanasami said that if he were to charge today, traders will move away, but if he has liquidity, he would be able to charge more than his competitors. Finally, there are two ways to look at this business — one, build a market through large volumes and then charge; two, watch the bottomline or valuations and charge accordingly. Both are valid. But both are business decisions, not regulatory.
This order has made a mockery of the Commission and the way it functions. It is shameful that NSE had to file three writ petitions in the Delhi High Court to get the Commission to fulfil the conditions of natural justice — first, to get a 30-day extension to file objections to the director-general’s 1,356-page report which the CCI wanted in seven days; second, to seek a copy of an order that was never written but based on which CCI issued it a show-cause notice; and third, to get hold of the “dissent order”. The kind of haste with which the Commission has issued this order is mysterious.
Until that mystery is cracked, Reliance Industries should worry about its entry into financial services and retail because it is a “dominant” company in view of its size and Bajaj Auto should be concerned about launching its car because it is a “dominant” player in scooters.