FUNCTIONING OF STOCK MARKET IN INDIA

Submitted to:

Ms. Kriti Shrivastava

Submitted by:

Sarthak Singh

BALLB-B
 ACKNOWLEDGEMENT

Heart full thanks to the following people….

I express my sincere and deep sense of gratitude to my esteemed guide Ms. Kriti Shrivastava
lecturer in LAW Dep’t., CHRIST ACADEMY INSTITUTE OF LAW, BENGALURU for his
continued support and supervision. I am highly obliged to him for providing me the opportunity
to work under his guidance. It was his scholarly suggestions, immense interest and moral support
that helped in competing the work confidently and successfully.

I would also place on record my gratitude to all teachers of CHRIST ACADEMY INSTITUTE
OF LAW, BENGALURU for their constant encouragement.

(SARTHAK SINGH)
 CONTENTS
ACKNOWLEDGEMENT

Introduction
 About Stock Exchange
 Brief History of Stock Exchanges in India
 The Stock Exchanges
 Function of Stock Exchange

Bibliography
 ABOUT STOCK EXCHANGE

“Stock Exchange is an institution evolved in industrially developed capitalist economics with

free market mechanism”. In typical free market, the individual investor would ideally choose to
make money available to those new or existing enterprises which offer the best prospect of
immediate and continuing profit. And since he is entitled to withdraw money from a less
profitable enterprise by selling his shares, as long as he can find a buyer and to reinvest it, he will
be continually looking for new and more profitable outlets for his money. Therefore, in theory,
stock exchange was termed as institution allocator of resources par excellence.

The stock exchange an institution broadly fulfilling the following objectives:

 Making funds available to entrepreneurs for business activity;
 Ensuring maximum return on the investment made by the investors;
 Providing platform for saving, investment and reinvestment activity.

In India, however, the institution of stock exchange evolved and developed as an

organization offering place for speculative activity, which had little to do with industrial
financing and investment activity. After 1865, a number of financial failures and problems in
speculative activity led brokers to form an association in 1875. “It was only the disaster that
followed the boom, which brought the brokers together in July, 1875 to form an association that
is today called the Stock Exchange, Bombay.

Stock exchange remain absolutely on the borders of industrial financing and investment
activity in pre-independence economy, the primary reason being the general distrust by the
public of private business. With the absence of any meaningful role in industrial financing and
investment activity, the functioning, organization and management of the institution of stock
exchange tended to develop as that of an organization primarily concerned with speculative
activity. The organization and management of major stock exchanges formed during this period
did not prove to be positive to the developments and desirable changes later, more particularly
during the period of 1980’s.
 The recent reforms in stock markets were triggered by issues of surveillance and any
developments that will have a bearing on the quality and effectiveness of the surveillance and
implications on the quality of growth. This is an important aspect that should be seriously
addressed to the stock markets and the regulators. While government and regulatory authorities
will have a greater role to play in promoting competition, the stock exchanges at their individual
level have to take keen interest and initiate measures that would promote greater inter-exchange
cooperation helping each other on overcoming shortfalls and setbacks. A fair degree of
cooperation is required with in the stock exchanges in the country to avoid imprudent practices
and inducements that will be harmful to the health of the markets,

The term ‘Stock Market' is a concept for the mechanism that enables the trading of
company stocks (collective shares), other securities and derivatives. The stock market is one of
the most important sources for companies to raise money. This allows businesses to go public, or
raise additional capital for expansion. The liquidity that an exchange provides affords investors
the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks,
compared to other less liquid investments such as real estate.

History has shown that the price of shares and other assets is an important part of the
dynamics of economic activity, and can influence or be an indicator of social mood. Rising share
prices, for instance, tend to be associated with increased business investment and vice versa.
Share prices also affect the wealth of households and their consumption. Therefore, central banks
tend to keep an eye on the control and behavior of the stock market and, in general, on the
smooth operation of financial system functions. .

Exchanges also act as the clearinghouse for each transaction, meaning that they collect
and deliver the shares, and guarantee payment to the seller of a security. This eliminates the risk
to an individual buyer or seller that the counterparty could default on the transaction.

The smooth functioning of all these activities facilitates economic growth in that lower
costs and enterprise risks promote the production of goods and services as well as employment.
In this way the financial system contributes to increased prosperity.
 Despite its expansion a very small percentage of household’s savings is channelised into
the securities market. What worries further is the intention revealed that the majority of existing
shareholders are unlikely to invest in the securties market in the coming years. It indicates lack
of condidence by the existing investors in the securties market. The recent crises on the equity
market has highlighted the deficiencies of governance with broker-run exchanges. While there is
a broad agreement that the governance structures of the broker-run exchanges need to be
transformed.

HISTORY OF STOCK EXCHANGES IN INDIA

The origin of stock exchanges in India can be traced back to the later half of 19 th century. After
the American Civil War (1860-61) due to the share mania of the public, the number of brokers
dealing on shares increased. The brokers organised an informal association in Mumbai named
“The Native Stock and Share Brokers Association” in 1875.

Increased activity in trade and commerce during the First World War and Second World
War resulted in an increase in stock trading. Stock exchanges were established in different
centres like Chennai, Delhi, Nagpur, Kanpur, Hyderabad and Banglore. The growth of stock
exchanges suffered a set back after the end of World War. Worldwide depression affected them.
Most of the stock exchanges in the early stages had a speculative nature of working without
technical stregth. Securties and Contract Regulation Act, 1956 gave powers to the central
government to regulate the stock exchanges. The stock exchanges in Mumbai, Calcutta, Chennai,
Ahmedabad, Delhi, Hyderabad and Indore were recognised by the SCR Act.

Till recent past, floor trading took places in all stock exchanges. In the flooe trading
system, the trade takes place through open outcry system during the official trading hours.
Trading posts are assigned for different securties were buy and sell activities of securties took
place. This system needs a face to face contact among the traders and restict the trading volume.
The speed of new information reflected on the prices was rather slow. The deals were also not
transparent and the system favoured the brokers rather than the investors.
 The setting up of NSE and OTCEI with the screen-based trading facility resulted in more
and more stock exchanges turning towards the computer-based trading. Bombay stock exchange
introduced the screen-based trading system in 1995.

Madras stock exchange introdued Automated Network Trading System (MANTRA) on Oct 7 th
1996. Apart from Bombay stock exchange, Vadodara, Delhi, Pune, Banglore, Calcutta abd
Ahmedabad stock exchanges have introduced screen-based trading. Other exchanges are also
planning to shift to the scren based trading.

One of the oldest stock markets in Asia, the Indian Stock Markets have a 200 years old history.

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
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 Rs. 2850 could only be sold at Rs. 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 Lahoe 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 was
established
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 Estock 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:

1. Bombay
2. Calcutta
3. Madras
4. Ahmedabad
5. Delhi
6. Hyderabad
7. Bangalore
8. Indore

Many more stock exchanges were established during 1980's, namely:

1. Cochin Stock Exchange (1980)

2. Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982)
3. Pune Stock Exchange Limited (1982)
4. Ludhiana Stock Exchange Association Limited (1983)
5. Gauhati Stock Exchange Limited (1984)
6. Kanara Stock Exchange Limited (at Mangalore, 1985)
7. Magadh Stock Exchange Association (at Patna, 1986)
8. Jaipur Stock Exchange Limited (1989)
9. Bhubaneswar Stock Exchange Association Limited (1989)
10. Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989)
11. Vadodara Stock Exchange Limited (at Baroda, 1990)
 12. Coimbatore Stock Exchange
13. Meerut Stock Exchange

At present, there are twenty-one recognized stock exchanges in India which does not include the
Over The Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of
India Limited (NSEIL).

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 following table:

S.
As on 31st December 1946 1961 1971 1975 1980 1985 1991 1995
No.
1 No. of Stock Exchanges 7 7 8 8 9 14 20 22
2 No. of Listed Cos. 1125 1203 1599 1552 2265 4344 6229 8593
No. of Stock Issues of Listed
3 1506 2111 2838 3230 3697 6174 8967 11784
Cos.
Capital of Listed Cos. (Cr.
4 270 753 1812 2614 3973 9723 32041 59583
Rs.)
Market value of Capital of
5 971 1292 2675 3273 6750 25302 110279 478121
Listed Cos. (Cr. Rs.)
Capital per Listed Cos. (4/2)
6 24 63 113 168 175 224 514 693
(Lakh Rs.)
Market Value of Capital per
7 86 107 167 211 298 582 1770 5564
Listed Cos. (Lakh Rs.) (5/2)
Appreciated value of Capital
8 358 170 148 126 170 260 344 803
per Listed Cos. (Lak Rs.)
 THE STOCK EXCHANGES

The names of the stock exchanges are given below:

 Ahmedabad Stock Exchange

 Banglore Stock Exchange

 Bhubaneswar Stock Exchange

 Bombay Stock Exchange

 Calcutta Stock Exchange

 Cochin Stock Exchange

 Coimbatore Stock Exchange

 Delhi Stock Exchange

 Guwahati Stock Exchange

 Hyderabad Stock Exchange

 Indore Stock Exchange

  Jaipur Stock Exchange

 Kanpur Stock Exchange

 Ludhiana Stock Exchange

 Madras Stock Exchange

 Magadh Stock Exchange

 Mangalore Stock Exchange

 Pune Stock Exchange

 Saurashtra Stock Exchange

 NSE

 OTCEI

 Inter Connected Stock Exchange

Stock exchanges normally function between 10:00 a.m. and 3:30 p.m. on the working days.

FUNCTIONS OF STOCK EXCHANGE

The functions of Stock Exchanges are as followed:

 Maintains Active Trading: Shares are traded on the stock exchanges, enabling the
investors to buy and sell securties. The prices may vary from transaction to transaction. A
continuous trading increses the liquidity or marketability of the shares traded on the stock
exchanges.
  Aids In Financing The Industry: A continuous market for shares provides a faourable
climate for raising capital. The negotiability and transferability pf the securties helps the
companies to raise long-term funds.

 Fixation Of Prices: Price is determined by the transactions that flow from investor’s
demand and supplier’s preferences. Usually the traded prices are made known to the
public. This helps the investors to make better decisions.

 Ensures Safe And Fair Dealings: The rules, regulations and by-laws of the stock
exchanges provide a measure of safety to thr invesors. Transactions are conducted under
competitive conditions enabling the investors to get a fair deal.

 Performance Inducer: The prices of stocks reflect the performance of the traded
companies. This makes the corporate more concerned with its public image and tries to
maintain good performance.

 Dissemination Of Information: Stock exchanges provide information through their

various publications. They publish the share prices traded on daily basis along with the
volume traded. Handouts, Handbooks and Pamphlets provide information regarding the
functioning of the stock exchanges.

 Self Regulating Organisation: The stock exchanges monitor the integrity of the
members, brokers, listed companies and clients. Continuous internal audit safeguards the
investors against unfair trade practices. It settles the disputes between member brokers,
investors and brokers.

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:
Types of Transactions
The flowchart below describes the types of transactions that can be carried out on the 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.

MOST COMMONLY USED STOCK EXCHANGES-IN INDIA

 THE BONBAY STOCK EXCHANGE (BSE)

(Established in 1875, the Bombay Stock Exchange is Asia's first stock exchange)
The Indian stock market is one of the oldest markets in Asia. Its history dates back to
nearly two centuries. The earlier records of security dealings in India are meager and obscure.
The East India Company was the dominant institution in those days and business in its loans
securities was transacted towards the close of the eighteen centuries.
By the 1830’s business in corporate stocks and shares in bank and cotton presses took
place in Bombay. Through the trading list was broader in 1839, there were only a half a dozen
brokers recognized by the banks and merchants.
In 1860-61, the American Civil War broke out and Cotton supply from the United States
of America and Europe was stopped. This resulted in the “Share Mania” for cotton trading in
India. The number of brokers increased to between 200 and 250. However, at the end of the
American Civil War, 1865 a disastrous slump began- for example, a bank of Bombay share that
had touched Rs. 2850 could only be sold at Rs. 87.
At the same time, brokers found a place in Dalal Street, Bombay where they could
conveniently assemble and transact business. In 1887, they formally established the “Native
Share and Stock Brokers Association”. In 1895 the association acquired premises in the same
street; it was inaugurated in 1899 as the Bombay Stock Exchange.
The Bombay Stock Exchange is governed by a board, chaired by a non-executive
chairman. The executive director is in charge of the administration of the exchange and is
supported by elected directors, Securities Exchange Board of India (SEBI) nominees, and public
representatives.

THE NATIONAL STOCK EXCHANGE(NSE)

The National Stock Exchange of India Limited was set up to provide access to investors
from across the country on an equal footing. NSE was promoted by leading financial institutions
at the behest of the Government of India and was incorporated in November 1992 as a tax-
paying company, unlike other stock exchanges in the country.
On its recognition as a stock exchange under the Securities Contracts (Regulation) Act,
1956 in April 1993, NSE commenced operations in the wholesale debt market (WDM) segment
in June 1994. The capital market (equities) segment commenced operations in November 1994,
and operations in the derivatives segment commenced in June 2000. The organizational structure
of NSE is through the link between National Securities Clearing Corporation Ltd. (NSCCL),
India Index Services and Products Ltd. (IISL), National Securities Depositary Limited (NSDL),
DotEx International Limited (DotEx) and MSEIT Ltd.

Trading at NSE

1. Fully automated screen-based trading mechanism

2. Strictly follows the principle of an order-driven market
3. Trading members are linked through a communication network
4. This network allows them to execute trade from their offices
5. The prices at which the buyer and seller are willing to transact will appear on the screen
6. When the prices match the transaction will be completed
7. A confirmation slip will be printed at the office of the trading member

Advantages of trading at NSE

1. Integrated network for trading in stock market of India

2. Fully automated screen-based system that provides higher degree of transparency
3. Investors can transact from any part of the country at uniform prices
4. Greater functional efficiency supported by totally computerized network

SUGGESTIONS AND CONLUSIONS

There are some suggestions which may be helpful for brokers and Investors regarding analyzing
stock market which increased confidence among investors regarding stock market. These are:

1. A uniform organizational structure among all the stock exchanges having democratic
representation of different interest groups would be proposed. It would facilitate in
dealing with crises situation promptly, firmly and impartially.

2. Steps to be taken towards improvement of operational efficiency includes enhancement

of trading hours, strict vigilance on the price manipulation, advancement of computerized
trading and development of communication system in the remote areas of the country.

3. Prudent use of available mechanism like imposition of margin money, volume

restrictions, and circuit breakers to control the temporal disequilibrium of the market.

4. To increase investor’s confidence in stock market must be regained in order to encourage

capital mobilization through primary market issues.

5. The investor forum as well other authorities should have power to dispose off the cases
summarily and to award compensation to the investors.

6. The detail information regarding investments which investors wants may include the
form of organization, management, capital adequacy, liabilities, defaults and penal
actions taken by the regulator and self regulatory organizations against the broker in the
past and other relevant information, must provides them.

7. The stock market is integrated with banking sector so that the effective and efficient
payment, settlement and clearing systems are developed.

8. Further expansion of banking activities in conjunction with further efforts to liberalize the
banking system.
 BIBLIOGRAPHY

 website

Sunit Garg, working of stock market, (03/17/20 03:35 pm)

https://www.scribd.com/document/93231546/Working-of-Stock-Market-in-India

Manoj Singh, An Introduction to the Indian Stock Market, (03/17/20 04:15 pm)

https://www.investopedia.com/articles/stocks/09/indian-stock-market.asp

 Books

Benjamin Graham, The Intelligent Investor, 205-218, 384-406, 600-605 (2013 [edition] 1949)