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EvolutionIndian Stock Markets are one of the oldest in Asia. Its history dates back tonearly 200years ago. The earliest records of security dealings in India are meagreand obscure. TheEast India Company was the dominant institution in those days and

business in its loansecurities used to be transacted towards the close ofthe eighteenth century.By 1830's business on corporate stocks and shares in Bankand Cotton presses took place inBombay. Though the trading list was broader in1839, there were only half a dozen brokersrecognized by banks and merchantsduring 1840 and 1850.The 1850's witnessed a rapid development of commercialenterprise and brokerage businessattracted many men into the field and by 1860the number of brokers increased into 60.In 1860-61 the American Civil War brokeout and cotton supply from United States ofEurope was stopped; thus, the'Share Mania' in India begun. The number of brokersincreased to about 200 to

250. However, at the end of the American Civil War, in 1865, adisastrous slumpbegan (for example, Bank of Bombay Share which had touched Rs 2850could onlybe sold at Rs. 87).At the end of the American Civil War, the brokers who thrivedout of Civil War in 1874,found a place in a street (now appropriately called asDalal Street) where they wouldconveniently assemble and transact business. In1887, they formally established in Bombay,the "Native Share and Stock Brokers'Association" (which is alternatively known as " TheStock Exchange "). In 1895, theStock Exchange acquired a premise in the same street andit was inaugurated in1899. Thus, the Stock Exchange at Bombay was consolidated.Other leading cities in stock market operationsAhmedabad gained importance next to Bombay with respect to cotton textileindustry.After 1880, many mills originated from Ahmedabad and rapidly forgedahead. As new millswere floated, the need for a Stock Exchange at Ahmedabad wasrealised and in 1894 thebrokers formed "The Ahmedabad Share and StockBrokers' Association".What the cotton textile industry was to Bombay andAhmedabad, the jute industry was toCalcutta. Also tea and coal industries werethe other major industrial groups in Calcutta.After the Share Mania in 1861-65, inthe 1870's there was a sharp boom in jute shares,which was followed by a boomin tea shares in the 1880's and 1890's; and a coal boombetween 1904 and 1908. OnJune 1908, some leading brokers formed "The Calcutta StockExchangeAssociation".In the beginning of the twentieth century, the industrial revolutionwas on the way in Indiawith the Swadeshi Movement; and with the inauguration ofthe Tata Iron and Steel Company Limited in 1907, an important stage in industrial

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advancement under Indian enterprise wasreached.Indian cotton and jute textiles,steel, sugar, paper and flour mills and all companiesgenerally enjoyed phenomenalprosperity, due to the First World War.In 1920, the then demure city of Madrashad the maiden thrill of a stock exchangefunctioning in its midst, under the nameand style of "The Madras Stock Exchange" with 100members. However, when boomfaded, the number of members stood reduced from 100 to3, by 1923, and so itwent out of existence.In 1935, the stock market activity improved, especially inSouth India where there was arapid increase in the number of textile mills andmany plantation companies were floated. In1937, a stock exchange was once againorganized in Madras - Madras Stock ExchangeAssociation (Pvt) Limited. (In 1957the name was changed to Madras Stock ExchangeLimited).Lahore Stock Exchangewas formed in 1934 and it had a brief life. It was merged with thePunjab StockExchange Limited, which was incorporated in 1936.

Indian Stock Exchanges - An Umbrella GrowthThe Second World War broke out in 1939. It gave a sharp boom which wasfollowed by aslump. But, in 1943, the situation changed radically, when India wasfully mobilized as asupply base.On account of the restrictive controls on cotton,bullion, seeds and other commodities,those dealing in them found in the stockmarket as the only outlet for their activities. Theywere anxious to join the tradeand their number was swelled by numerous others. Many newassociations were

constituted for the purpose and Stock Exchanges in all parts of thecountry werefloated.The Uttar Pradesh Stock Exchange Limited (1940), Nagpur StockExchange Limited (1940)and Hyderabad Stock Exchange Limited (1944) wereincorporated.In Delhi two stock exchanges - Delhi Stock and Share Brokers'Association Limited and theDelhi Stocks and Shares Exchange Limited - werefloated and later in June 1947,amalgamated into the Delhi Stock ExchnageAssociation Limited.Post-independence ScenarioMost of the exchanges suffered almost a total eclipse during depression. Lahore

Exchangewas closed during partition of the country and later migrated to Delhi andmerged withDelhi Stock Exchange.Bangalore Stock Exchange Limited wasregistered in 1957 and recognized in 1963.Most of the other exchanges languished till 1957 when they applied to theCentralGovernment for recognition under the Securities Contracts (Regulation)Act, 1956. OnlyBombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad andIndore, the well establishedexchanges, were recognized under the Act. Some

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of the members of the other Associationswere required to be admitted bythe recognized stock exchanges on a concessional basis,but acting on the principleof unitary control, all these pseudo stock exchanges wererefused recognition bythe Government of India and they thereupon ceased to function.Thus, during early

sixties there were eight recognized stock exchanges in India (mentionedabove).The number virtually remained unchanged, for nearly two decades. Duringeighties,however, many stock exchanges were established: Cochin Stock Exchange(1980), UttarPradesh Stock Exchange Association Limited (at Kanpur, 1982), andPune Stock ExchangeLimited (1982), Ludhiana Stock Exchange Association Limited(1983), Gauhati StockExchange Limited (1984), Kanara Stock Exchange Limited (atMangalore, 1985), MagadhStock Exchange Association (at Patna, 1986), JaipurStock Exchange Limited (1989),Bhubaneswar Stock Exchange Association Limited(1989), Saurashtra Kutch Stock ExchangeLimited (at Rajkot, 1989),

Vadodara Stock Exchange Limited (at Baroda, 1990) and recentlyestablishedexchanges - Coimbatore and Meerut. Thus, at present, there are totally twentyonerecognized stock exchanges in India excluding the Over The Counter Exchangeof IndiaLimited (OTCEI) and the National Stock Exchange of India Limited(NSEIL).The Table given below portrays the overall growth pattern of Indian stockmarkets sinceindependence. It is quite evident from the Table that Indian stockmarkets have not onlygrown just in number of exchanges, but also in number oflisted companies and in capital oflisted companies. The remarkable growth after1985 can be clearly seen from the Table,and this was due to the favouringgovernment policies towards security market industry.

Trading Pattern of the Indian Stock MarketTrading in Indian stock exchanges are limited to listed securities of publiclimitedcompanies. They are broadly divided into two categories, namely, specifiedsecurities(forward list) and non-specified securities (cash list). Equity shares ofdividend paying,growth-oriented companies with a paid-up capital of atleastRs.50 million and a marketcapitalization of atleast Rs.100 million and having morethan 20,000 shareholders are,normally, put in the specified group and the balancein non-specified group.Two types of transactions can be carried out on the Indianstock exchanges: (a) spotdelivery transactions "for delivery and payment withinthe time or on the date stipulatedwhen entering into the contract which shall notbe more than 14 days following the date ofthe contract" : and (b) forwardtransactions "delivery and payment can be extended byfurther period of 14 dayseach so that the overall period does not exceed 90 days from thedate of thecontract". The latter is permitted only in the case of specified shares. Thebrokers

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who carry over the outstandings pay carry over charges (cantangoorbackwardation) which are usually determined by the rates of interestprevailing.A member broker in an Indian stock exchange can act as an agent, buyand sell securitiesfor his clients on a commission basis and also can act as a trader

or dealer as a principal, buyand sell securities on his own account and risk,in contrast with the practice prevailing onNew York and London Stock Exchanges,where a member can act as a jobber or a brokeronly.The nature of trading onIndian Stock Exchanges are that of age old conventional style offace-to-facetrading with bids and offers being made by open outcry. However, there is agreatamount of effort to modernize the Indian stock exchanges in the very recenttimes.Over The Counter Exchange of India (OTCEI)The traditional trading mechanism prevailed in the Indian stock markets gave way

to manyfunctional inefficiencies, such as, absence of liquidity, lack of transparency,unduly longsettlement periods and benami transactions, which affected the smallinvestors to a great extent. To provide improved services to investors, thecountry's first ringless, scripless,electronic stock exchange - OTCEI - was createdin 1992 by country's premier financialinstitutions - Unit Trust of India, IndustrialCredit and Investment Corporation of India,Industrial Development Bank of India,SBI Capital Markets, Industrial Finance Corporationof India, General InsuranceCorporation and its subsidiaries and CanBank Financial Services.Trading at OTCEI

is done over the centres spread across the country. Securities traded ontheOTCEI are classified into:

• Listed Securities - The shares and debentures of the companies listed onthe OTCcan be bought or sold at any OTC counter all over the country and theyshould notbe listed anywhere else• Permitted Securities - Certain shares and debentures listed on other exchangesandunits of mutual funds are allowed to be traded• Initiated debentures - Any equity holding atleast one lakh debentures ofaparticular scrip can offer them for trading on the OTC.OTC has a unique featureof trading compared to other traditional exchanges. That is,certificates of listedsecurities and initiated debentures are not traded at OTC. Theoriginal certificatewill be safely with the custodian. But, a counter receipt is generated outat thecounter which substitutes the share certificate and is used for all transactions.In

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the case of permitted securities, the system is similar to a traditional stockexchange.The difference is that the delivery and payment procedure will becompleted within 14 days.Compared to the traditional Exchanges, OTC Exchangenetwork has the followingadvantages:

• OTCEI has widely dispersed trading mechanism across the country whichprovidesgreater liquidity and lesser risk of intermediary charges.• Greater transparency and accuracy of prices is obtained due to the screen-basedscripless trading.• Since the exact price of the transaction is shown on the computer screen,theinvestor gets to know the exact price at which s/he is trading.•

Faster settlement and transfer process compared to other exchanges.• In the case of an OTC issue (new issue), the allotment procedure is completed inamonth and trading commences after a month of the issue closure, whereas ittakes alonger period for the same with respect to other exchanges.Thus, with the superior trading mechanism coupled with information transparencyinvestorsare gradually becoming aware of the manifold advantages of the OTCEI.National Stock Exchange (NSE)With the liberalization of the Indian economy, it was found inevitable to lift theIndianstock market trading system on par with the international standards. On thebasis of therecommendations of high powered Pherwani Committee, the NationalStock Exchange wasincorporated in 1992 by Industrial Development Bank of India,Industrial Credit andInvestment Corporation of India, IndustrialFinance Corporation of India, all InsuranceCorporations, selected commercial banksand others.Trading at NSE can be classified under two broad categories:(a)Wholesale debt market and(b) Capital market.Wholesale debt market operationsare similar to money market operations - institutions andcorporate bodies enterinto high value transactions in financial instruments such asgovernment securities,treasury bills, public sector unit bonds, commercial paper,certificate of deposit,etc.There are two kinds of players in NSE:(a) trading membersand(b) participants.Recognized members of NSE are called trading members whotrade on behalf of themselvesand their clients. Participants include tradingmembers and large players like banks who takedirectsettlement responsibility.Trading at NSE takes place through a fully automated

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screen-based trading mechanismwhich adopts the principle of an order-drivenmarket. Trading members can stay at theiroffices and execute the trading, sincethey are linked through a communication network.The prices at which the buyerand seller are willing to transact will appear on the screen.When the prices match

the transaction will be completed and a confirmation slip will beprinted at theoffice of the trading member.NSE has several advantages over the traditionaltrading exchanges. They are as follows:

• NSE brings an integrated stock market trading network across the nation.• Investors can trade at the same price from anywhere in the country since inter-market operations are streamlined coupled with the countrywide access tothesecurities.• Delays in communication, late payments and the malpractice’s prevailingin thetraditional trading mechanism can be done away with greater operationalefficiencyand informational transparency in the stock market operations, withthe support oftotal computerized network.Unless stock markets provideprofessionalised service, small investors and foreign investorswill not be interestedin capital market operations. And capital market being one of themajor source oflong-term finance for industrial projects, India cannot afford to damagethe capitalmarket path. In this regard NSE gains vital importance in the Indian capitalmarket

system.

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Structure of Indian Capital Market

Broadly speaking the capital market is classified in to two categories. They are the Primary market (New Issues

Market) and the Secondary market (Old (Existing) Issues Market). This classification is done on the basis of the

nature of the instrument brought in the market. However on the basis of the types of institutions involved in capital

market, it can be classified into various categories such as the Government Securities market or Gilt-edged market,

Industrial Securities market, Development Financial Institutions (DFIs) and Financial intermediaries. All of these

components have specific features to mention. The structure of the Indian capital market has its distinct features.

These different segments of the capital market help to develop the institution of capital market in many dimensions.

The primary market helps to raise fresh capital in the market. In the secondary market, the buying and selling

(trading) of capital market instruments takes place. The following chart will help us in understanding the

organizational structure of the Indian Capital market.

1. Government Securities Market : This is also known as the Gilt-edged market. This refers to the market for

government and semi-government securities backed by the Reserve Bank of India (RBI) .

2. Industrial Securities Market : This is a market for industrial securities i.e. market for shares and debentures ofthe existing and new corporate firms. Buying and selling of such instruments take place in this market. This market

is further classified into two types such as the New Issues Market (Primary) and the Old (Existing) Issues Market

(secondary). In primary market fresh capital is raised by companies by issuing new shares, bonds, units of mutual

funds and debentures. However in the secondary market already existing i.e old shares and debentures are

traded. This trading takes place through the registered stock exchanges. In India we have three prominent stock

exchanges. They are the Bombay Stock Exchange (BSE) , the National Stock Exchange (NSE) and Over The

Counter Exchange of India (OTCEI) .

3. Development Financial Institutions (DFIs) : This is yet another important segment of Indian capital market. This

comprises various financial institutions. These can be special purpose institutions like IFCI, ICICI, SFCs, IDBI, IIBI,

UTI, etc. These financial institutions provide long term finance for those purposes for which they are set up.4. Financial Intermediaries : The fourth important segment of the Indian capital market is the financial

intermediaries. This comprises various merchant banking institutions, mutual funds, leasing finance companies,

venture capital companies and other financial institutions.These are important institutions and segments in the Indian capital market.

SEBI Regulates Indian Capital Market

For the smooth functioning of the capital market a proper coordination among above organizations and segments is a

prerequisite. In order to regulate, promote and direct the progress of the Indian Capital Market, the government has

set up 'Securities and Exchange Board of India' (SEBI). SEBI is t he supreme authority governing and regulating the

Capital Market of India.