Thursday, June 30, 2011

India's governance crisis: Tales from the battlefront

The Competition Commission of India (CCI) has written an order on NSE and MCX-SX in the currency derivatives market. Even if you do not take interest in financial markets, this is an interesting episode in Indian governance. It illuminates the larger problems of building regulatory agencies, and India's middle income trap.

In an impressive show of strength with the media, there was a flurry of editorial and other commentary praising CCI for this order - even before the order had been released. The files are now on the CCI website. Here is the main order and here is the dissent by two members of CCI.

Gautam Chikermane has written an excellent analysis of the order in the Hindustan Times. Unlike much of the other commentary on this order, he has actually read the two PDF files above. Also see this editorial and column by Mobis Philipose, in Mint, on 6 June.

The order has breathtaking ramifications. If this works as a precedent, it would impose huge complexities upon an array of industries where some products and services are given out free. This feature is particularly prevalent in the new economy, where systems such as google search are free and have been free for the longest time, and where a blizzard of new product launches (e.g. google plus) are free.

In India, regulatory organisations are still finding their feet. They have to gradually build up credibility and respect. When a regulatory body signs on a breathtakingly large penalty which will have huge implications for the economy, they have to be absolutely sure they are right. Otherwise, the institution loses credibility. I fear that with this order, CCI is now in a soup. If the appeals process is half decent, the order will be overturned, which will make CCI look bad. If the appeals process is not half decent, CCI will be seen as a source of trouble in the Indian regulatory landscape. In numerous industries, zero pricing will run into trouble. More generally, such muggings will be a new dimension of the political risk faced by firms operating in India.

India's crisis of governance is about the puzzle of building agencies like the Competition Commission of India, of taking these agencies closer to the competence and honesty seen at SEBI in recent years. How do we master the intricate recipe of public administration, so that such events don't happen? Until this is done, the structure of incentives encourages a certain kind of entrepreneur, and will damage the outlook for India.


  1. Ajay, if I understand the order correctly, it means this: the NSE pricing must be such that till MCX turns a profit, the price must keep rising. This order is in consumer and market interest? It is a mockery of regulation.

  2. Hi Ajay

    Given that I'm proven wrong on CCI being a lame duck by this orders, do you think there is merit in Zee Group (ICL) taking BCCI (IPL) to CCI for malpractice/ unfair competition?
    Applying first cut understanding of competition law BCCI seems to have used their monopoly power to throw ICL out of the market (banning players, refusing stadia).

    Note: No conflicts of interest on Zee of BCCI. I am just a lover of cricket and student of economic law.

  3. I read the Hindustan Times article and the first comment there tells you how one-sided that article is.

    The CCI took many issues into consideration such as entry barriers in terms of regulations, skillset, capital etc.

    I think the CCI order was good. Just a cursory glance gives me a feeling that NSE is indulging in predatory pricing. It is not a regulation-free, capital-lite business like email. It is a bad comparison and bad journalism.

    I am happy to see that a regulatory agency has some teeth. Good!

  4. I am a broker (on BSE/NSE, as well as currency). I am surprised at the antipathy that MCX generates. My experience has been that even the threat of its entry into equity has tempered down NSE and its' attitudes. NSE has become more responsive to market dynamics in the last two years, largely thanks to MCX. This is not to say MCX is good or bad, but it has made a sea of difference to NSE's body language.
    Even on the currency segment, the argument that it is only to create liquidity that NSE is offering zero charges appears to be false. My experience is that MCX has been more aggressive and innovative in marketing.
    NSE's zero charges are predatory and cross funded by its profits in the equity segment. Though I do not mind as far as my current currency business is concerned :-).
    They could try to cut charges on the equity side. You want to take a guess how charges will drop IF MCX gets permission?
    NSE operates like a monopoly and I am amazed at how many people spring to its defence just because it is not privately owned.

  5. I am almost sure that this is a behind the scenes deal between NSE and MCX.
    1) NSE imposes a totally unreasonable fees
    2) NSE - FTIL software issue gets resolved
    3) MCX imposes a similarly ridiculous fees

    With MCX CEO saying that price war is not healthy, can't they be sued for cartelization?

    While I am totally in favor of a fees (exchanges are not running a charity), I do not understand how can they levy an unreasonable fees without consulting with the market participants.


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