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
The Indian Capital Market
2
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 exist even without direct contact of buyer and
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 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)
The Indian Capital Market – An Overview
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
exist even without direct contact of buyer and
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.
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)
The Indian Capital Market – An Overview
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
The Indian Capital Market – An Overview
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)
The Indian Capital Market
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
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 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
The Indian Capital Market – An Overview
“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
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
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
The Indian Capital Market – An Overview
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.
The Indian Capital Market – An Overview
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.
The Indian Capital Market – An Overview
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.
The Indian Capital Market – An Overview
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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The Indian Capital Market – An Overview
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
The Indian Capital Market – An Overview
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
The Indian Capital Market – An Overview
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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
The Indian Capital Market
14
Philippine Stock Exchange,
Milan Stock Exchange, Italy
Paris Stock Exchange,
SWX Swiss Exchange, Mexican Stock Exchange, Mexico
Hong Kong Stock Exchange
The Indian Capital Market – An Overview
Paris Stock Exchange, France
Hong Kong Stock Exchange, China
The Indian Capital Market – An Overview
15
Australian Securities Exchange, Australia
Madrid Stock Exchange, Spain
NASDAQ, America
Osaka Securities Exchange, Japan
Toronto Stock Exchange, Canada
Islamabad Stock Exchange, Pakistan
The Indian Capital Market – An Overview
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
The Indian Capital Market
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
The Indian Capital Market – An Overview
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
The Indian Capital Market – An Overview
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
The Indian Capital Market – An Overview
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
The Indian Capital Market – An Overview
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.
The Indian Capital Market – An Overview
21
Map 1.2
Source: http://www.mapsofindia.com/maps/india/stock_exchange.htm accessed on
April 4, 2011
The Indian Capital Market – An Overview
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
The Indian Capital Market – An Overview
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
The Indian Capital Market – An Overview
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
The Indian Capital Market – An Overview
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
The Indian Capital Market – An Overview
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
tors
Affe
ctin
g P
erfo
rman
ce o
f Sto
ck E
xcha
nge
Mar
ket
Cap
italiz
atio
n
Num
bers
of
List
ed
Com
pani
es
Geo
grap
hica
l C
over
age
Exp
erie
nce
of
Sto
ck E
xcha
nge
-H
ow o
ld it
is?
Em
ploy
ees
of S
tock
E
xcha
nges
Pro
duct
s Tr
aded
The
Indi
an C
apita
l Mar
ket
27
Cha
rt 1
.4
Fac
tors
Affe
ctin
g P
erfo
rman
ce o
f Sto
ck E
xcha
nge
Fac
tors
Affe
ctin
g P
erfo
rman
ce o
f S
tock
Exc
hang
eOnl
ine
Trad
ing
Fac
ility
Liqu
idity
Nat
ural
C
alam
ities
Bro
kers
,Jo
bber
s &
In
vest
ors
Gov
ernm
ent
-Fic
al P
olic
y-M
onet
ory
Pol
icy
Mar
gin
Trad
ing
T
he In
dian
Cap
ital M
arke
t –
An
Ove
rvie
w
Liqu
idity
FD
I &
FII
Vola
tility
Pop
ular
ity
Terr
oris
m
Gov
ernm
ent
Pol
ocie
sF
ical
Pol
icy
Mon
etor
y P
olic
y -S
EB
I
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
The Indian Capital Market
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
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
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. 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
The Indian Capital Market – An Overview
National Stock Exchange have these
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
In the derivative market trading is done mainly through two instruments – the
Future contract and the Option contract. In both these types of contracts the stocks are
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
The Indian Capital Market
29
1.10 Types of Transactions
The flowchart below describes the types of transactions that can be carried out
on the Indian stock exchanges:
Chart 1.6
Transactions on Indian Stock Exchanges
Indian stock exchange allows a member broker to perform following
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
The stock exchanges are the exclusive centre for trading of securities. At
present, there are 23 operative stock exchanges in India. Most of them are
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. 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
The Indian Capital Market – An Overview
The flowchart below describes the types of transactions that can be carried out
Transactions on Indian Stock Exchanges
Indian stock exchange allows a member broker to perform following
Buy and sell securities for his clients and charge commission for the same,
Structure of the Secondary Market
The stock exchanges are the exclusive centre for trading of securities. At
operative stock exchanges in India. Most of them are
incorporated as ‘Association of Persons’ of section 25 companies under the
Companies Act. These are organized as ‘mutuals’ and considered beneficial in terms
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
The Indian Capital Market – An Overview
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.
The Indian Capital Market – An Overview
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.
The Indian Capital Market – An Overview
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
The Indian Capital Market – An Overview
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