The Competition Commission of India has taken the bull by its horns within a few days of the enactment of the new Competition Law, by bringing up the issue of predatory pricing by the country's premier bourse, the National Stock Exchange.
The Competition Commission of India (CCI) has held the exchange guilty on this charge and issued a show-cause notice asking why it should not be penalised.
The moot question that, however, needs to be answered is why the market regulator, Securities and Exchange Board of India (SEBI), was silent on this issue. Does it have no power to control the operations of the exchanges and ensure a level playing field among stock exchanges?
Currency futures were launched by NSE, BSE and MCX-SX in the second half of 2008.
The NSE waived transaction charges on these instruments right from the outset, “in order to encourage active participation “, as its circular to trading member stated.
The BSE could not sustain volumes in this segment and had to soon shut down operations. It then launched the United Stock Exchange that began trading in currency futures from August 2010.
Both the USE and the MCX-SX have been unable to levy transaction charges on trading in these instruments, given the pricing policy adopted by National Stock Exchange.
Multiple products
It needs to be understood that the main streams of revenue for Indian stock exchanges are the transaction and membership fees.
The NSE has multiple product categories such as the equity derivatives, whole-sale debt market, capital market (cash transactions in equity) and currency derivatives.
So waiving the transaction fee in one segment does not impact its revenue significantly. The other two exchanges that operate only in the currency derivatives segment are, on the other hand, earning little or no revenue since inception.
The MCX-SX recorded a loss of Rs 29 crore in FY 2009 and Rs 56 crore in FY 2010. Its operating income was a mere Rs 64 lakh, mainly earned from membership fee. The USE finds itself in a tighter situation as far as its finances go since, in a bid to increase number of members, it has also waived membership fee.
The currency derivative segment has been the cynosure of all eyes over the last two years due to the stellar growth in turnover since its launch in 2008. Daily average value of contracts traded is currently over Rs 40,000 crore, almost half the size of the equity derivative market.
Role of SEBI
While SEBI has worked towards expanding the products traded on this segment by allowing trading in euro-rupee, pound-rupee and yen-rupee futures and subsequently allowing the NSE and the USE to launch dollar-rupee currency options, the regulator seems to have turned a blind eye to the fact that two of the three exchanges in this segment are facing an uphill task to break even.
Given that the market regulator's mandate is as much to promote the development of the securities market as it is to ensure orderly market functioning, why was SEBI inactive on this count over the last two years? Should it not take action on pricing practices that completely deter competition?
SEBI was formed according to the Securities and Exchanges Board of India Act, 1992, according to which the duty of SEBI is said to be: first, to protect the interest of investors in securities, and second, to promote the development of and to regulate securities market.
The Act goes on to state that powers of SEBI include ‘regulating the business in stock exchanges and any other securities markets.'
While SEBI in recent years was proactively working in the interest of the investors, implementing many unpalatable rulings much to the chagrin of various intermediaries in the financial market, it has not displayed as much enthusiasm in fulfilling its other duty — working for the development of securities market.
How else can one explain the fact that the regulator took no action when the fact of the NSE's aggressive pricing in currency derivatives was brought to its notice?
The MCX-SX has stated that it had originally approached SEBI regarding this issue and the regulator had advised it to file a complaint with the CCI.
Even if the MCX-SX had not filed a complaint with SEBI, should the regulator not have acted suo motu , in the interest of securities market? It is hard to see how stock exchanges can develop if the existing players make it difficult for new entrants to earn any revenue!
Taking note
Interestingly, SEBI did take note of the reduction/waiver of transaction charges through a circular issued in October 2009 to all the stock exchanges. This circular advised stock exchanges to ensure that such waiver or reduction of transaction charges “does not create artificial demand”, “does not result in any market irregularities” and “is uniformly applied to trades of similar nature”. The regulator could have subsequently taken action on all these three scores. But it did not.
The Act that oversees regulation of stock exchanges is the Securities Contract (Regulation) Act.
This Act gives superseding powers to SEBI in almost every area of stock exchange operations. It states that exchanges can levy and recover fees, fines and penalties subject to the previous approval of SEBI.
It also provides that SEBI can issue an order to make, amend or revise any bye-laws made by exchanges if the regulator is satisfied that it is in the interest of trade or in public interest.
In other words, SEBI could have acted as far back as in October 2009 to rectify the impasse in transaction fee charged in currency derivatives.
Normally, SEBI adopts the policy of not interfering in the operations of the exchanges, but it could have made an exception in this case since a stark distortion in pricing was being created.
It was empowered by law to set up an enquiry and issue an order in this regard if found necessary. Why it did not exercise these powers, is the question.