THE INDIAN CAPITAL MARKET

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THE INDIAN CAPITAL MARKET

AN OVERVIEW

The Indian capital market is more than a century old. Its history goes back to 1875, when

22 brokers formed the Bombay Stock Exchange (BSE). Over the period, the Indian

securities market has evolved continuously to become one of the most dynamic, modern,and efficient securities markets in Asia. Today,

Indian market confirms to best international practices and standards both in terms ofstructure and in terms of operating efficiency .Indian securities markets are mainly

governed by a) The Companys Act1956, b) the Securities Contracts (Regulation) Act

1956 (SCRA Act), and c) the Securities and Exchange Board of India (SEBI) Act, 1992.

A brief background of these above regulations are given below

a) The Companies Act 1956 deals with issue, allotment and transfer of securities and

various aspects relating to company management. It provides norms for

disclosures in the public issues, regulations for underwriting, and the issuespertaining to use of premium and discount on various issues.

b) b) SCRA provides regulations for direct and indirect control of stock exchangeswith an aim to prevent undesirable transactions in securities. It provides

regulatory jurisdiction to Central Government over stock exchanges, contracts

in securities and listing of securities on stock exchanges.

c) The SEBI Act empowers SEBI to protect the interest of investors in the securities

market, to promote the development of securities market and to regulate the security

market.

The Indian securities market consists of primary (new issues) as well as secondary(stock) market in both equity and debt. The primary market provides the channel forsale of new securities, while the secondary market deals in trading of securities

previously issued. The issuers of securities issue (create and sell) new securities in the

primary market to raise funds for investment. They do so either through public issuesor private placement. There are two major types of issuers who issue securities. The

corporate entities issue mainly debt and equity instruments (shares, debentures, etc.),

while the governments (central and state governments) issue debt securities (dated

securities, treasury bills). The secondary market enables participants who holdsecurities to adjust their holdings in response to changes in their assessment of risk

and return. A variant of secondary market is the forward market, where securities are

traded for future delivery and payment in the form of futures and options. Thefutures and options can be on individual stocks or basket of stocks like index. Two

exchanges, namely National Stock Exchange (NSE) and the Stock Exchange,

Mumbai (BSE) provide trading of derivatives in single stock futures, index futures,single stock options and index options. Derivatives trading commenced in India in

June 2000 Other leading cities in stock market operations


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Ahmedabad gained importance next to Bombay with respect to cotton textile

industry. After 1880, many mills originated from Ahmedabad and rapidly forged

ahead. As new mills were floated, the need for a Stock Exchange at Ahmedabad wasrealized and in 1894 the brokers formed "The Ahmedabad Share and Stock Brokers'

Association".

What the cotton textile industry was to Bombay and Ahmedabad, the jute industry

was to Calcutta. Also tea and coal industries were the other major industrial groups in

Calcutta. After the Share Mania in 1861-65, in the 1870's there was a sharp boom injute shares, which was followed by a boom in tea shares in the 1880's and 1890's; and

a coal boom between 1904 and 1908. On June 1908, some leading brokers formed

"The Calcutta

Stock Exchange Association".

In the beginning of the twentieth century, the industrial revolution was on the way in

India with the Swadeshi Movement; and with the inauguration of the Tata Iron and

Steel Company Limited in 1907, an important stage in industrial advancement underIndian enterprise was reached.

Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies

generally enjoyed phenomenal prosperity, due to the First World War.

In 1920, the then demure city of Madras had the maiden thrill of a stock exchangefunctioning in its midst, under the name and style of "The Madras Stock Exchange"

with 100 members. However, when boom faded, the number of members stood

reduced from 100 to 3, by 1923, and so it went out of existence.

In 1935, the stock market activity improved, especially in South India where there

was a rapid increase in the number of textile mills and many plantation companieswere floated. In 1937, a stock exchange was once again organized in Madras -

Madras Stock Exchange Association (Pvt) Limited. (In 1957 the name was changed

to Madras Stock Exchange Limited). Lahore Stock Exchange was formed in 1934and it had a brief life. It was merged with the Punjab Stock Exchange Limited, which

was incorporated in 1936.

Indian Stock Exchanges - An Umbrella Growth

The Second World War broke out in 1939. It gave a sharp boom which was followed

by a slump. But, in 1943, the situation changed radically, when India was fully

mobilized as a supply base.

On account of the restrictive controls on cotton, bullion, seeds and other

commodities, those dealing in them found in the stock market as the only outlet fortheir activities. They were anxious to join the trade and their number was swelled by

numerous others. Many new associations were constituted for the purpose and Stock

Exchanges in all parts of the country were floated.


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The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited

(1940) and Hyderabad Stock Exchange Limited (1944) were incorporated.

In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited

and the Delhi Stocks and Shares Exchange Limited - were floated and later in June

1947, amalgamated into the Delhi Stock Exchange Association Limited.There are two major indicators of Indian capital market-

SENSEX & NIFTY:

What are the Sensex & the Nifty?

The Sensex is an "index". What is an index? An index is basically an indicator. It

gives you a general idea about whether most of the stocks have gone up or most of

the stocks have gone down. The Sensex is an indicator of all the major companies ofthe BSE. The Nifty is an indicator of all the major companies of the NSE. If the

Sensex goes up, it means that the prices of the stocks of most of the major companies

on the BSE have gone up. If the Sensex goes down, this tells you that the stock price

of most of the major stocks on the BSE have gone down. Just like the Sensexrepresents the top stocks of the BSE, the Nifty represents the top stocks of the NSE.

Just in case you are confused, the BSE, is the Bombay Stock Exchange and the NSEis the National Stock Exchange. The BSE is situated at Bombay and the NSE is

situated at Delhi. These are the major stock exchanges in the country. There are other

stock exchanges like the Calcutta Stock Exchange etc. but they are not as popular as

the BSE and the NSE. Most of the stock trading in the country is done though theBSE & the NSE . Besides Sensex and the Nifty there are many other indexes. There is

an index that gives you an idea about whether the mid-cap stocks go up and down.

This is called the BSE Mid-cap Index. There are many other types of index.Unless stock markets provide professionalized service, small investors and foreign

investors will not be interested in capital market operations. And capital market

being one of the major source of long-term finance for industrial projects, Indiacannot afford to damage the capital market path. In this regard NSE gains vital

importance in the Indian capital market but if we see the sensex & nifty graph there

is a great variation.

HISTORICAL PERSPECTIVE

The history of Indian stock market is about 200 years old. Prior to this the hundis andbills of exchange were in use, specially in the medieval period, which can be

considered as a form of virtual stock trading but it was certainly not an organized

stock trading. The recorded stock trading can be traced only after the arrival of EastIndia Company. The first organized stock market that was governed by the rules and

regulations came into the existence in the form of The Native Share and Stock

Brokers' Association in 1875. After gone through numerous changes this associationis today better as Bombay Stock Exchange, which remains the premier stock

exchange since its inception. During this period several other exchanges were

launched and some of which were closed also. Presently, there are 19 recognized

stock exchanges out of which four are national level exchanges and the remaining are


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regional exchanges. National Stock Exchange, established in 1992, was the last

exchange. Although the regional level exchanges are in existence the volume of

trading in these exchanges is negligible. National Stock Exchange and Bombay StockExchange are the leaders of Indian Securities Market in terms of listing, trading and

volumes. The last 15 years of the Indian securities market can be considered as the

most important part of the history where the market gone

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THE INDIAN CAPITAL MARKET