The Evolution Of Indian Stock Market

In the year 1920, a stock exchange was established in Madras called “The Madras Stock Exchange”. “The Madras Stock Exchange Association Pvt. Ltd.” was established in the year 1941. The Lahore Stock Exchange was formed in the year 1934. However, in the year 1936, after the Punjab Stock Exchange Ltd. came into existence, the Lahore Stock Exchange merged with it.

In Calcutta, a second Stock Exchange by name “The Bengal Share & Stock Exchange Ltd.” was established in the year 1937 and likewise in the year 1938, Bombay Stock Exchange also witnessed the formation of a rival Stock Exchange in the name of “Indian Stock Exchange Ltd.”

The U.P. Stock Exchange was formed in Kanpur and the Nagpur Stock Exchange Ltd. in 1940. The Hyderabad Stock Exchange Ltd. was incorporated in the year 1944. Two stock exchanges which came into being in Delhi by the name “The Delhi Stock & Share Brokers Association Ltd.” and “The Delhi Stocks & Shares Exchange Association Ltd.” were amalgamated into “The Delhi Stock Exchange Association Ltd.” in the year 1947.

The depression witnessed after the independence led to closure of a lot of exchanges in the country. Lahore Stock Exchange was closed down after the partition of India, and later on merged with the Delhi Stock Exchange. Bangalore 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 after it was enacted were Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad, Bangalore and Indore.

Later during 1980’s, many more stock exchanges were established such as 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 and Meerut Stock Exchange.

A new phase in the Indian stock markets began in the 1970s, with the introduction of Foreign Exchange Regulation Act (FERA) that led to divestment of foreign equity by the multinational companies, which created a surge in retail investing. The early 1980s witnessed another surge in stock markets when companies such as Reliance, which created a new equity culture, accessed the capital markets.

Sensex, the 30-stock index of the Bombay Stock Exchange, was introduced in 1986 constituting stocks of large and established companies from different sectors. The base year for the index was 1978 -79.

During 1990s, India witnessed radical changes in its policies regarding Foreign Direct Investments and Foreign Institutional Investments as part of the liberalization policies. In 1990, the BSE crossed the 1000 mark for the first time. It crossed 2000, 3000 and 4000 marks in 1992.

The up-beat mood of the market was suddenly vanished with Harshad Mehta scam. It came to public knowledge that Mr. Mehta, also known as the “big bull” of Indian stock market, diverted large amount of funds from banks through fraudulent means. Millions of small-scale investors became victims to the fraud as the Sensex plunged shedding 570 points.

To prevent such frauds, the Government of India formed The Securities and Exchange Board of India or SEBI, through an Act in 1992. With the act, SEBI became the statutory body that controls and regulates the functioning of stock exchanges, brokers, sub-brokers, portfolio managers, investment advisors etc. The objective of SEBI is to protect the interests of the investors in securities and to promote the development of securities markets and to regulate the securities markets. The scope and functioning of SEBI has greatly expanded with the rapid growth of securities markets in India.

While going global, it became a necessity 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 enables fully automated screen-based trading mechanism which strictly follows the principle of an order-driven market. Trading members are linked through a communication network which 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 and when the prices match the transaction will be completed. It ensures greater functional efficiency supported by totally computerized network.

Within one year of the onset of equity trading at NSE, it became India’s most liquid stock market. Further, NSE is said to have generated a dynamic process of change in the securities industry. It directly spawned new institutions like the Clearing Corporation and Depository and played a vital role in injecting new ideas into the securities markets such as derivatives trading.

In 1995, the BSE also replaced its open outcry trading system with totally automated trading known as the BSE Online trading, or BOLT, system. The BOLT network was expanded nationwide in 1997.

The last decade of 20th century has been exceptionally good for the stock markets in India. In the back of wide ranging reforms in regulation and market practice as well as growing participation of foreign institutional investment, stock markets in India have showed phenomenal growth in the 90’s. Investor base continued to grow from domestic and international markets.

Stock markets became intensely technology and process driven, giving little scope for manipulation. Electronic trading, digital certification, straight through processing, electronic contract notes, online broking have emerged as major trends in technology. Risk management became robust reducing the recurrence of payment defaults. Product expansion took place in a speedy manner. Indian equity markets now offer, in addition to trading in equities, opportunities in trading of derivatives in futures and options in index and stocks. Even modern financial instruments like ETFs are showing gradual growth.

Within five years of introduction of derivatives, Indian stock markets now are ranked first in stock futures and fourth in index futures. Indian stock markets are transaction intensive and thus rank among the top five markets in this regard. Stock exchange reforms brought in professional management separating conflicts of interest between brokers as owners of the exchanges and traders/dealers. The demutualisation and corporatisation of all stock exchanges is nearing completion and the boards of the stock exchanges now have majority of independent directors. Foreign institutions took stake in India’s two leading domestic stock exchanges. While NYSE Group led consortium that took stake in the National Stock Exchange, Deutsche Bourse and Singapore Stock Exchange bought equity in the Bombay Stock Exchange Ltd.

In today’s global scenario that witness the flow of capital and goods without borders, India is keen to go along with the trend with its reforms like improving the investment climate by allowing more and more foreign investors to invest in equity and debt markets, allowing Indian companies to issue ADRs and GDRs in international exchanges and enable them to raise resources through wide range of financing routes as well as permitting Indian companies and individuals to invest abroad.

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