Literature Review of Indian Stock Exchanges

During the eighteenth and nineteenth centuries, India supplied Britain with raw materials and a market for manufactured products. Britain became increasingly reliant on India for raw materials such as cotton, especially during the American Civil War. The resultant wealth generation in India created a need for legitimate means of investment rather than rampant unorganised speculation in securities. To this end, a group of brokers created the Native Share and Stockbrokers Association, which later became the Bombay Stock Exchange (BSE) in 1875. The Bombay Stock Exchange Limited is the oldest stock exchange in Asia and was the first stock exchange to be recognized by the Indian government, in 1956. Today, the BSE is professionally managed under the overall direction of the board of directors, which formulates larger policy issues and exercises overall control. The board comprises eminent professionals, representatives of trading members and the managing director of the BSE. In addition to the BSE, there are two other main exchanged – the National Stock Exchange (NSE) and the Over the Counter Exchange of India Limited (OTCEI) – which operate at a national level. The NSE is the world’s third largest stock exchange in terms of transactions and is also located in Mumbai. The OTCEI, which operates from Mumbai, Kolkata and New Delhi, is a unique stock exchange suited to small and medium-sized firms looking to gain access to the capital markets. It is often the exchange of choice for technology and growth stocks.

1.2 CLASSIFICATION OF MARKET

The stock market comprises of two markets, viz., the primary market and the secondary market. The evolution and the development of various stock exchanges in India and Abroad were presented briefly. The Stock Exchange is a key institution facilitating the issue and sale of various types of securities. It is pivot around which every activity of the capital market revolves. In the absence of the stock exchange, the people with savings would hardly invest in corporate securities for which there would be no liquidity (buying & selling facility). Corporate investments from a general public would have been thus lower. The stock exchanges are virtually the nerve centre of the capital market & reflect the health of the country’s economy as a whole.

THE PRIMARY MARKET: – The primary market provides the channel for sale of new securities, while the secondary market deals in securities previously issued. The primary market consists of new issues of capital (equity, debentures, bonds etc.) by new/existing companies. In this case, the corporate body invites applications to the issue of equity or debentures by filling the prospectus or letter of offer. The application forms can be obtained from the bankers / merchant bankers of the issues, brokers etc.

Investors subscribe to issue these by filling in the application forms & remitting the requisite amount to the designated banks (listed on the reverse of the application) within the time period for which the subscription list is open. The subscription list is generally kept open for 3 days. The company in consultation with its merchant bankers & the Stock Exchange Authorities is expected to finalize the list of successful applications within 10 weeks. The share/debenture certificates are dispatched to the successful application while refund orders are posted to the others. If the amount paid on application is only half the face/nominal value, the company must mention the date by which the successful applicants are required to pay the balance. The company normally gives an allotment advice & after remittance of the first/final call, the fully paid share certificate is sent to the investor.

In case the applicant does not hear from the company regarding allotment/refund, he can approach the merchant banker to the issue & the Securities and the Exchange Board of India, lodging a written complaint giving particulars of the application form no., the bank at which the application was lodged, etc. the securities are listed by the concerned exchange once the company complies with the listing agreement of the exchange. Once the shares/debentures are listed, market forces decided the price of the same- the investor’s perception of the company, its management, the industry potential, the general economic environment, etc.

The primary market is an intermittent and discrete market where the initially listed shares are traded first time, changing hands from the listed company to the investors. It refers to the process through which the companies, the issuers of stocks, acquire capital by offering their stocks to investors who supply the capital. In other words primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is called an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus.

The issue of securities by companies can take place in any of the following methods:

• Initial public offer (securities issued for the first time to the public by the company);
• Further issue of capital;
• Rights issue to the existing shareholder. (on their renunciation, the shares can be sold by the company to others also);
• Offer of securities under reservation/firm allotment basis to :

i) Foreign partners & collaborators,

ii) Mutual funds

iii) Merchant bankers

iv) Banks and institutions

v) non resident Indians and overseas corporate bodies

vi) employee

• Offer to public
• Bonus issue.

The primary market (New Issues) is of great significance to the economy of a country. It is through the primary market that funds flow for productive purposes from investors to entrepreneurs. The latter use of funds for creating new products & rendering services to customers in India & abroad. The strength of the economy of a country is gauged by the activities of the Stock Exchanges. The primary market creates and offers the merchandise for the secondary market.

2. THE SECONDARY MARKET: The secondary market is where listed securities are bought and sold. Shares are normally issued having a face value of Rs. 10 or Rs. 100. The trading is normally done in what are known as market lots. For a share of face value Rs. 10, the market lot is 50 or 100 & for Rs. 100, the market lot is 1 or 5 shares respectively.

Secondary Market is the market where, unlike the primary market, an investor can buy a security directly from another investor in lieu of the issuer. It is also referred as “after market”. The securities initially are issued in the primary market, and then they enter into the secondary market. In other words, secondary market is a place where any types of used goods are available. In the secondary market shares are manoeuvred from one investor to other, that is, one investor buys an asset from another investor instead of an issuing corporation. So, the secondary market should be liquid. Example of secondary market is New York Stock Exchange, in the United States of America; all the securities belong to the secondary market. The secondary market has an important role to play behind the developments of an efficient capital market. Secondary market connects investors’ favouritism for liquidity with the capital users’ wish of using their capital for a longer period. For example, in a traditional partnership, a partner cannot access the other partner’s investment but only his or her investment in that partnership, even on an emergency basis. Then if he or she may breaks the ownership of equity into parts and sell his or her respective proportion to another investor. This kind of trading is facilitated only by the secondary market.

The secondary market is an on-going market, which is equipped and organized with a place, facilities and other resources required for trading securities after their initial offering. It refers to a specific place where securities transaction among many and unspecified persons is carried out through intermediation of the securities firms, i.e., a licensed broker, and the exchanges, a specialized trading organization, in accordance with the rules and regulations established by the exchanges.

1.3 ORIGIN OF INDIAN STOCK MARKET

The origin of the stock market relates back to the year 1494, when the Amsterdam Stock Exchange was set up. In India it dates back to the 18th century, an era when the East India Company was a dominant Institution in India. The real beginning occurred in the middle of the nineteenth century after the enactment of the companies Act in 1850, which introduced the features of limited liability and generated investor interest in corporate securities. An important early event in the development of the stock market in India was the formation of the native share and stock brokers ‘Association at Bombay in 1875, the precursor of the present day Bombay Stock Exchange.

The Ahmadabad Shares and Stock Association” was formed in the year 1894. The Calcutta Stock Exchange Association was formed by about 150 brokers on 15th June 1908. In the year 1920, one stock exchange was established in Northern India and one in Madras called “The Madras Stock Exchange”. “The Madras Stock Exchange Association Pvt. Ltd.” was established in the year 1941. On 29th April 1959, it was reorganized as a company limited by guarantee under the name and style of “Madras Stock Exchange” (MSE). The Lahore Stock Exchange was formed in the year 1934. However in the year 1936 after the Punjab Stock Exchange Ltd. came into existence, the Lahore Stock Exchange merged with it. In Calcutta, a second Stock Exchange by name “The Bengal Share & Stock Exchange Ltd.” was established in the year 1937 and likewise once again in the year 1938, Bombay also witnessed a rival Stock Exchange formed in the name of “Indian Stock Exchange Ltd.” The U.P. Stock Exchange was formed in Kanpur and the Nagpur Stock Exchange Ltd. in Nagpur in the year 1940. The Hyderabad Stock Exchange Ltd. was incorporated in the year 1944. Two stock exchanges which came into being in Delhi by the name “The Delhi Stock & Share Brokers Association Ltd.” and “The Delhi Stocks & Shares Exchange Association Ltd.” were amalgamated into “The Delhi Stock Exchange Association Ltd.” in the year 1947. Subsequently the Bangalore Stock Exchange was registered in the year 1957 and recognized in the year 1963. The third stock exchange in the state of Gujarat the “Vadodara Stock Exchange Ltd.” was incorporated in 1990. The Over the Counter Exchange of India (OTCEI) broadly based on the lines of NASDAQ (National Association of Securities Dealers Automated Quotation) of the USA was promoted and approved on August 1989. The National Stock Exchange of India Ltd. was incorporated in November 1992.

Without a stock exchange, the saving of the community- the sinews of economic progress and productive efficiency- would remain underutilized. The task of mobilization and allocation of savings could be attempted in the old days by a much less specialized institution than the stock exchanges. But as business and industry expanded and the economy assumed more complex nature, the need for ‘permanent finance’ arose. Entrepreneurs needed money for long term whereas investors demanded liquidity – the facility to convert their investment into cash at any given time. The answer was a ready market for investments and this was how the stock exchange came into being. Stock exchange means a body of individuals, whether incorporated or not, constituted for the purpose of regulating or controlling the business of buying, selling or dealing in securities.

These securities include:

(i) Shares, scrip, stocks, bonds, debentures stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ii) Government securities; and

(iii) Rights or interest in securities.

The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE) are the two primary exchanges in India. In addition, there are 22 Regional Stock Exchanges. However, the BSE and NSE have established themselves as the two leading exchanges and account for about 80 per cent of the equity volume traded in India. The NSE and BSE are equal in size in terms of daily traded volume. The average daily turnover at the exchanges has increased from Rs 851 crore in 1997-98 to Rs 1,284 crore in 1998-99 and further to Rs 2,273 crore in 1999-2000 (April – August 1999). NSE has around 1500 shares listed with a total market capitalization of around Rs 9, 21,500 crore.

The BSE has over 6000 stocks listed and has a market capitalization of around Rs 9, 68,000 crore. Most key stocks are traded on both the exchanges and hence the investor could buy them on either exchange. Both exchanges have a different settlement cycle, which allows investors to shift their positions on the bourses. The primary index of BSE is BSE Sensex comprising 30 stocks. NSE has the S&P NSE 50 Index (Nifty) which consists of fifty stocks. The BSE Sensex is the older and more widely followed index.

Today, there are a total of 24 recognised stock exchanges ii India, operating at a national or regional level.

Bombay Stock Exchange

National Stock Exchange

Regional Stock Exchanges

Ahmedabad Stock Exchange

Bangalore Stock Exchange

Bhubaneshwar Stock Exchange

Calcutta Stock Exchange

Cochin Stock Exchange

Coimbatore Stock Exchange

Delhi Stock Exchange

Guwahati Stock Exchange

Hyderabad Stock Exchange

Jaipur Stock Exchange

Ludhiana Stock Exchange

Madhya Pradesh Stock Exchange

Madras Stock Exchange

Magadh Stock Exchange

Mangalore Stock Exchange

Meerut Stock Exchange

OTC Exchange Of India

Pune Stock Exchange

Saurashtra Kutch Stock Exchange

Uttar Pradesh Stock Exchange

Vadodara Stock Exchange

Incorporation and Management

The NSE is owned by a set of leading Indian and International financial institutions, banks, insurance companies, private equity funds, mutual funds, venture capital funds etc. NSE was incorporated in November 1992, and received recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993. It is managed by professionals who do not directly or indirectly trade on the Exchange. The trading rights are with trading members who offer their services to the investors. The Board of NSE comprises of senior executives from promoter institutions and eminent professionals, without having any representation from trading members. While the Board deals with the broad policy issues, the Executive Committees (ECs), which include trading members, formed under the Articles of Association and the Rules of NSE for different market segments, set out rules and parameters to manage the day-today affairs of the Exchange. The day-to-day management of the Exchange is delegated to the Managing Director and CEO who is supported by a team of professional staff. Therefore, though the role of trading members at NSE is to the extent of providing only trading services to the investors, the Exchange involves trading members in the process of consultation and participation in vital inputs towards decision making. Tables 1-1 and 1-2 gives the composition of its Board of Directors and the Executive Committees.