Evolution & Growth of stock exchanges14/05/2020
The earliest stock exchange was set up in Amsterdam in 1602 and it was involved in buying and selling of shares for Dutch East India Company. Prior to this, brokers existed in France dealing with government securities. It must be noted that the first real stock exchange started in Philadelphia in the United States during the late 18th century. Later, the New York Stock Exchange became popular and Wall Street became the hotspot of brokerage activities. Earlier stockbrokers were largely unorganised, but later most of them joined hands to form institutions and organisations.
Security Trading in India goes back to the 18th century when East India Company began trading in loan securities.
Derivatives market have been functioning in India in some form or the other for a long time. Corporate shares with the stock of Bank and Cotton presses started being traded in the 1830s in Mumbai with Bombay Cotton Trade Association being the first to start future trading in 1875 in the arena of commodities trading and by the early 1900s, India had one of the world’s largest futures industry. Going back to 1850s the roots of stock exchanges in India sprouting when 22 stockbrokers began trading opposite the Town Hall of Bombay under a banyan tree. The tree is still present in the area and is known as Horniman Circle.
This trading continued till a shift to banyan trees at the Meadows Street Junction, which is now known as Mahatma Gandhi Road, a decade later. The shift was an ongoing one and number of brokers gradually increased finally settling in 1874 at what is known as Dalal Street. The group of 318 people came together to form “Native Shares and Stock Brokers Association” and the membership fee was Re 1. This association is now known as Bombay Stock Exchange (BSE) and in 1965 it was given permanent recognition by the Government of India under the Securities Contracts (Regulation) Act (SCRA), 1956. BSE is also the oldest stock exchange in Asia and it is been 144 years since it has been formed. Following its formation, Ahmedabad stock exchange came into operation in 1894 trading in shares of textile mills. Another development in the history of stock exchanges began with the Calcutta stock exchange opening up in 1908 and began trading shares of plantations and jute mills. It was followed by Madras Stock Exchange starting in 1920.
Post-independence Era and Reforms in the market
There were a series of reforms in the stock market between 1993 and 1996 which further lead to the development of exchange-traded equity derivatives markets in India.
There was a certain element of the trading system called “Badla” involving some elements of forwards trading which had been in existence for decades. This practice led to the growth of undesirable market practices and to check this development it was prohibited off and on till it was banned in 2001. In the 1980s stockbroking services were restricted only to the wealthy class who could afford them. With the spread of the Internet, stockbroking became accessible.
In the 1990s stock market witnessed a steady increase in stock market crises. An aspect of these crises was market manipulation on the secondary market. Following are the incidents which prompted the development of the stock market:
- 1992: Harshad Mehta: The first “stock market scam” was one which involved both the GOI bond and equity markets in India. Thereafter, manipulation was based on inefficiencies in the settlement system in GOI bond market transactions. Inflation came about in the equity markets and the market index went up by 143% between September 1991 and April 1992 and the amount involved in the crises was Rs 54 billion.
- 1994: MS Shoes: Here the dominant shareholder of the firm, took large leveraged positions through brokers at both Delhi and Bombay stock exchanges, to manipulate share prices prior to the rights issue. After the share prices crashed, broker defaulted and BSE shut down for three days in a consequence.
- 1995: Sesa Goa: Another episode of market crises for the BSE, was the case of price manipulation of the shares of Sesa Goa. This was perpetrated by two brokers, who later failed on their margin payments on leveraged positions in the shares and the exposure was around 4.5 million.
- 1995: Bad deliveries of physical certificates: When anonymous trading and the nationwide settlement became the norm by the end of 1995, there was an increased incidence of fraudulent shares being delivered into the market. It has been the expected cost of encountering fake certificates in equity settlement in India at the time was as high as 1%.
- 1997: CRB. C.R. Bhansali created a group of companies, called the CRB group, which was a conglomerate of finance and non-finance companies. Market manipulation was an important focus of group activities. The non-finance companies routed funds to finance companies for price manipulations. The non-finance companies were tasked with sourcing funds from external sources, using manipulated performance numbers. The CRB episode was particularly important in the way it exposed extreme failures of supervision on part of RBI and SEBI. The amount involved in the episode was Rs 7 billion.
- 1998: BPL, Videocon and Sterlite: This is an episode of market manipulation involving the broker that engineered the stock market bubble of 1992, Harshad Mehta. He seems to have worked on manipulating the share prices of these three companies, in collusion.
- 2001: Ketan Parekh. This was triggered by a fall in the prices of IT stocks globally. Ketan Parekh was seen to be a leader of the episode, with leveraged positions onset of stocks called the “K10 stocks”. There are allegations of fraud in this crisis with respect to an illegal “Badla” market at the Calcutta Stock Exchange and banking fraud.
The above instances have had a disruptive effect on the market that is(i) pricing efficiency (ii) intermediation between households investing in shares and firms financing projects by issuing shares which were resolved by reform measures by the government.
In the post-independence era, the BSE dominated the volume of trading. However, the low level of transparency and undependable clearing and settlement systems, apart from other macro factors, increased the need for a financial market regulator, and the SEBI was born in 1988 as a non-statutory body. Later it was made a statutory body in 1992.
Thereafter, in 1952 cash settlement and options trading were prohibited by the government and derivatives trading shifted to informal forwards market. At present, the government allows for markets based pricing mechanism and shows less scepticism towards derivatives trading. The prohibition on futures trading of many commodities was lifted starting in the early 2000s and national electronic exchanges were created. In the 1980s stockbroking services were used only by a wealthy class who could afford them. With the rise of the Internet, stockbroking services became accessible to even the common man. Major organisations became involved in stockbroking activities.
Although in the wake of Harshad Mehta scam in 1992, there was a pressing need for another stock exchange large enough to compete with BSE and bring transparency to the stock market. It leads to the development of the National Stock Exchange (NSE). It was incorporated in 1992, became recognised as a stock exchange in 1993, and trading began on it in 1994. It was the first stock exchange on which trading was conducted electronically. In response to this competition, BSE also introduced an electronic trading system known as BSE Online Trading (BOLT) in 1995.
Thereafter, BSE launched its own sensitivity index, the Sensex, known at present as the S&P BSE Sensex, in 1986 with 1978-79 as the base year. This is an index of 30 companies and is a benchmark stock index, measuring the overall performance of the exchange. Equity derivatives were introduced by the exchange in 2000. Index options launched in June 2001, stock options in July 2001, and stock futures in November 2001. India’s first free-float index, BSE Teck, was launched in July 2001.
Its competitor, NSE launched its benchmark exchange, the CNX Nifty, now known as Nifty 50, in 1996. It comprises of 50 stocks and functions as a performance measure of the exchange. In terms of electronic screen-based trading and derivatives, it has left behind its competitor BSE by introducing first of its kind products and services.
Stock exchanges at present
After incorporation of BSE and NSE, 23 stock exchanges were added not including the BSE. At present, there are 23 approved stock exchanges in India out of which 6 are functional:-
- BSE Ltd
- Calcutta Stock Exchange
- India International Exchange (India INX)
- Metropolitan Stock Exchange
- NSE IFSC Ltd
Thus, from the times when buyers and sellers had to assemble at stock exchanges for trading till the present times when the dawn of IT has made the operations at stock exchanges electronic hence making stock markets paperless. Trading facilities can be accessed from home or office on phone or Internet. Therefore, with new products and services, rampant growth in stock trading can be foreseen.