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Knowledge centre for MBA students. |
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Indian Capital Market: An Overview Dr N Balakumar Evolution Indian Stock Markets are one of the oldest in By 1830's business on corporate stocks and
shares in Bank and Cotton presses took place in Bombay. Though the trading
list was broader in 1839, there were only half a dozen brokers recognized by
banks and merchants during 1840 and 1850. The 1850's witnessed a rapid development of
commercial enterprise and brokerage business attracted many men into the
field and by 1860 the number of brokers increased into 60. In 1860-61 the American Civil War broke out
and cotton supply from United States of Europe was stopped; thus, the 'Share
Mania' in India begun. The number of brokers increased to about 200 to 250.
However, at the end of the American Civil War, in 1865, a disastrous slump
began (for example, Bank of Bombay Share which had touched Rs 2850 could only
be sold at Rs. 87). At the end of the American Civil War, the
brokers who thrived out of Civil War in 1874 found a place in a street (now
appropriately called as Dalal Street) where they would conveniently assemble
and transact business. In 1887, they formally established in Bombay, the
"Native Share and Stock Brokers' Association" (which is
alternatively known as " The Stock Exchange "). In 1895, the Stock
Exchange acquired a premise in the same street and it was inaugurated in
1899. Thus, the Stock Exchange at Bombay was consolidated. Other leading cities
in stock market operations 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 was realised 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 in jute 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 under Indian 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 exchange functioning 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 companies were 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 1934 and
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 for their 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. 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 Exchnage Association Limited. Post-independence
Scenario Most of the exchanges suffered almost a total
eclipse during depression. Lahore Exchange was closed during partition of the
country and later migrated to Delhi and merged with Delhi Stock Exchange. Bangalore Stock Exchange Limited was
registered in 1957 and recognized in 1963. Most of the other exchanges languished till
1957 when they applied to the Central Government for recognition under the
Securities Contracts (Regulation) Act, 1956. Only Bombay, Calcutta, Madras,
Ahmedabad, Delhi, Hyderabad and Indore, the well established exchanges, were
recognized under the Act. Some of the members of the other Associations were
required to be admitted by the recognized stock exchanges on a concessional
basis, but acting on the principle of unitary control, all these pseudo stock
exchanges were refused recognition by the Government of India and they
thereupon ceased to function. Thus, during early sixties there were eight
recognized stock exchanges in India (mentioned above). The number virtually
remained unchanged, for nearly two decades. During eighties, however, many
stock exchanges were established: Cochin Stock Exchange (1980), Uttar Pradesh
Stock Exchange Association Limited (at Kanpur, 1982), and 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) and recently established exchanges -
Coimbatore and Meerut. Thus, at present, there are totally twenty one
recognized stock exchanges in India excluding the Over The Counter Exchange
of India Limited (OTCEI) and the National Stock Exchange of India Limited
(NSEIL). The Table given below portrays the overall
growth pattern of Indian stock markets since independence. It is quite
evident from the Table that Indian stock markets have not only grown just in
number of exchanges, but also in number of listed companies and in capital of
listed companies. The remarkable growth after 1985 can be clearly seen from
the Table, and this was due to the favouring government policies towards
security market industry. Growth Pattern of the
Indian Stock Market
Source : Various issues of the Stock Exchange
Official Directory, Vol.2 (9) (iii), Bombay Stock Exchange, Bombay. Trading Pattern of the
Indian Stock Market Trading in Indian stock exchanges are limited to
listed securities of public limited companies. They are broadly divided into
two categories, namely, specified securities (forward list) and non-specified
securities (cash list). Equity shares of dividend paying, growth-oriented
companies with a paid-up capital of at least Rs.50 million and a market
capitalization of at least Rs.100 million and having more than 20,000
shareholders are, normally, put in the specified group and the balance in
non-specified group. Two types of transactions can be carried out
on the Indian stock exchanges: (a) spot delivery transactions "for
delivery and payment within the time or on the date stipulated when entering
into the contract which shall not be more than 14 days following the date of
the contract" : and (b) forward transactions "delivery and payment
can be extended by further period of 14 days each so that the overall period
does not exceed 90 days from the date of the contract". The latter is
permitted only in the case of specified shares. The brokers who carry over
the out standings pay carry over charges (cantango or backwardation) which
are usually determined by the rates of interest prevailing. A member broker in an Indian stock exchange
can act as an agent, buy and sell securities for his clients on a commission
basis and also can act as a trader or dealer as a principal, buy and sell
securities on his own account and risk, in contrast with the practice
prevailing on New York and London Stock Exchanges, where a member can act as
a jobber or a broker only. The nature of trading on Indian Stock
Exchanges are that of age old conventional style of face-to-face trading with
bids and offers being made by open outcry. However, there is a great amount
of effort to modernize the Indian stock exchanges in the very recent times. Over The Counter
Exchange of India (OTCEI) The traditional trading mechanism prevailed in
the Indian stock markets gave way to many functional inefficiencies, such as,
absence of liquidity, lack of transparency, unduly long settlement periods and
benami transactions, which affected the small investors to a great extent. To
provide improved services to investors, the country's first ringless,
scripless, electronic stock exchange - OTCEI - was created in 1992 by
country's premier financial institutions - 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. Trading at OTCEI is done over the centres
spread across the country. Securities traded on the OTCEI are classified
into: v
Listed Securities -
The shares and debentures of the companies listed on the OTC can be bought or
sold at any OTC counter all over the country and they should not be listed
anywhere else v
Permitted Securities -
Certain shares and debentures listed on other exchanges and units of mutual
funds are allowed to be traded v
Initiated debentures -
Any equity holding at least one lakh debentures of a particular scrip can
offer them for trading on the OTC. OTC has a unique feature of trading compared
to other traditional exchanges. That is, certificates of listed securities
and initiated debentures are not traded at OTC. The original certificate will
be safely with the custodian. But, a counter receipt is generated out at the
counter, which substitutes the share certificate and is used for all
transactions. In the case of permitted securities, the system
is similar to a traditional stock exchange. The difference is that the
delivery and payment procedure will be completed within 14 days. Compared to the traditional Exchanges, OTC
Exchange network has the following advantages: v
OTCEI has widely dispersed
trading mechanism across the country, which provides greater liquidity and
lesser risk of intermediary charges. v
Greater transparency
and accuracy of prices is obtained due to the screen-based scrip less
trading. v
Since the exact price
of the transaction is shown on the computer screen, the investor gets to know
the exact price at which s/he is trading. v
Faster settlement and
transfer process compared to other exchanges. v
In the case of an OTC
issue (new issue), the allotment procedure is completed in a month and
trading commences after a month of the issue closure, whereas it takes a
longer period for the same with respect to other exchanges. Thus, with the superior trading mechanism
coupled with information transparency investors are 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 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. Trading at NSE can be classified under two
broad categories: (a) Wholesale debt market and (b) Capital market. Wholesale debt market operations are similar to
money market operations - institutions and corporate bodies enter into high
value transactions in financial instruments such as government securities,
treasury bills, public sector unit bonds, commercial paper, certificate of
deposit, etc. There are two kinds of players in NSE: (a) trading members and (b) participants. Recognized members of NSE are called trading
members who trade on behalf of themselves and their clients. Participants
include trading members and large players like banks who take direct
settlement responsibility. Trading at NSE takes place through a fully
automated screen-based trading mechanism, which adopts the principle of an
order-driven market. Trading members can stay at their offices and execute
the trading, since they are linked through a communication network. 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 and a
confirmation slip will be printed at the office of the trading member. NSE has several advantages over the
traditional trading exchanges. They are as follows: v
NSE brings an
integrated stock market trading network across the nation. v
Investors can trade at
the same price from anywhere in the country since inter-market operations are
streamlined coupled with the countrywide access to the securities. v
Delays in
communication, late payments and the malpractices prevailing in the
traditional trading mechanism can be done away with greater operational
efficiency and informational transparency in the stock market operations,
with the support of total computerized network. Unless stock markets provide professionalised
service, small investors and foreign investors will not be interested in
capital market operations. And capital market being one of the major sources
of long-term finance for industrial projects, |
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