chapter 1 the indian capital market an overview -...

Chapter 1

The Indian Capital Market

– An Overview

Chapter – 1

The Indian Capital Market – An Overview

1.0 Introduction

In the ancient age the man was living a roaming and lonely, separate life.

Gradually there were the inventions of fire and the life of the ancient man was

changed. Then the invention of wheel, change the life of man totally. Due to this

invention people started moving from one place to another. They came in to the

contact of another people and started to live into groups. As there is a saying in the

economics that “A man is a bundle of needs”, the needs of the ancient man

increased. He could not satisfy all his needs by himself. For these needs, he has to

depend on others. So there was the evolution of ‘Barter System’. People started

exchange of the goods what they need with others. After some time they experienced

many inconveniences in this system and then there was the wonderful invention of

money. Due to the invention of money the markets became more meaningful. Then

the growth of commerce was noticeable.

People started their business not only by their own money but also by the

borrowed money. So the financial markets – capital market and money markets came

into existence. Financial markets played a vital role in raising funds from public for

the companies and it helped the investors to get profits from the trading on the shares

and other financial assets of these companies. For this purpose there, a special part of

the financial market called ‘Stock Exchange’ evolved.

The task of mobilization and allocation of savings could be attempted in the

old days by a much less specialised institution than the stock exchange. But as the

business and industry expanded and the economy assumed more complex nature, the

need of permanent finance arose. According to Bhalla (2010)1, “Entrepreneurs

needed money for long term whereas investors demanded liquidity the facility to

convert their investments into cash at any given time. The answer was a ready market

for investments and this was how the Stock Exchange came into being.”

1 V. K. Bhalla, Fundamentals of Investment Management (2nd Edition).

New Delhi: S. Chand and Company Ltd., 2011, ISBN: 81-219-2702-1, p. 56.

1.1 Market

Market means a place where buyer and seller meet together in order to carry

on transactions of goods and services. But in Economics, it may be a place, perhaps

may not be. In Economics, market can

seller. This fact can be explained with the help of the following statement.

A market is normally governed by the laws of the state the market belongs to.

Most markets make transactions through

It should not be forgotten though that barter markets also exist.

1.1.2 Classification

Source: prepared from and-lassification.html

2 Ryan, The History of the Market System, September 18, 2003.

Place

Local

National

Inter-national


2



may not be. In Economics, market can exist even without direct contact of buyer and



Most markets make transactions through currency or something equivalent to money.

It should not be forgotten though that barter markets also exist.2

1.1.2 Classification of Market

Chart 1.1 Classification of Markets

prepared from http://kalyan-city.blogspot.com/2010/11/whatlassification.html accessed on 28/06/2011.

Ryan, The History of the Market System, September 18, 2003.

Market Classification

On the basis of

Time

Very Short Period

Short Period

Long Perios

Very Long Period

Competition

Imperfect Competition

Monopoly (One seller)

Duopoly (Two seller)

Oligopoly (Few sellers)

Monopolistic Competition

(Many sellers)




exist even without direct contact of buyer and



or something equivalent to money.

city.blogspot.com/2010/11/what-is-market-types-

Ryan, The History of the Market System, September 18, 2003.

Competition

Monopoly (One seller)

Duopoly (Two seller)

Monopolistic Competition

(Many sellers)

Perfect Competition

(Many sellers)


3

1.2 Indian Financial Market

In economics, a financial market is a mechanism that allows people to buy

and sell (trade) financial securities (such as stocks and bonds), commodities (such as

precious metals or agricultural goods), and other fungible items of value at low

transaction costs and at prices that reflect the efficient-market hypothesis.

In finance, financial markets facilitate:

• The raising of capital (in the capital markets)

• The transfer of risk (in the derivatives markets)

• The transfer of liquidity (in the money markets)

• International trade (in the currency markets)

1.2.1 Classification of Financial Markets in India

According to the period of maturity of the financial assets with which the

markets are dealing, the markets can be classified as (a) Money Market (b) Capital

Market.

Chart 1.2

Classification of Financial Markets

Source: Prepared from http://www.kasikornsecurities.com/EN/Knowledge Center

/Invest ment1O1/Pages/Investment001.aspx accessed on 28/06/2011.

Financial Market

Money Market Capital Market

Pimary Market Secondary Market

Stock Market Over-the-Counter


4

(a) Money Market

Money market deals in short-term debt and channels the savings into short-

term productive investments like working capital, call money, treasury bills etc. The

money market is a component of the financial markets for assets involved in short-

term borrowing and lending with original maturities of one year or shorter time

frames. It provides liquidity funding for the global financial system. Treasury Bills

(T-Bills), Certificate of Deposit, Repurchase Agreements, Banker's Acceptance,

Commercial Papers are the popular instruments of the money market.

(b) Capital Market

Capital market is the market for financial assets having a period of maturity of

more than one year or of an indefinite period. Thus, capital market provides long-term

resources needed by medium and large scale industries.

According to Khan and Jain (2011)3, “The capital market is created by a

financial relationship created by a number of institutions and arrangement that allows

suppliers and demands of long-term funds (i.e. funds with maturities exceeding one

year) to make transactions. It is a market for long term funds.”

� Role/Functions of Capital Market

Capital market plays as significant role as money market in the national

economy. A developed, dynamic and vibrant capital market can immensely contribute

for speedy economic growth and development.

Functions of the capital market are:

•••• Mobilization of Savings

•••• Capital Formation

•••• Provision of Investment Avenue

•••• Speed up Economic Growth and Development

•••• Proper Regulation of Funds

•••• Service Provision

•••• Continuous Availability of Funds

3 M. Y. Khan and Jain P. K., Financial Management – Text, Problems and

Cases. New Delhi: Tata McGraw Hill Education Private Limited, 2011, ISBN: 978-

0-07-106785-0, p. 21.5.

Major Players in Indian

Source: Prepared from

Exchange of Thailand

10/22/2009. (http://kalyan

(c) Primary Market

According to Pandian (2010)

between the prospective investors and the company. By providing liquidity and

safety, the stock markets encourage the public to subscribe to the new issues. The

marketability and the capital appreciation provid

4 Punithavathy Pandian,

Delhi: Vikas Publishing House Pvt. Ltd., 2010, ISBN: 978

Industrial Securities Market

New IssueMarket (NIM)

Old Issue Market (Stock Exchange)


5

Chart 1.3

Major Players in Indian Capital Market

Source: Prepared from “First Step in Stock Market Investment” by the Stock

Thailand - Dictionary of Economics by Vitayakorn Chiangkul

http://kalyan-city.blogspot.in /2010/09/organizational-

Primary Market

Pandian (2010)4, “The primary market provides a direct link



marketability and the capital appreciation provided in the stock market are the major

Punithavathy Pandian, Security Analysis and Portfolio Management.

Delhi: Vikas Publishing House Pvt. Ltd., 2010, ISBN: 978-81-2591

Capital Market in India

New IssueMarket (NIM)

Old Issue Market (Stock Exchange)

Government Securities

(Gilt-edged market)

Development Financial

Institutions (DFIs)

IFCI

ICICI

SFCs

IDBI

IIBI

UTI

Intermedraries


“First Step in Stock Market Investment” by the Stock

Dictionary of Economics by Vitayakorn Chiangkul dated

-structure-of india)

, “The primary market provides a direct link



ed in the stock market are the major

Security Analysis and Portfolio Management. New

2591-084-8, p. 37.

Financial Intermedraries

MerchantBanks

MutualFunds

Leasing Companies

Venture Capital Companies

Other Financial Organisations


6

factors that attract the investing public towards the stock market. Thus, it provides an

indirect link between the savers and the company. ”

This is the market for new long term equity capital. The primary market is the

market where the securities are sold for the first time. Therefore it is also called the

New Issue Market (NIM).

According to Khan and Jain (2011),5 “The NIM is not rooted in any

particular spot and has no geographical existence. The NIM has neither any tangible

form any administrative organisational set up like that of stock exchanges, nor is it

subjected to any centralised control and administration for the achievement of the

ultimate goal of its business.”

(d) Secondary Market

The secondary market, also called aftermarket , is the financial market

where previously issued securities and financial instruments such as stock, bonds,

options, and futures are bought and sold. Another frequent usage of "secondary

market" is to refer to loans which are sold by a mortgage bank to investors.

The term ‘secondary market’ is also used to refer to the market for any used

goods or assets, or an alternative use for an existing product or asset where the

customer base is the second market. It is for a variety of assets can vary from loans to

stocks, from fragmented to centralized, and from illiquid to very liquid. The major

stock exchanges are the most visible example of liquid secondary markets - in this

case, for stocks of publicly traded companies.

• Stock Exchange

A stock exchange is an entity that provides services for stock brokers and

traders to trade stocks, bonds, and other securities. Stock exchanges also provide

facilities for issue and redemption of securities and other financial instruments, and

capital events including the payment of income and dividends. Securities traded on a

stock exchange include shares issued by companies, unit trusts, derivatives, pooled

investment products and bonds.

• Over the counter

Over the Counter Market is a market where shares which are not listed on

the stock exchange are traded. These shares are traditionally those of smaller

companies which do not fulfill the listing requirements of a stock exchange, or are

5 Khan and Jain, op. cit., p. 21.6.


7

waiting to be listed on the stock market. According to Pandian (2010)6, “OTCEI got

off the ground with features that were totally new to the Indian Markets; Screen based

trading, national wide coverage, rolling settlements and market making.”

1.3 The role of stock exchanges

Stock exchanges have multiple roles in the economy:

• Raising capital for businesses

• Mobilizing savings for investment

• Facilitating company growth

• Profit sharing

• Corporate governance

• Creating investment opportunities for small investors

• Government capital-raising for development projects

• Barometer of the economy

1.4 History of Stock Exchange World-wide

Securities markets took centuries to develop. The idea of debt dates back to

the ancient world, as evidenced for example by ancient Mesopotamian clay tablets

recording interest-bearing loans. There is little agreement among scholars as to when

corporate stock was first traded. Some see the key event as the Dutch East India

Company's founding in 1602, while others point to earlier developments. Economist

Ulrike Malmendier of the University of California at Berkeley argues that a share

market existed as far back as ancient Rome.

In 1171, the authorities of the Republic of Venice, concerned about their war-

depleted treasury, drew a forced loan from the citizenry. Such debt, known as prestiti,

paid 5 percent interest per year and had an indefinite maturity date. Initially regarded

with suspicion, it came to be seen as a valuable investment that could be bought and

sold. The bond market had begun.

The forefront of commercial innovation eventually shifted from Italy to

northern Europe. The Hanseatic League, an alliance of mercantile towns such as

Bruges and Antwerp, operated counting houses to boost the trade rapidly. The term

"bourse," which has become synonymous with "stock market," arose in Bruges,

either from a sign outside a trading center showing one or a few purses (bursa is Latin

6 Pandian, op. cit., p. 99.


8

for bag) or because merchants gathered at the house of a man named Van der Burse;

nobody's quite sure.

The next big step was in Amsterdam. In 1602, the Dutch East India Company

was formed as a joint-stock company with shares that were readily tradable. The stock

market had begun. Control of the company was held tightly by its directors, with

ordinary shareholders not having much influence on management or even access to

the company's accounting statements.

However, shareholders were rewarded well for their investment. The company

paid an average dividend of over 16 percent per year from 1602 to 1650. Financial

innovation in Amsterdam took many forms. In 1609, investors led by one Isaac Le

Maire formed history's first bear syndicate, but their coordinated trading had only a

modest impact in driving down share prices, which tended to be robust throughout the

17th century. By the 1620s, the company was expanding its securities issuance with

the first use of corporate bonds.

Joseph de la Vega was a successful businessman in 17th-century Amsterdam.

His 1688 book Confusion of Confusions explained the workings of the city's stock

market. It was the earliest book about stock trading, taking the form of a dialogue

between a merchant, a shareholder and a philosopher, the book described a market

that was sophisticated but also prone to excesses, and de la Vega offered advice to his

readers on such topics as the unpredictability of market shifts and the importance of

patience in investment.

By 1698, a broker named John Castaing, operating out of Jonathan's Coffee

House, was posting regular lists of stock and commodity prices. Those lists mark the

beginning of the London Stock Exchange. In 1875, the The Native Share & Stock

Brokers' Association latterly known as Bombay Stock Exchange in India. On

February 8, 1971, NASDAQ, the world's first electronic stock exchange, started its

operations.

1.5 Stock Exchanges All over the world7

Asia

Asia is a massive continent blessed with an abundance of natural resources

facilitating trade within and between countries, giving rise to a need for stock

7 http://www.stockmarkets.com accessed on March 23, 2011.


9

exchanges. The continent extends all the way from the northern regions – most of

which fall under the territory of Russia – to the cluster of islands below India such as

Colombo in Sri Lanka, the wealthy emirate of Dubai in the United Arab Emirates in

the west and those landmasses on the eastern side of the main landmass such as Japan.

The economic situations of the various countries found in Asia are very different.

Many are emerging from years of struggle under a harsh political climate while others

have been enjoying relative freedom for years. Major stock exchanges in Asia are:

• Amman Stock Exchange

• Bombay Stock Exchange(BSE)

• Bursa Malaysia

• Chinese Stock Exchange

• Colombo Stock Exchange

• Dubai Stock Exchange

• Hongkong Stock Exchange

• India Stock Exchange(NSE)

• Indonesia Stock Exchange

• Istanbul Stock Exchange

• Korea Exchange

• Kuala Lumpur Exchange

• Lahore Stock Exchange

• Osaka Securities Exchange

• Philippine Stock Exchange

• Shanghai Stock Exchange

• Shenzhen Stock Exchange

• Singapore Stock Exchange

• Taiwan Stock Exchange

• Tehran Stock Exchange

• Tel Aviv Stock Exchange

• Thailand Stock Exchange

• Tokyo Stock Exchange

Africa

As the largest stock exchange in Africa and the 16th largest stock exchange in

the world, the Johannesburg Stock Exchange (JSE) is probably the first one that

comes to mind when one thinks about stock markets in Africa. However, just because

this stock market is the largest and most successful on the continent, doesn’t mean it

is the only one. The Cairo and Alexandria Stock Exchanges have been growing

steadily since the early 1900s and now enjoys a sizable number of listed companies

and good stock trade. The Ghana Stock Exchange is somewhat smaller but is steadily

growing and will likely soon catch up to its contemporaries. Mauritius is well known

as a tropical paradise holiday destination, however even this beautiful island has

Prosperous businesses and a stock exchange - the Mauritius Stock Exchange. Major

stock exchanges in Africa are:

• Egyptian Stock Exchange

• Ghana Stock Exchange

• Johannesburg Stock Exchange

• Mauritius Stock Exchange

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11

Australia

While the geographic area known as Australasia - incorporating Australia,

New Zealand, the island of New Guinea and some neighboring Pacific Ocean islands

- is somewhat smaller than many of the world's continents, it still has plenty to offer.

From the rugged, green mountains of New Zealand to the beautiful varied climates of

Australia, Australasia is a place of both natural beauty and economic growth. Both

Australia and New Zealand have enjoyed relative economic prosperity for some time

now and as a result they both have relatively strong stock exchanges in which local

and global contenders can be challenge for stocks, bonds, securities and other tradable

commodities. As Australia the New Zealand are the biggest in this geographical

region their major stock exchanges are:

• Asia Pacific Stock Exchange

• Australian Securities Exchange

• New Zealand Exchange

• South Pacific Exchange

Europe

There are many countries in Europe that enjoy some form of global market

exchange. Whilst some of these countries have well-developed economies and

excellent, well-developed and transparent stock markets, others are still emerging

from a period of difficult government and are picking up the pieces of their

fragmented economy. Some of these countries – especially those in Central and

Eastern Europe – have recovered quite quickly and have excellent stock markets

while others are still struggling with various problems resulting in small stock markets

or no stock markets at all. Major stock exchanges of Europe are:

• Athens Stock Exchange

• Borsa Italiana

• Budapest Stock Exchange

• CEE Stock Exchange Group

• Cyprus Stock Exchange

• Deutsche Borse

• Equiduct Trading

• Euronext Stock Exchange

• Frankfurt Stock Exchange

• French Stock Exchange

• Helsinki Stock Exchange

• Hungarian Stock Exchange

• Irish Stock Exchange

• Lisbon Stock Exchange

• Ljubljana Stock Exchange

• London Metal Exchange

• London Stock Exchange

• Luxembourg Stock Exchange

• Macedonian Stock Exchange

• Malta Stock Exchange

• Omx Stock Exchanges

• Oslo Stock Exchange


12

• Prague Stock Exchange

• Russian Stock Exchange

• Spanish Stock Exchange

• Swiss Exchange

• Vienna Stock Exchange

• Warsaw Stock Exchange

• Zagreb Stock Exchange

North America

In many senses, North America enjoys one of the biggest and most developed

stock markets in the world. Since the country is one of the few privileged enough to

be at the top of the global food-chain, it enjoys the many benefits of a developed

economy and a developed infrastructure. One of the biggest of all North American

stock exchanges is most likely the NYSE Amex Equities, although it competes with

the active New York Stock Exchange and NASDAQ for this highly desired title on a

daily basis. Canada also enjoys the benefits of several great stock markets, with the

two most notable being that of the Toronto Stock Exchange and the Montreal Stock

Exchange. Other notable stock markets in North America include the ones in

Bermuda and Chicago. Major stock exchanges in North America:

• Arizona Stock Exchange

• Bermuda Stock Exchange

• Chicago Board Options

• Chicago Stock Exchange

• CME Group

• Jamaica Stock Exchange

• MX - Montreal Exchange

• NADEX

• Nasdaq Exchange

• NASDAQ OMX BX

• National Stock Exchange

• New York Stock Exchange

• NYSE Amex

• Pacific Exchange

• Philadelphia Stock Exchange

• San Diego Exchange

• Toronto Stock Exchange

• Trinidad Tobago Exchange

South America

South America is a beautiful place to visit but few people think of investing in

the various stock markets that can be found here. To be sure, there are several thriving

stock markets in South America and most of them enjoy a significant amount of both

local and global trading. Major stock exchanges in South America are:

∗∗∗∗ Buenos Aires Exchange

∗∗∗∗ Caracas Stock Exchange

∗∗∗∗ Colombia Stock Exchange

∗∗∗∗ Lima Stock Exchange

∗∗∗∗ Mexican Stock Exchange

∗∗∗∗ Santiago Stock Exchange

∗∗∗∗ Sao Paulo Stock Exchange


13

Table 1.1

Images of Major Stock Exchanges World-wide

New York Stock Exchange, United States

London Stock Exchange, England

Tokyo Stock Exchange, Japan

National Stock Exchange, India

Sao Paulo Stock Exchange, Brazil

Bombay Stock Exchange, India

Philippine Stock ExchangePhilippine

SWX Swiss Exchange, Switzerland


14

Philippine Stock Exchange,

Milan Stock Exchange, Italy

Paris Stock Exchange,

SWX Swiss Exchange, Mexican Stock Exchange, Mexico

Hong Kong Stock Exchange


Paris Stock Exchange, France

Hong Kong Stock Exchange, China


15

Australian Securities Exchange, Australia

Madrid Stock Exchange, Spain

NASDAQ, America

Osaka Securities Exchange, Japan

Toronto Stock Exchange, Canada

Islamabad Stock Exchange, Pakistan


16

Johannesburg Stock Exchange, South Africa

Indonesia Stock Exchange, Indonesia

Taiwan Stock Exchange, China

Saudi Stock Exchange (Tadawul)

Nepal Stock Exchange, Nepal

Bursa Malaysia, Malaysia

Major Stock Exchanges: Year ended 31 December 2010

Source: http://en.wikipedia.org/wiki/List_of_stock_exchanges accessed on June 21

2011.

Rank Economy

1 United States

2 United States

3 Japan

4 United Kingdom

5 China

6 Hong Kong

7 Canada

8 India

9 India

10 Brazil

11 Australia

12 Germany

13 China

14 Switzerland

15 Spain

16 South Korea

17 Russia

18 South Africa


17

Table 1.2 Major Stock Exchanges: Year ended 31 December 2010

http://en.wikipedia.org/wiki/List_of_stock_exchanges accessed on June 21

Economy Stock Exchange

Market

Capitalization

(USD Billions)

United States Europe NYSE Euronext

United States Europe NASDAQ OMX

Tokyo Stock Exchange

United Kingdom London Stock Exchange

Shanghai Stock Exchange

Hong Kong Stock

Exchange

Toronto Stock Exchange

Bombay Stock Exchange

National Stock Exchange

of India

BM&F Bovespa

Australian Securities

Exchange

Deutsche Borse

Shenzhen Stock Exchange

SIX Swiss Exchange

BME Spanish Exchanges

South Korea Korea Exchange

MICEX

South Africa JSE Limited


Major Stock Exchanges: Year ended 31 December 2010

http://en.wikipedia.org/wiki/List_of_stock_exchanges accessed on June 21,

Market

Capitalization

(USD Billions)

Trade

Value

(USD

Billions)

15970 19813

4931 13439

3827 3787

3613 2741

2717 4496

2711 1496

2170 1368

1631 258

1596 801

1545 868

1454 1062

1429 1628

1311 3572

1229 788

1171 1360

1091 1607

0949 408

0925 340


18

1.6 History of the Indian Stock Market - The Origin

Towards the close of the 18th century, the East India Company was the

dominant institution to transact the loan securities. The beginning of the 19th century

saw a perceptible increase in the nature of business. During 1861-65 the number of

brokers increases to about 200 to 250. All categories of people were engaged in

dealing in pepper.

The brokers organized a formal association in Bombay on 3rd Dec. 1885 as a

Society called as “Native Shares and Stock Brokers Association”. The Ahmedabad

Share and Stock Brokers Association was instituted in 1894. The Calcutta Stock

Exchange were refused recognition under the provisions of the Bombay securities

Contracts Act of 1925.

Futile attempt were made to establish exchanges in Madras and Northern

India. By 1923 the number of members declined from 100 to 30. In 1940 two stock

exchanges were established viz., one at Kanpur known as UP Stock Exchange and

Nagpur Stock Exchange at Nagpur. In 1944, the Hyderabad Stock Exchange was

started. Before the control on securities trading became a central subject under the

constitution in 1950, it was a state subject and Bombay Securities Contract (Contract)

act of 1925 used to regulate trading in securities. Later there was a mushroom growth

of stock exchanges in India. Now the Securities Contracts (Regulation) Act 1956

operates and governs the stock exchange working in the country.

One of the oldest stock markets in Asia, the Indian Stock Market has a 200

years old history.

Table 1.3

Timeline of history of Indian Stock Market

18th

Century

East India Company was the dominant institution and by end of the

century, business 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


19

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 ` 2850 could only

be sold at ̀ 87)

Pre-Independence 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 Lahore Stock Exchange with the Punjab Stock Exchange

1937 Re-organization 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 were established


20

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 Independence Scenario

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 were Bombay, Calcutta, Madras, Ahmedabad, Delhi,

Hyderabad, Bangalore and Indore.

Post-reforms Stock Market Scenario

After the initiation of reforms in 1991, the Indian secondary market now has

three tire forms.

i. Regional stock exchanges: A stock exchange that operates outside of the

country's main financial center.

ii. The National Stock Exchange (NSE)

iii. The Over the Counter Exchange of India (OTCEL)

There are at present 23 stock exchanges in India – 19 regional stock

exchanges, the BSE, the NSE, the OTCEI and the Inter Connected Stock

Exchange of India (ICSE/ISE). The ISE is the stock exchange of stock exchanges.8

ISE has received ‘in principle’ approval from SEBI. The 15 exchanges participating

in ISE are Bangalore, Bhubaneswar, Chennai, Kochi, Coimbatore, Guwahati,

Hyderabad, Jaipur, Ludhiana, Indore, Magadh, Mangalore, Saurashtra Kutch, Uttar

Pradesh, and Vadodara. The exchanges that are not part of ISE are Delhi, Calcutta,

Ahmedabad, Pune, OTCEI, BSE and NSE.

8 Bharati V. Pathak, The Indian Financial System – Markets. Institutions and Services (2nd Edition). New Delhi: Dorling Kindersley (India) Pvt. Ltd., licensees of Pearson Education in South Asia, 2010, ISBN: 978-81-7758-562-9, p. 165.


21

Map 1.2

Source: http://www.mapsofindia.com/maps/india/stock_exchange.htm accessed on

April 4, 2011


22

Table 1.4

Stock Exchanges in India

No. Name of the

Stock Exchange

Year of Formu- lation

Headquarters Remarks Valid up to

1

Ahmedabad Stock

Exchange Ltd.(ASE)

1894 Ahmedabad

(Gujarat)

ASE is the second oldest exchange of India. It was

constituted in the year 1894 as a Public Charitable Trust.

Ahmedabad Stock Exchange (ASE) started under a banyan tree and therefrom progressed

year after year. It holds a unique place in India.

Permanent

2

Bangalore Stock

Exchange Ltd. (BgSE)

1963 Bangalore (Karnataka)

The stock exchange is managed by a Council of

Management, consisting of members appointed by the

SEBI

Permanent

3

Bhubaneswar Stock

Exchange Ltd.(BHSE)

1989 Bhubaneswar

(Orissa)

It is one among the 21 odd regional stock exchanges in

India.

June 04, 2012

4

Bombay Stock

Exchange Ltd.(BSE)

1875 Mumbai

(Maharashtra)

Emerges as the premier Indian stock exchange by establishing global

benchmarks.

Permanent

5

Calcutta Stock

Exchange Ltd. (CSE)

1908 Kolkata

(West Bengal)

It is the second largest bourse in India.

Permanent

6 Cochin Stock

Exchange Ltd. (CSE)

1978 Kochi (Kerala)

It is a capital stock market in Kochi, Kerala in India.

November 07, 2011

7

Coimbatore Stock

Exchange Ltd.(CSX)

1996 Coimbatore (Tamilnadu)

It is the youngest stock exchange in India. It is now governed by the Governing Body which consists of the

member brokers.

September 17, 2006

8 Delhi Stock Exchange

(DSE) 1947

New Delhi

It is India's fifth exchange. The exchange is one of the premier Stock Exchange in

India.

Permanent


23

9

Guwahati Stock

Exchange Ltd.

1983 Guwahati (Assam)

The GSE is limited by guarantee by the member-

brokers.

April 30, 2012

10

Hyderabad Stock

Exchange Ltd. (HSE)

1941 Hyderabad (Andhra Pradesh)

It was a stock exchange established in 1941 located in

Hyderabad, India. The exchange was disbanded in

2007.

Derecogni-sed from

August 29, 2007

11

Inter Connected

Stock Exchange of

India Ltd.(ICSE)

1998 Mumbai

(Maharashtra)

It is a stock exchange of stock exchanges, members of

the stock exchanges being traders on the ISE.

November 17, 2011

12 Jaipur Stock Exchange Ltd.(JSEL)

1989 Jaipur

(Rajasthan)

JSE is the third largest exchange in India in terms of

membership.

January 08, 2012

13

Ludhiana Stock

Exchange Ltd.(LSE)

1983 Ludhiana (Punjab)

Ludhiana Stock Exchange became the second bourse in India to introduce modified carry forward system after

BSE on April 6, 1998.

April 27, 2012

14

Madhya Pradesh Stock

Exchange Ltd.(MPSEL)

1928 Indore

(Madhya Pradesh)

It was granted permanent recognition under the

provisions of the Securities Contract (Regulation) Act,

1956 (“SCRA”), by the Government of India in 1988.

Permanent

15 Madras Stock

Exchange Ltd.(MSE)

1937 Chennai

(Tamilnadu)

The MSE is the fourth stock exchange to be established in

the country and the first in South India.

Permanent

16

Magadh Stock

Exchange Association

Ltd. (MSEA)

1986 Patna

(Bihar)

In September 2005, the Magadh Stock Exchange was corporatized and demutualised

in accordance with the provisions of the Securities Contracts (Regulation) Act,

1956.

Derecogni-sed from

September 3, 2007


24

17

Mangalore Stock

Exchange Ltd. (MGSE)

1984 Mangalore (Karnataka)

The company was granted recognition as a stock

exchange on September 9, 1985 under section 4 of the

Securities Contracts (Regulation) Act, 1956.

Derecogni-zed from

October 4, 2006

18

National Stock

Exchange of India Ltd.

1992 Mumbai

(Maharashtra)

It is mutually-owned by a set of leading financial

institutions, banks, insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities.

Permanent

19 OTCEI 1990 Mumbai

(Maharashtra) It is the first exchange for

small companies. August 22,

2012

20 Pune Stock Exchange Ltd.(PSE)

1982 Pune

(Maharashtra)

PSE is a company limited by

guarantee.

September 01, 2012

21 SKSE

(Erstwhile) Ltd.

1989 Rajkot

(Gujarat)

The recognition has been renewed from time to time by the Central Government and SEBI. The Stock Exchange is recognized under Securities Contracts Regulation Act.

Derecogni-zed from July 06, 2007

22

Uttar Pradesh Stock

Exchange Association Ltd.(UPSE)

1982 Kanpur

(Uttar Pradesh)

It plays an important role in the development of the capital

market of North India.

June 02, 2012

23

Vadodara Stock

Exchange Ltd.(VSE)

1986 Vadodara (Gujarat)

It is the third largest stock exchange in the state of

Gujarat after Ahmadabad and Rajkot.

January 03, 2012

24 MCX Stock Exchange

Ltd 2008

Mumbai (Maharashtra)

It is an India-wide electronic platform for trading in

currency futures under the regulatory control of SEBI

and RBI.

September 15, 2011

25 United Stock Exchange of India Limited

2010 Mumbai

(Maharashtra)

It is situated in BSE Ltd. building. USE also has

Bombay Stock Exchange as a strategic partner.

March 21, 2012


25

Source: Prepared from (1) http://www.sebi.gov.in/investor/recog.html

(2) http://www.jagranjosh.com/general-knowledge/stock-exchanges-in-india-list-2-

1334642900-1 (3) http://www.jagranjosh.com/general-knowledge/stock-exchanges-

in-india-list-2-1334642900-2 (4) http://www.sebi.gov.in/investor/recog.html

(5) http://www.sebi.gov.in/investor/stockexchadd.html

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 table 1.5.

Table 1.5

Stock Exchanges in India from the years

No. As on 31st December 1946 1961 1971 1975 1980 1985 1991 1995

1

No. of Stock

Exchanges

(Recognized)

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. ̀ ) 270 753 1812 2614 3973 9723 32041 59583

5 Market value of Capital

of Listed Cos. (Cr. ̀) 971 1292 2675 3273 6750 25302 110279 478121

6 Capital per Listed Cos.

(4/2) (Lakh ̀ ) 24 63 113 168 175 224 514 693

7

Market Value of

Capital per Listed Cos.

(Lakh ̀ )

86 107 167 211 298 582 1770 5564

8

Appreciated value of

Capital per Listed Cos.

(Lakh ̀ )

358 170 148 126 170 260 344 803

Source: Prepared from SEBI handbook of statistics on Indian securities market


26

In the year 2001 the number of recognised stock exchanges reached to 23 but

in the year 2010 it slipped to 19 because in the midtime Magadh, Mangalore,

Hyderabad and Saurashtra Kutch stock exchanges have been derecognised by SEBI.

1.7 Recognition

A stock exchange is recognised only after the government is satisfied that its

rules and bye-laws confirm to the conditions prescribed for ensuring fair dealing and

protection to investors. Bombay, Calcutta, Delhi, Madras, Ahmedabad, Hyderabad,

Bangalore and Indore have so far been granted permanent recognition. Others are

granted temporary recognition for a period of 5 years at a time.9

1.8 Regulatory Framework

According to Bhalla (2011)10, “The four main legislations governing the

securities market are: (1) the SEBI Act, 1992 which establishes SEBI to protect

investors and develop and regulate security market, (b) the Companies Act, 1956,

which sets out the code of conduct for the corporate sector in relation to issue,

allotment and transfer of securities and disclosures to be made in public issues, (c) the

Securities Contracts (Regulation) Act, 1956, which provides for regulation of

transactions in securities through control over stock exchanges and (d) the

Depositories Act, 1956 which provides for electronic maintenance and transfer of

ownership of demat securities.”

According to Pandian (2010)11, “A comprehensive legal framework was

provided by Securities Contract Regulation Act, 1956 and the Securities and

Exchange Board of India Act, 1992. A three tire regulatory structure comprising

(1) Ministry of Finance (2) The Securities and Exchange Board of India and (3)

Governing Boards of Stock Exchanges regulates the functioning of stock exchanges.”

Securities Contracts (Regulation) Act, 1956 provides for direct and indirect

control of virtually all aspects of securities trading and the running of stock exchanges

and aims to prevent undesirable transactions in securities. It gives Central

Government regulatory jurisdiction over (a) stock exchanges, through process of

recognition and continued supervision, (b) contracts in securities and (c) listing of

securities on stock exchanges.

9 http://subramoneyplanning.blogspot.in/2012/05/indian-stock-exchanges-history.html

10 Bhalla, op. cit., p. 56-62.

11 Pandian, op. cit., p. 59-60.

Fac

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27

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1.9 Types of Stock

Both the Bombay Stock Exchange

types of stock markets.

• Equity market

In this type of trading the buyer pays the entire amount of the value of the

stocks that is determined by multiplying the number stocks with the current price of

the stock.

• Derivative Market

In the derivative market trading is done mainly through two inst

Future contract and the Option contract. In both these types of contracts the stocks are

bought and sold in lot.

future contract or the option contract.

Source: prepared from

March 23, 2011

Commodities

Commodities

Metals

Energy

Live Stocks

Commodities


28

Types of Stock Markets in India

Bombay Stock Exchange and the National Stock Exchange

types of stock markets.

Equity market or the Cash Segment



Derivative Market

In the derivative market trading is done mainly through two inst


bought and sold in lot. For trading in derivative market one has

future contract or the option contract.

Chart 1.5 Derivatives Market Landscape

prepared from http://www.sharetipsinfo.com/modesoftips.html

, 2011

Derivatives Market Landscape

Exchange Traded Derivatives

Commodities

Soft Commodities

Metals

Energy

Live Stocks

New Commodities

Financials

Currencies

Over the Counter Derivatives


National Stock Exchange have these



In the derivative market trading is done mainly through two instruments – the


one has to buy either the

http://www.sharetipsinfo.com/modesoftips.html accessed on

Derivatives Market Landscape

Financials

Equity Financials

InterestRates

Over the Counter Derivatives

1.10 Types of Transactions

The flowchart below describes the types of transactions that can be carried out

on the Indian stock exchanges:

Transactions on Indian Stock Exchanges

Indian stock exchange allows a member broker to perform following

activities:

1. Act as an agent,

2. Buy and sell securities for his clients and charge commission for the same,

3. Act as a trader or dealer as a principal,

4. Buy and sell securities on his own account and risk.

1.11 Organizational

The stock exchanges are the exclusive centre for trading of securities. At

present, there are 23

incorporated as ‘Association of Persons’ of section 25 companies under the

Companies Act. These are organized as ‘mutuals’ and considered beneficial in terms

of tax benefits and matters of compliance.

Spot Delivery Transactions

Forward Transactions


29

1.10 Types of Transactions


on the Indian stock exchanges:

Chart 1.6



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.

Organizational Structure of the Secondary Market


present, there are 23 operative stock exchanges in India. Most of them are



of tax benefits and matters of compliance. The trading members, who own, control

Spot Delivery Transactions

• Includes transactions that require delivery and payment within stipulated time period at the time of entering into the time of entering into the contract

• This period shall not be more than 14 days following the date of the contract

Forward Transactions

• Transactions in which delivery and payment can be extended by further period of 14 days each

• The overall period should not exceed 90 days from the date of contract

• Transactions permitted only in case of specified shares





Buy and sell securities for his clients and charge commission for the same,

Structure of the Secondary Market


operative stock exchanges in India. Most of them are



e trading members, who own, control

Includes transactions that require delivery and payment within stipulated time period at the time of entering into the time of entering

This period shall not be more than 14 days following the date of the contract

Transactions in which delivery and payment can be extended by further period of 14 days

The overall period should not exceed 90 days

Transactions permitted only in case of


30

and manage the stock exchanges. They elect their representatives to regulate the

functioning of exchange, including their own activities. Until recently, the area of

operation/jurisdiction of an exchange was specified at the time of its recognition,

which in effect precluded competition among the exchanges. These are called

regional exchanges.

The organizational forms of the various stock exchanges in India are:12

i. BSE : A tax-paying company incorporated

under the Companies Act, 1956. Prior

to August 2005 it was Voluntary non-

profit making association of persons.

ii. NSE : A tax-paying company incorporated

under the Companies Act, 1956 and

promoted by leading financial

institutions and banks.

iii. Ahmedabad, Patna, Indore : Voluntary non-profit making

association of persons.

iv. Kolkata, Delhi, Bangalore, : Public Limited company

Cochin, Kanpur, Guwahati,

Ludhiana, Mangalore, Chennai

v. Hyderabad, Pune, Rajkot, : Company limited by guarantee

Magadh

vi. OTCEI : A company under section 25 of the

xxCompanies Act, 1956

In order to provide an opportunity to investors to invest/trade in the securities

of local companies, it is mandatory for the companies, wishing to list their securities,

to list on the regional stock exchange nearest to their registered office. If they so wish,

they can seek listing on other exchanges as well. Monopoly of the exchanges within

their allocated area, regional aspiration of the people and mandatory listing on the

regional stock exchange resulted in multiplicity of exchanges. As a result, at the end

of March 2008, there were 19 regional stock exchanges registered with SEBI having a

total of 8517 registered brokers and 43874 registered sub-brokers trading on them.

12 Pathak, op.cit., p. 166.


31

The stock exchanges need to be recognised under the Securities Contracts

(Regulation) Act, 1956. SEBI has approved and notified the Corporatisation and

Demutualisation Scheme of 19 stock exchanges. BSE has successfully completed

the process of Demutualisation Scheme in terms of The BSE (Corporatisation

and Demutualisation) Scheme, 2005 on May 16, 2007. NSE since inception has

adopted a demutualised structure and its model of demutualisation compares well

with the international models of demutualised stock exchanges as seen from.

1.12 Risk managements in Stock Market13

The risk management systems at the exchange have improved substantially in

the recent past because of positive steps taken by the exchanges. The margin systems

have become more sophisticated to consider the factors of volatility, volumes and

other factors. The margins are required to be compulsorily collected from the clients

by the brokers. A quarterly certificate has been prescribed for compliance of the

margin system. With the infrastructure of risk management enhanced, the stock

exchanges as well as the investors would be better protected towards risk of various

scams which has recently shaken the market. The SEBI and stock exchanges have

developed rules and regulations to seize market failures and to protect investors, as a

part of risk management mechanism in securities trade transactions through regulated

markets.

Margin System Adopted by Exchanges in India14

� In India, the NSE and BSE use a margin system called Standardised Portfolio

Analysis (SPAN) developed by the Chicago Mercantile Exchange (CME),

Chicago, USA.

� SPAN is used to determine margin requirements. Its main objective is to

determine the largest loss that a portfolio might reasonably suffer from one

day to the next day.

� Initial Margin is required to be paid by a person taking the risk. The option

buyer’s risk is limited to the amount of premium. So he need not to pay

13 Kishore, op. cit., p. 293-94.

14 Patwari and Bhargava, op. cit., p. 61-63.


32

margin but option seller, future buyer and future seller have potentially

unlimited risk, hence they have to pay the margin.

� Mark-to-Market (MTM) is the profit or loss of the investor’s open

position which is calculated on a daily basis. The daily profit/loss is

credited/debited to the investor’s account on a daily basis.

1.13 Latest Methods of Trading Systems on Stock Market

(I) On-line Stock Market Trading

Stock trading in India was basically started as a floor-based activity in

Bombay Stock Exchange (BSE). The National Stock Exchange (NSE) was set up and

in 1994 adopting a computer screens based trading system using satellite

communications to make the net work accessible from different locations all over the

country. Investors can trade shares through a website without any manual intervention

from sub-brokers. The on-line stock trading companies act as stock brokers for the

investors. They are registered with one or more stock exchanges. This type includes

two sub-types (i) Installable Software-based Stock Trading (ii) Web-based Trading

Application

The stock exchanges now provide an on-line fully automated ‘Screen Based

Trading System (SBTS)’ the important features of SBTS are:

(a) A member can punch into the computer quantities of securities and the prices

at which he likes to transact and the transaction is executed as soon as it finds

a matching order from a counter party.

(b) It cuts down on time, cost and risk of error, as well as fraud resulting in

improved operational efficiency.

(c) It enables market participants to see the full market on real time, making the

market transparent.

(d) It allows a large number of participants, irrespective of geographical location,

to trade with one another simultaneously, improving the depth and liquidity of

the market.

(e) It provide full anonymity by accepting orders of small, from members without

revealing their identity, thus providing equal access to everybody.

(II) WAP Trading

The activity of transacting on a stock exchange would not only be restricted to

exchange floor, exchange terminals, from the officers or from homes but even while


33

one is mobile, say in a car or train for that matter in an aircraft. This would be made

possible with WAP (Wireless Application Protocol). WAP is a mode of

communication between the mobile phone and another mobile phone or a computer,

with the wireless world a really, the capital market will see a sea change in the way in

which the transactions are put through.15

1.14 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 as presented in chart 1.7.

Chart 1.7

Trading Pattern of Indian Stock Market

1.15 Conclusion

The present chapter includes the highlights of the financial markets and stock

exchanges worldwide. It also covers the glorious history and functioning of Indian

stock market. in the next chapter the researcher had gone through the literature review

and found the gap in the source of knowledge and formulated research design.

15 Kishore, op. cit., p. 289-90.

Listed Securities of

Public Limited

Companies

Specified Securities

(Forward List)

Equity Shares of Company that are:(1) Dividend Paying(2) Growth-oriented Companies(3) Paid up capital of at least (4) Rs. 50 Million(4) Market Capitalisation of at (5) least Rs. 100 Million(5) Has more than 20,000 (4) Shareholders

Non-specified Securities

(Cash List)

Equity Shares of Companies not covered in Specified Securities

chapter 1 the indian capital market an overview -...

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