3

Chapter 01
History of Stock Exchange in India

Indian stock market marks to be one of the oldest stock market in Asia. It dates back to the close
of 18th century when the East India Company used to transact loan securities. In the 1830s,
trading on corporate stocks and shares in Bank and Cotton presses took place in Bombay
informal group of 22 stockbrokers began trading under a banyan tree opposite the Town Hall of
Bombay from the mid-1850s, each investing a (then) princely amount of Rupee 1. This banyan
tree still stands in the Horniman Circle Park, Mumbai. In 1860, the exchange flourished with 60
brokers. In fact the 'Share Mania' in India began with the American Civil War broke and the
cotton supply from the US to Europe stopped. Further the brokers increased to 250. The informal
group of stockbrokers organized themselves as the Native Share and Stockbrokers Association
which, in 1875, was formally organized as the Bombay Stock Exchange (BSE). Though the
trading was broad but the brokers were hardly half dozen during 1840 and 1850.

BSE was shifted to an old building near the Town Hall. In 1928, the plot of land on which the
BSE building now stands (at the intersection of Dalal Street, Bombay Samachar Marg and
Hammam Street in downtown Mumbai) was acquired, and a building was constructed and
occupied in 1930. Premchand Roychand was a leading stockbroker of that time, and he assisted
in setting out traditions, conventions, and procedures for the trading of stocks at Bombay Stock
Exchange and they are still being followed. In 1956, the Government of India recognized the
Bombay Stock Exchange as the first stock exchange in the country under the Securities Contracts
(Regulation) Act. But still there was no means to measure the overall performance of the
exchange. So, in 1986, Bombay Stock Exchange developed BSE Sensex (Sensex = Sensitive
Index), an index of top 30 companies, which gave a means to measure the overall performance of
the Exchange.

Until late 1980s, BSE ran with low transparency and an unreliable clearing and settlement
systems. Towards the end of the 1980s, new economic forces, the economic growth and currency
crisis emphasized the need for modernization of the financial system. Government created
the Securities and Exchange Board of India (SEBI) in 1988.
 4

The most decisive period in the history of the BSE took place after 1992. In the aftermath of a
major scandal with market manipulation involving a BSE member named Harshad Mehta, BSE
responded to calls for reform with intransigence. The foot-dragging by the BSE helped radicalize
the position of the government, which encouraged the creation of the National Stock Exchange
(NSE), which created an electronic marketplace. NSE started trading on 4 November 1994.
Within less than a year, NSE turnover exceeded the BSE. BSE rapidly automated, but it never
caught up with NSE spot market turnover. The second strategic failure at BSE came in the
following two years. In November 1992, NSE (National Stock Exchange) was established as the
first electronically traded Stock Exchange in India. After a few years of operations, the NSE has
become the largest stock exchange in India.

BSE also automated the systems in 1995 but it never caught up with NSE Spot Market turnover.

Three segments of the NSE trading platform were established one after another. The Wholesale
Debt Market (WDM) commenced operations in June 1994 and the Capital Market (CM) segment
was opened at the end of 1994. Finally, the Futures and Options segment began operating in
2000. Today the NSE takes the 14th position in the top 40 futures exchanges in the world.

In 1996, the National Stock Exchange of India launched S&P CNX Nifty. CNX Nifty (Nifty =
National Fifty) is a diversified index of 50 stocks from 25 different economy sectors. NSE
embarked on the launch of equity derivatives trading. BSE responded by political effort, with a
friendly SEBI chairman (D. R. Mehta) aimed at blocking equity derivatives trading. The BSE
and D. R. Mehta succeeded in delaying the onset of equity derivatives trading by roughly five
years. But this trading, and the accompanying shift of the spot market to rolling settlement, did
come along in 2000 and 2001 - helped by another major scandal at BSE involving the then
President Mr. Anand Rathi. NSE scored nearly 100% market share in the runaway success of
equity derivatives trading, thus consigning BSE into clearly second place. Today, NSE has
roughly 66% of equity spot turnover and roughly 100% of equity derivatives turnover.1

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Sodhganga, History & Evolution of Stock Exchanges in India(9:23PM, 8/10/2019)
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Chapter 02

Major Stock Exchanges in India

Bombay Stock Exchange

Established in 1875, BSE (formerly known as Bombay Stock Exchange Ltd.), is Asia's first &
the Fastest Stock Exchange in world with the speed of 6 micro seconds and one of India's leading
exchange groups. Over the past 141 years, BSE has facilitated the growth of the Indian corporate
sector by providing it an efficient capital-raising platform. Popularly known as BSE, the bourse
was established as "The Native Share & Stock Brokers' Association" in 1875. Today BSE
provides an efficient and transparent market for trading in equity, currencies, debt instruments,
derivatives, mutual funds. It also has a platform for trading in equities of small-and-medium
enterprises (SME). India INX, India's 1st international exchange, located at GIFT CITY IFSC in
Ahmedabad is a fully owned subsidiary of BSE. BSE is also the 1st listed stock exchange of
India.

BSE provides a host of other services to capital market participants including risk management,
clearing, settlement, market data services and education. It has a global reach with customers
around the world and a nation-wide presence. BSE systems and processes are designed to
safeguard market integrity, drive the growth of the Indian capital market and stimulate
innovation and competition across all market segments. BSE is the first exchange in India and
second in the world to obtain an ISO 9001:2000 certification. It is also the first Exchange in the
country and second in the world to receive Information Security Management System Standard
BS 7799-2-2002 certification for its On-Line trading System (BOLT). It operates one of the most
respected capital market educational institutes in the country (the BSE Institute Ltd.). BSE also
provides depository services through its Central Depository Services Ltd. (CDSL) arm. BSE's
popular equity index - the S&P BSE SENSEX - is India's most widely tracked stock market
benchmark index. It is traded internationally on the EUREX as well as leading exchanges of the
BRCS nations (Brazil, Russia, China and South Africa).
 6

While BSE Ltd is now synonymous with Dalal Street, it was not always so. The first venue of
the earliest stock broker meetings in the 1850s was in rather natural environs - under banyan
trees - in front of the Town Hall, where Horniman Circle is now situated. A decade later, the
brokers moved their venue to another set of foliage, this time under banyan trees at the junction
of Meadows Street and what is now called Mahatma Gandhi Road. As the number of brokers
increased, they had to shift from place to place, but they always overflowed to the streets. At last,
in 1874, the brokers found a permanent place, and one that they could, quite literally, call their
own. The new place was, aptly, called Dalal Street (Brokers' Street).The journey of BSE Ltd. is
as eventful and interesting as the history of India's securities market. In fact, as India's biggest
bourse in terms of listed companies and market capitalization, almost every leading corporate in
India has sourced BSE Ltd. services in raising capital and is listed with BSE Ltd. Even in terms
of an orderly growth, much before the actual legislations were enacted, BSE Ltd. had formulated
a comprehensive set of Rules and Regulations for the securities market. It had also laid down
best practices which were adopted subsequently by 23 stock exchanges which were set up after
India gained its independence. BSE Ltd., as an institutional brand, has been and is synonymous
with the capital market in India. Its S&P BSE SENSEX is the benchmark equity index that
reflects the health of the Indian economy2.

At par with international standards, BSE Ltd. has been a pioneer in several areas over the
decades and has many firsts and key achievements to its credit. BSE is the first exchange in India
to -

 Launch a special platform for trading in SME securities

 Introduce Equity Derivatives

 Launch a Free Float Index - S&P BSE SENSEX

 Launch Exchange Enabled Internet Trading Platform

 Obtain ISO certification for a stock exchange

 Exclusive facility for financial training – BSE Institute Ltd.

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 Launch its website in Hindi and regional languages

 Host the popular opening-bell ceremony in Indian capital markets

 Launch mobile-based trading in India in Sept 2010

National Stock Exchange

The National Stock Exchange (NSE) is the leading stock exchange in India and the fourth
largest in the world by equity trading volume in 2015, according to World Federation of
Exchanges (WFE).It began operations in 1994 and is ranked as the largest stock exchange in
India in terms of total and average daily turnover for equity shares every year since 1995,
based on annual reports of SEBI. NSE launched electronic screen-based trading in 1994,
derivatives trading (in the form of index futures) and internet trading in 2000, which were
each the first of its kind in India. NSE has a fully-integrated business model comprising our
exchange listings, trading services, clearing and settlement services, indices, market data
feeds, technology solutions and financial education offerings. NSE also oversees compliance
by trading and clearing members and listed companies with the rules and regulations of the
exchange. NSE is a pioneer in technology and ensures the reliability and performance of its
systems through a culture of innovation and investment in technology. NSE believes that the
scale and breadth of its products and services, sustained leadership positions across multiple
asset classes in India and globally enable it to be highly reactive to market demands and
changes and deliver innovation in both trading and non-trading businesses to provide high-
quality data and services to market participants and clients. Mr. Ashok Chawla is the
Chairman of the Board of Directors of NSE and Mr. Vikram Limaye is the Managing Director
and CEO of NSE. National Stock Exchange has a total market capitalization of more than
US$1.41 trillion, making it the world’s 12th-largest stock exchange as of March 2016. NSE's
flagship index, the NIFTY 50, the 51 stock index (50 companies with 51 securities inclusive
of DVR), is used extensively by investors in India and around the world as a barometer of the
Indian capital markets. However, only about 4% of the Indian economy / GDP is actually
derived from the stock exchanges in India.
 8

NSE was mainly set up to bring in transparency in the markets. Instead of trading
membership being confined to a group of brokers, NSE ensured that anyone who was
qualified, experienced and met minimum financial requirements was allowed to trade. In this
context, NSE was ahead of its times when it separated ownership and management in the
exchange under SEBI's supervision. The price information which could earlier be accessed
only by a handful of people could now be seen by a client in a remote location with the same
ease. The paper-based settlement was replaced by electronic depository-based accounts and
settlement of trades was always done on time. One of the most critical changes was that a
robust risk management system was set in place, so that settlement guarantees could protect
investors against broker defaults.

NSE was also instrumental in creating the National Securities Depository Limited (NSDL)
which allows investors to securely hold and transfer their shares and bonds electronically. It
also allows investors to hold and trade in as few as one share or bond. This not only made
holding financial instruments convenient but more importantly, eliminated the need for paper
certificates and greatly reduced the incidents of forged or fake certificates and fraudulent
transactions that had plagued the Indian stock market. The NSDL's security, combined with
the transparency, lower transaction prices and efficiency that NSE offered, greatly increased
the attractiveness of the Indian stock market to domestic and international investors.

NSE is committed to improve the financial well-being of people. With a vision to continue to
be a leader, establish global presence, facilitate the financial well-being of people. NSE is
committed to the following core values:

• Integrity

• Customer focused culture

• Trust, respect and care for the individual

• Passion for excellence

• Teamwork
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Chapter 03

The Role of the Stock Exchange in the Economy

Stock exchanges play a vital role in the functioning of the economy by providing the backbone to
a modern nation's economic infrastructure. Stock exchanges help companies raise money to
expand. They also provide individuals the ability to invest in companies. Stock exchanges
provide order and impose regulations for the trading of stocks. Finally, stock exchanges and all
of the companies that are associated with the stock exchanges provide hundreds of thousands of
jobs.

Business Expansion

Stock exchanges provide companies the ability to raise capital to expand their businesses. When
a company needs to raise money they can sell shares of the company to the public. They
accomplish this by listing their shares on a stock exchange. Investors are able to buy shares of
public offerings and the money that is raised from the investors is used by the company to
expand operations, buy another company or hire additional workers. All of this leads to increased
economic activity which helps drive the economy.

Widespread Investing

Stock exchanges allow any person to invest in the greatest companies in the world. Investors,
both large and small, use the stock exchanges to buy into a company's future. Investing would
not be possible for the average person if there was not a centralized place to trade stocks. The
ability for the average person to invest in these companies leads to increased wealth for the
investors. This increased wealth then leads to additional economic activity when the investors
spend their money.

Increased Investor Class

The stock exchanges provide order and regulation to the process of stock trading. Without the
regulations and the shareholder protections that the stock exchanges provide few people would
be willing to invest in stocks. Because of the oversight of the stock exchanges the average person
 10

has the confidence to invest in stocks and this leads to more people become a part of the investor
class. The investors' wealth grows over time, which allows them to contribute more to the
economy.

Direct Jobs

The stock exchanges and all of the companies that serve the stock exchanges such a brokerage
firms, investment banks and financial news organizations employ hundreds of thousands of
people. Most of the jobs related to stock exchanges are well paying and career orientated jobs.
As a result, the employees of these firms are able to help spur economic activity.3

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Eric Scott, The Role of the Stock Exchange in the Economy https://www.sapling.com/5244730/role-stock-
exchange-economy(7:23PM, 18/10/2019)
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Chapter 04

How Stock Exchange to boost the Economy

The role of stock markets as a source of economic growth has been widely debated. It is well
recognized that stock markets influence economic activity through the creation of liquidity.
Liquid financial market was an important enabling factor behind most of the early innovations
that characterized the early phases of the Industrial Revolution

Following are the some of its major functions

1. Raising capital for businesses:

The Stock Exchange provides companies with the facility to raise capital for expansion
through selling shares to the investing public. Stock markets are, first and foremost,
financial institutions established to help businesses and entrepreneurs come together to
buy, sell and trade shares for the purpose of providing capital to enterprises that need it.
Were it not for stock exchanges, entrepreneurs would be left to their own devices to find
investors, and consumers could wind up at the mercy of unlicensed and unregulated
financial products with no oversight. Emerging from the stock market system are unique
financial terms and concepts including initial public offerings, or IPOs, an international
acronym for new business stock introductions.

2. Mobilizing savings for investment:

When people draw their savings and invest in shares, it leads to a more rational allocation
of resources because funds, which could have been consumed, or kept in idle deposits
with banks, are mobilized and redirected to promote business activity with benefits for
several economic sectors such as agriculture, commerce and industry, resulting in a
stronger economic growth and higher productivity levels and firms.

3. Facilitating company growth:

Companies view acquisitions as an opportunity to expand product lines, increase
distribution channels, hedge against volatility, increase its market share, or acquire other
 12

necessary business assets. A takeover bid or a merger agreement through the stock
market is one of the simplest and most common ways for a company to grow by
acquisition or fusion.

4. Redistribution of wealth:
Stocks exchanges do not exist to redistribute wealth. However, both casual and
professional stock investors, through dividends and stock price increases that may result
in capital gains, will share in the wealth of profitable businesses.

5. Creating investment opportunities for small investors:

As opposed to other businesses that require huge capital outlay, investing in shares is
open to both the large and small stock investors because a person buys the number of
shares they can afford. Therefore the Stock Exchange provides the opportunity for small
investors to own shares of the same companies as large investors.

6. Government capital-raising for development projects:

Governments at various levels may decide to borrow money in order to finance
infrastructure projects such as sewage and water treatment works or housing estates by
selling another category of securities known as bonds. These bonds can be raised through
the Stock Exchange whereby members of the public buy them, thus loaning money to the
government. The issuance of such bonds can obviate the need to directly tax the citizens
in order to finance development, although by securing such bonds with the full faith and
credit of the government instead of with collateral, the result is that the government must
tax the citizens or otherwise raise additional funds to make any regular coupon payments
and refund the principal when the bonds mature.

7. Barometer of the economy:

At the stock exchange, share prices rise and fall depending, largely, on market forces.
Share prices tend to rise or remain stable when companies and the economy in general
show signs of stability and growth. An economic recession, depression, or financial crisis
could eventually lead to a stock market crash. Therefore the movement of share prices
 13

and in general of the stock indexes can be an indicator of the general trend in the
economy.

8. Corporate governance:
By having a wide and varied scope of owners, companies generally tend to improve on
their management standards and efficiency in order to satisfy the demands of these
shareholders and the more stringent rules for public corporations imposed by public stock
exchanges and the government. Consequently, it is alleged that public companies
(companies that are owned by shareholders who are members of the general public and
trade shares on public exchanges) tend to have better management records than privately-
held companies.

9. Financial Accountability
Sophisticated financial market systems require credibility and accountability if they are to
function on behalf of businesses and investors as interested in ethics as they are in profits.
For this reason, a stock exchange benefits from a formal structure upheld by rules, laws
and regulations. Management and operational standards set by governments, bureaus and
agencies overseeing stock exchange operations add authority and oversight to the
institution, giving stockholders, investors and businesses checks and balances necessary
for investor confidence.

10. Economic Effects

The direct effect of stock market activity can impact a nation’s economy in multiple
ways. Stocks fall, spending stops, consumers lose confidence and a nation's financial
state begins to falter. Conversely, stocks rise, confidence spreads, spending and
investments grow. A nation’s mood can rise or fall on stock market activity and
performance, which shows how important the role played by a stock exchange can be in a
society’s social and fiscal fabric.

11. Expanded Diversity

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If one of the stock market’s roles is to bring together like-minded investors, exchanges
also serve as fiscal melting pots, giving minority businesses an opportunity to place
shares of new company assets before potential stakeholders who might not otherwise
learn about diverse new products were it not for the exchange. Few economies can hope
to flourish without infusions of new ideas, systems and opportunities -- all represented by
cash -- which is why this confluence of financial needs and wants regularly merges on the
floor of a vibrant stock exchange.4

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Conclusion

Stock exchanges perform important roles in national economies. Most importantly, they
encourage investment by providing places for buyers and sellers to trade securities. This
investment, in turn, enables corporations to obtain funds to expand their businesses. Stock
exchanges also encourage investment in other ways. They protect investors by upholding rules
and regulations that ensure buyers will be treated fairly and receive exactly what they pay for.
Exchanges also support state-of-the-art technology and the business of brokering. This support
helps traders buy and sell securities quickly and efficiently. Of course, being able to sell a
security in the secondary market increases the relative safety of investing because investors can
unload a stock that may be on the decline or that faces an uncertain future.

In deciding whether to seek a listing, a company should consider the alternative financing needs
available and the benefits versus the drawbacks of listings.

Benefits

 Creating a market for the company's shares

 Enhancing the status and financial standing of the company

 Increasing public awareness and public interest in the company and its products

 Providing the company with an opportunity to implement share option schemes for their
employees

 Accessing to additional fund raising in the future by means of new issues of shares or
other securities

 Facilitating acquisition opportunities by use of the company's shares

 Offering existing shareholders a ready means of realizing their investments

Drawbacks

While there are benefits to going public, it also means additional obligations and reporting
requirements on the companies and its directors:
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 Increasing accountability to public shareholders

 Need to maintain dividend and profit growth trends

 Becoming more vulnerable to an unwelcome takeover

 Need to observe and adhere strictly to the rules and regulations by governing bodies

 Increasing costs in complying with higher level of reporting requirements

 Relinquishing some control of the company following the public offering

 Suffering a loss of privacy as a result of media interest

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References

Books
1. Machiraju, H.R. 1995 .The working of stock Exchanges in India. New Delhi: Wiley Eastern Limited.
2. Raghunathan, V. 1994. Stock Exchanges and Investments. New Delhi: Tata McGraw –Hill publishing
company Limited.

Journals
1. Stock Exchanges: Behind the Ruse of Demutualizing. (2001). Economic and Political Weekly, 36(12),
993-994. Retrieved from http://www.jstor.org/stable/4410416
2. Sucheta Dalal. (1999). Setting the Agenda for Change in Indian Capital Market: Five Years of
National Stock Exchange. Economic and Political Weekly, 34(36), 2541-2544. Retrieved from
http://www.jstor.org/stable/4408362
3. Patil, R. (2002). Demutualization of Stock Exchanges. Economic and Political Weekly, 37(12), 1103-
1105. Retrieved from http://www.jstor.org/stable/4411896

Websites
1. http://commerceplus.blogspot.in/20
2. http://www.rediff.com/money/report/perfin-how-does-a-stock-exchange-function/20090925.htm
3. https://www.nseindia.com/global/content/about_us/about_us.htm
4. http://www.bseindia.com/static/about/introduction.aspx?expandable=0
5. http://shodhganga.inflibnet.ac.in/bitstream/10603/20277/07_chapter%202.pdf