Monday 14 November 2011
Histroy of Stock Market in India
Introduction
Stock markets refer to a market place where investors can buy and sell stocks. The price at which each buying and selling transaction takes is determined by the market forces (i.e. demand and supply for a particular stock).Let us take an example for a better understanding of how market forces determine stock prices. ABC Co. Ltd. enjoys high investor confidence and there is an anticipation of an upward movement in its stock price. More and more people would want to buy this stock (i.e. high demand) and very few people will want to sell this stock at current market price (i.e. less supply). Therefore, buyers will have to bid a higher price for this stock to match the ask price from the seller which will increase the stock price of ABC Co. Ltd. On the contrary, if there are more sellers than buyers (i.e. high supply and low demand) for the stock of ABC Co. Ltd. in the market, its price will fall down.
In earlier times, buyers and sellers used to assemble at stock exchanges to make a transaction but now with the dawn of IT, most of the operations are done electronically and the stock markets have become almost paperless. Now investors dont have to gather at the Exchanges, and can trade freely from their home or office over the phone or through Internet.
History of the Indian Stock Market - The Origin
One of the oldest stock markets in Asia, the Indian Stock Markets have a 200 years old history.
| 18th Century | East India Company was the dominant institution and by end of the century, busuness in its loan securities gained full momentum |
| 1830's | Business on corporate stocks and shares in Bank and Cotton presses started in Bombay. Trading list by the end of 1839 got broader |
| 1840's | Recognition from banks and merchants to about half a dozen brokers |
| 1850's | Rapid development of commercial enterprise saw brokerage business attracting more people into the business |
| 1860's | The number of brokers increased to 60 |
| 1860-61 | The American Civil War broke out which caused a stoppage of cotton supply from United States of America; marking the beginning of the "Share Mania" in India |
| 1862-63 | The number of brokers increased to about 200 to 250 |
| 1865 | A disastrous slump began at the end of the American Civil War (as an example, Bank of Bombay Share which had touched Rs. 2850 could only be sold at Rs. 87) |
Pre-Independance Scenario - Establishment of Different Stock Exchanges
| 1874 | With the rapidly developing share trading business, brokers used to gather at a street (now well known as "Dalal Street") for the purpose of transacting business. |
| 1875 | "The Native Share and Stock Brokers' Association" (also known as "The Bombay Stock Exchange") was established in Bombay |
| 1880's | Development of cotton mills industry and set up of many others |
| 1894 | Establishment of "The Ahmedabad Share and Stock Brokers' Association" |
| 1880 - 90's | Sharp increase in share prices of jute industries in 1870's was followed by a boom in tea stocks and coal |
| 1908 | "The Calcutta Stock Exchange Association" was formed |
| 1920 | Madras witnessed boom and business at "The Madras Stock Exchange" was transacted with 100 brokers. |
| 1923 | When recession followed, number of brokers came down to 3 and the Exchange was closed down |
| 1934 | Establishment of the Lahore Stock Exchange |
| 1936 | Merger of the Lahoe Stock Exchange with the Punjab Stock Exchange |
| 1937 | Re-organisation and set up of the Madras Stock Exchange Limited (Pvt.) Limited led by improvement in stock market activities in South India with establishment of new textile mills and plantation companies |
| 1940 | Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited was established |
| 1944 | Establishment of "The Hyderabad Stock Exchange Limited" |
| 1947 | "Delhi Stock and Share Brokers' Association Limited" and "The Delhi Stocks and Shares Exchange Limited" were established and later on merged into "The Delhi Stock Exchange Association Limited" |
Post Independance Scenario
The depression witnessed after the Independance led to closure of a lot of exchanges in the country. Lahore Estock Exchange was closed down after the partition of India, and later on merged with the Delhi Stock Exchange. Bnagalore Stock Exchange Limited was registered in 1957 and got recognition only by 1963. Most of the other Exchanges were in a miserable state till 1957 when they applied for recognition under Securities Contracts (Regulations) Act, 1956. The Exchanges that were recognized under the Act were:
- Bombay
- Calcutta
- Madras
- Ahmedabad
- Delhi
- Hyderabad
- Bangalore
- Indore
- Cochin Stock Exchange (1980)
- Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982)
- Pune Stock Exchange Limited (1982)
- Ludhiana Stock Exchange Association Limited (1983)
- Gauhati Stock Exchange Limited (1984)
- Kanara Stock Exchange Limited (at Mangalore, 1985)
- Magadh Stock Exchange Association (at Patna, 1986)
- Jaipur Stock Exchange Limited (1989)
- Bhubaneswar Stock Exchange Association Limited (1989)
- Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989)
- Vadodara Stock Exchange Limited (at Baroda, 1990)
- Coimbatore Stock Exchange
- Meerut Stock Exchange
Government policies during 1980's also played a vital role in the development of the Indian Stock Markets. There was a sharp increase in number of Exchanges, listed companies as well as their capital, which is visible from the following table:
| S. No. | As on 31st December | 1946 | 1961 | 1971 | 1975 | 1980 | 1985 | 1991 | 1995 |
| 1 | No. of Stock Exchanges | 7 | 7 | 8 | 8 | 9 | 14 | 20 | 22 |
| 2 | No. of Listed Cos. | 1125 | 1203 | 1599 | 1552 | 2265 | 4344 | 6229 | 8593 |
| 3 | No. of Stock Issues of Listed Cos. | 1506 | 2111 | 2838 | 3230 | 3697 | 6174 | 8967 | 11784 |
| 4 | Capital of Listed Cos. (Cr. Rs.) | 270 | 753 | 1812 | 2614 | 3973 | 9723 | 32041 | 59583 |
| 5 | Market value of Capital of Listed Cos. (Cr. Rs.) | 971 | 1292 | 2675 | 3273 | 6750 | 25302 | 110279 | 478121 |
| 6 | Capital per Listed Cos. (4/2)(Lakh Rs.) | 24 | 63 | 113 | 168 | 175 | 224 | 514 | 693 |
| 7 | Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2) | 86 | 107 | 167 | 211 | 298 | 582 | 1770 | 5564 |
| 8 | Appreciated value of Capital per Listed Cos. (Lak Rs.) | 358 | 170 | 148 | 126 | 170 | 260 | 344 | 803 |
The Bombay Stock Exchange developed the BSE Sensex in 1986, giving the BSE a means to measure overall performance of the exchange. In 2000 the BSE used this index to open its derivatives market, trading Sensex futures contracts. The development of Sensex options along with equity derivatives followed in 2001 and 2002, expanding the BSE’s trading platform.
Historically an open-cry floor trading exchange, the Bombay Stock Exchange switched to an electronic trading system in 1995. It took the exchange only fifty days to make this transition.
Capital market reforms in India and the launch of the Securities and Exchange Board of India (SEBI) accelerated the integration of the second Indian stock exchange called the National Stock Exchange (NSE) in 1992. After a few years of operations, the NSE has become the largest stock exchange in India.
Three segments of the NSE trading platform were established one after another. The Wholesale Debt Market (WDM) commenced operations in June 1994 and the Capital Market (CM) segment was opened at the end of 1994. Finally, the Futures and Options segment began operating in 2000. Today the NSE takes the 14th position in the top 40 futures exchanges in the world.
In 1996, the National Stock Exchange of India launched S&P CNX Nifty and CNX Junior Indices that make up 100 most liquid stocks in India. CNX Nifty is a diversified index of 50 stocks from 25 different economy sectors. The Indices are owned and managed by India Index Services and Products Ltd (IISL) that has a consulting and licensing agreement with Standard & Poor’s.
In 1998, the National Stock Exchange of India launched its web-site and was the first exchange in India that started trading stock on the Internet in 2000. The NSE has also proved its leadership in the Indian financial market by gaining many awards such as ‘Best IT Usage Award’ by Computer Society in India (in 1996 and 1997) and CHIP Web Award by CHIP magazine (1999).
Trading Pattern of the Indian Stock Market
Indian Stock Exchanges allow trading of securities of only those public limited companies that are listed on the Exchange(s). They are divided into two categories:
Types of Transactions
The flowchart below describes the types of transactions that can be carried out on the Indian stock exchanges:
Indian stock exchange allows a member broker to perform following activities:
- Act as an agent,
- Buy and sell securities for his clients and charge commission for the same,
- Act as a trader or dealer as a principal,
- Buy and sell securities on his own account and risk.
Over The Counter Exchange of India (OTCEI)
Traditionally, trading in Stock Exchanges in India followed a conventional style where people used to gather at the Exchange and bids and offers were made by open outcry.
This age-old trading mechanism in the Indian stock markets used to create many functional inefficiencies. Lack of liquidity and transparency, long settlement periods and benami transactions are a few examples that adversely affected investors. In order to overcome these inefficiencies, OTCEI was incorporated in 1990 under the Companies Act 1956. OTCEI is the first screen based nationwide stock exchange in India created by Unit Trust of India, Industrial Credit and Investment Corporation of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance Corporation of India, General Insurance Corporation and its subsidiaries and CanBank Financial Services.
Advantages of OTCEI
- Greater liquidity and lesser risk of intermediary charges due to widely spread trading mechanism across India
- The screen-based scripless trading ensures transparency and accuracy of prices
- Faster settlement and transfer process as compared to other exchanges
- Shorter allotment procedure (in case of a new issue) than other exchanges
In order to lift the Indian stock market trading system on par with the international standards. On the basis of the recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others.
NSE provides exposure to investors in two types of markets, namely:
- Wholesale debt market
- Capital market
Trading at NSE
- Fully automated screen-based trading mechanism
- Strictly follows the principle of an order-driven market
- Trading members are linked through a communication network
- This network allows them to execute trade from their offices
- The prices at which the buyer and seller are willing to transact will appear on the screen
- When the prices match the transaction will be completed
- A confirmation slip will be printed at the office of the trading member
- Integrated network for trading in stock market of India
- Fully automated screen based system that provides higher degree of transparency
- Investors can transact from any part of the country at uniform prices
- Greater functional efficiency supported by totally computerized network
