Reforms to ﬁnancial markets were high on the priorities of policy makers when India embarkedon market-oriented reforms in the early 1990s. These efforts had several motivations: the broadidea of markets playing a dominant role in resource allocation, an awareness of the opportunitycost that India was suffering by not being open to global capital ﬂows, and an immediate reactionto the ﬁxed income and equity market scandal of 1992.Over the decade of the 1990s,
the equity market
enjoyed a complete transformation of the marketdesign. All stock exchanges in India switched to order matching by computers, which workedextremely well as compared with market designs based on human market makers which wereutilised previously. A new risk management institution, the clearing corporation, was successfulin largely eliminating settlement risk. A new institution, the depository, eliminated the opera-tional vulnerabilities associated with physical share certiﬁcates. Derivatives trading came about,and within roughly a year after commencement, the stock index futures market was more liquidthan the underlying stock market. Finally, the spot market moved into rolling settlement, whichyielded important gains in market integrity.These changes added up to a complete transformation of the market design on the equity mar-ket. It was accompanied by a corresponding transformation of the human capital in the equitymarket. It is hard to ﬁnd many sectors of the Indian economy which experienced as radical atransformation in the decade of the 1990s.At the same time, the decade of the 1990s was marred by a steady procession of episodes of market misconduct which regularly hit the front pages of newspapers. These episodes of mar-ket misconduct have been extremely disruptive of the core functions of the equity market, i.e.(a) pricing efﬁciency, and (b) intermediation between households investing in shares and ﬁrmsﬁnancing projects by issuing shares.Turning to the secondary market for
, policy makers embarked on modestinitiatives which closed loopholes which had been exploited in the scandal of 1992. Throughthe decade of the 1990s, the market design of the GOI bond market did not experience majorchanges.Through this entire period, the GOI bond market was based on bilateral negotiations between asmall club of bond dealers in south Bombay. The non-transparency of these negotiations, and theentry barriers into this club, sustained rents for these intermediaries. While GOI bond turnoverrose sharply through the 1990s, and bid/offer spreads fell, these changes could (in signiﬁcantpart) be attributed to the enormous growth of the stock of GOI bonds, which was fueled by thelarge ﬁscal deﬁcits through the decade.In this paper, we focus on four important questions about these experiences:
1. Why did NSE succeed?2. Why did the equity market lurch from crisis to crisis?