Stock Exchanges in India: Conception to Revolution

Stock Exchanges have been defined under Section 2(i) of SCRA, 1956 as "body of individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling, or dealing in securities". Stock markets are generally considered as barometer of an economy. The health of an economy is very well indicated by the movements in the stock market, as the stock market takes into account all the economic activities of the nation relating to the macro as well as micro economic aspects. The macro economic fundamentals like rate of growth of economy, Inflation rate, Foreign Exchange Rate of the National Currency, Food grain production; Rate of Industrial Production, etc. also impact the movements in the Stock Market. Stock Exchange is an institution that plays a vital role in the economic development of a country. History is witness to the fact that in those countries where there are strong and well regulated Stock Exchanges, the economy of those countries has grown at much faster pace as compared to other countries, where Stock Exchanges are either not existed or defunct. Stock Exchange is an important institution of Capital Market and pivotal around which every activity of the economy of the country revolves. Stock Exchanges are continuously involved in capital generation process and ensure un-interrupted flow of capital originating from the household investors to the industry and government houses. It also ensures that capital flows into the most profitable channels. Stock Exchanges thus provide a mechanism for the collection of savings and provide the same to industry. Imagine the situation where Stock Exchanges had not existed, the savings of the households would have been kept lying in banks and at very low returns and industry would also have been deprived of much needed finance, and as a result, the economic growth of the country would have been seriously affected. HISTORY OF STOCK EXCHANGES IN INDIA: The history of the stock exchanges in India can be traced back to the later half of 19th century. After the American Civil War (1860-61) due to the share mania of the public, the number of brokers dealing in shares increased. The brokers organized an informal association in Mumbai named The Nativ Stock and Share Brokers Association in 1875. Increased activity in trade and commerce during the First World War and Second War resulted in an increase in the stock trading. As a result of which various stock exchanges were established in different centres like Chennai, Delhi, Nagpur, Kanpur, Hyderabad and Bangalore. Securities and Contract Regulation Act 1956 gave powers to the central government to regulate the stock exchanges. The SCR Act recognized the stock exchanges in Mumbai, Kolkata, Chennai, Ahmedabad, Delhi, Hyderabad and Indore. At present we have 23 stock exchanges and 21 of them had hardware and software compliant to solve Y2K problem. Since, only two stock exchanges are functioning nationwide i.e. BSE and NSE and all other Regional stock exchanges are working as subsidiary of these two stock exchanges. Till recent past, floor trading took place in all the stock exchanges. In the floor trading system, the trade takes place through open outcry system during the official trading hours. Trading posts are assigned for different securities where buy and sell activities of securities took place. This system needs a face to face contact among the traders and restricts the trading volume. The speed of the 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 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, which is known as BOLT (Bombay Online Trading System), and National Stock exchange introduced this system in May 1997 which is known as NEAT (National Exchange of Automated Trading). REGULATION OF STOCK EXCHANGES: In the pre-independence era Stock Exchanges in India were not regulated by any Government agency. Need for the regulation of Stock Exchanges in India was felt when Atlay Committee in 1921 recommended the regulation of BSE, and consequently, BSE Securities Contract control was passed in 1955. Later on SCRA was passed in 1956 by an Act of Parliament. Earlier Ministry of Finance was controlling the Stock Exchanges. In 1992, SEBI Act was passed and the entire control of Securities market has since been vested with SEBI under the legislative powers of SCRA, 1956 and SCR (Rules), 1957. MANAGEMENT OF STOCK EXCHANGES: The Stock Exchanges are governed by a Board of Directors or Council of Management which is comprised of elected brokers, SEBI Nominees and public representatives. The Board has powers to make, and operate rules, bye-laws and regulations and has jurisdiction over all its members. The total strength of number of Directors in an exchange is generally 50% elected directors among Broker Community, 50% directors from Public named as Public Representative Directors and one/ two SEBI nominees and one Executive Director/Managing Director/ Chief Executive Officer of the Exchange. MEMBERS: Business at a stock exchange can be transacted by members of the stock exchange only. Membership is restricted to persons who are financially sound and possess adequate experience. The eligibility criteria is defined in the SC(R)A, 1956 and its rules. Further, members of the recognized Stock Exchanges are subject to authorization and registration with SEBI, and have to pay certain fees to Stock Exchange and SEBI. A member can transact on his behalf or on behalf of his client. A non-member can deal in shares only through its members. The relationship between client and member is fiduciary in nature. Member acts as a custodian and handles securities of his client as per his instructions.

CORPORATISATION & DEMUTUALISATION OF STOCK EXCHANGES:

ORIGIN OF DEMUTUALISATION: The accepted norms of behaviour of members and their self imposed rules for trading governed the stock markets of the country. Members were responsible for their conduct with one another, with users of the Exchange and other stakeholders. With securities law in place, the concept of self-regulation under regulatory oversight emerged. But conflict of interest between members being owners of the Exchanges and also in the management of the Stock Exchanges persisted, which led to the concept of demutualisation. SEBI set up a Committee under the Chairmanship of Justice M.H. Kania to study and suggest about Corporatisation and Demutualisation of Indian Stock Exchanges in 2002, which provided the framework of Corporatisation & Demutualisation in Indian Stock Exchanges

DISADVANTAGES OF A MUTUALISED STOCK EXCHANGE: Mutualised Stock Exchanges had their own inherent disadvantages. Following are the limitations of mutual Stock Exchanges, which led to demutualization: Lack of adequate funds Lack of professional management Lack of transparency Lack of public confidence Historically, brokers owned, controlled and managed the Stock Exchanges. In case of disputes, the integrity of the Exchange suffered. Therefore regulators focused on reducing the dominance of brokers in the management of Stock Exchanges. They advised them to reconstitute their Governing Boards to provide for at least 50% non-broker representation. However, this did not materially alter the situation. In face of extreme volatility in the securities market in 2000, the Government proposed to Corporatise and Demutualise the Stock Exchanges by which ownership, management and trading membership would be segregated from one another. MEANING OF DEMUTUALISATION The concept of Demutualisation broadly means the separation of ownership from the management so that, conflict of interest could be avoided and the Exchanges could behave as a 'for profit organization'. 'De' means no and 'mutualisation' means association. Therefore demutualization means no to the association. In other words, segregation of three important functions of Stock Ex- changes, i.e., Trading, Ownership & Management. DEMUTUALISATION IN INDIA SEBI in order to corporatise & demutualise the Stock Exchanges constituted M.H. Kania committee to review the present structure of Indian Stock Exchanges and suggested uniform model of a Corporatised and Demutualised Stock Exchange. The Kania committee submitted its report in 2003. SEBI in Jan'2003 advised all the Exchanges to frame a scheme for Corporatisation & Demutualization on the lines of the recommendation of M.H. Kania committee before July 30, 2003, for its approval. All the Stock Exchanges prepared the respective schemes of corporatisation & demutualization and sent the same to SEBI for its approval in Sep' 2003. As the Government of India had already announced its intention to Corporatise & Demutualise the Exchanges in its budgets in 2002 & 2005, it promulgated an ordinance named as Securities Law (Amendment) Ordinance 2004, thereby amending the Securities Contract Regulation Act, 1956 & Depositories Act, 1996. The ordinance included various provisions to give a head start to the process of Corporatisation & Demutualization of Stock Exchanges. SEBI approved the Demutualisation Scheme of BSE in May'2005 and advised the other Stock Exchanges to submit their schemes of Corporatisation & Demutualisation in accordance with the approved scheme of BSE. The other regional Stock Exchanges also submitted their respective schemes of Demutualisation to SEBI in July-August 2005. SEBI has approved the aforesaid schemes. Pursuant to SEBI's approval, these Exchanges are converted into 'For Profit' entities and will be liable to payment of Income Tax as per Income Tax Act, 1961.

BOMBAY STOCK EXCHANGE

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now spanning three centuries in its 133 years of existence. What is now popularly known as BSE was established as The Native Share & Stock Brokers Association in 1875. It is located at Dalal Street, Mumbai, India. BSE is the first stock exchange in the country which obtained permanent recognition (in 1956) from the Government of India under the Securities Contracts (Regulation) Act 1956. BSEs pivotal and pre-eminent role in the development of the Indian capital market is widely recognized. It migrated from the open outcry system to an online screen-based order driven trading system in 1995. Earlier an Association of Persons (AOP), BSE is now a corporatised and demutualised entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatisation and Demutualisation) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI). With demutualisation, BSE has two of worlds best exchanges, Deutsche Brse and Singapore Exchange, as its strategic partners. More than 6000 Indian companies list on the stock exchange, and it has a significant trading volume. The BSE SENSEX (SENSITIVITY INDEX), also called the BSE-30, is a widely used market index in Asia. Though many other exchanges exist, BSE and National Stock Exchange of India account for most of the trading in shares in India. Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector by providing it with an efficient access to resources. There is perhaps no major corporate in India which has not sourced BSEs services in raising resources from the capital market. Today, BSE is the worlds number one exchange in terms of the number of listed companies and the worlds 5th in transaction numbers. The market capitalization as on December 31, 2007 stood at USD 1.79 trillion . An investor can choose from more than 4,700 listed companies, which for easy reference, are classified into A, B, S, T and Z groups. The BSE Index, SENSEX, is Indias first stock market index that enjoys an iconic stature , and is tracked worldwide. It is an index of 30 stocks representing 12 major sectors. The SENSEX is constructed on a free-float methodology, and is sensitive to market sentiments and market realities. Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral indices. BSE has entered into an index cooperation agreement with Deutsche Brse. This agreement has made SENSEX and other BSE indices available to investors in Europe and America. Moreover, Barclays Global Investors (BGI), the global leader in ETFs through its iShares brand, has created the iShares BSE SENSEX India Tracker which tracks the SENSEX. The ETF enables investors in Hong Kong to take an exposure to the Indian equity market.

BSE Milestones

The first Exchange Traded Fund (ETF) on SENSEX, called SPICE is listed on BSE. It brings to the investors a trading tool that can be easily used for the purposes of investment, trading, hedging and arbitrage. SPICE allows small investors to take a long-term view of the market. BSE provides an efficient and transparent market for trading in equity, debt instruments and derivatives. It has a nation-wide reach with a presence in more than 359 cities and towns of India. BSE has always been at par with the international standards. The systems and processes are designed to safeguard market integrity and enhance transparency in operations. BSE is the first exchange in India and the second in the world to obtain an ISO 9001:2000 certifications. 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 BSE On-line Trading System (BOLT). BSE continues to innovate. In recent times, it has become the first national level stock exchange to launch its website in Gujarati and Hindi to reach out to a larger number of investors. It has successfully launched a reporting platform for corporate bonds in India christened the ICDM or Indian Corporate Debt Market and a unique ticker-cum-screen aptly named BSE Broadcast which enables information dissemination to the common man on the street. In 2006, BSE launched the Directors Database and ICERS (Indian Corporate Electronic Reporting System) to facilitate information flow and increase transparency in the Indian capital market. While the Directors Database provides a single-point access to information on the boards of directors of listed companies, the ICERS facilitates the corporates in sharing with BSE their corporate announcements.

Services Offered by BSE:

BSE also has a wide range of services to empower investors and facilitate smooth transactions: Investor Services: The Department of Investor Services redresses grievances of investors. BSE was the first exchange in the country to provide an amount of Rs.1 million towards the investor protection fund; it is an amount higher than that of any exchange in the country. BSE launched a nationwide investor awareness programme- Safe Investing in the Stock Market under which 264 programmes were held in more than 200 cities. The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates on-line screen based trading in securities. BOLT is currently operating in 25,000 Trader Workstations located across over 359 cities in India. BSEWEBX.com: In February 2001, BSE introduced the worlds first centralized exchange-based Internet trading system, BSEWEBX.com. This initiative enables investors anywhere in the world to trade on the BSE platform. Surveillance: BSEs On-Line Surveillance System (BOSS) monitors on a real-time basis the price movements, volume positions and members positions and real-time measurement of default risk, market reconstruction and generation of cross market alerts.

BSE Training Institute: BTI imparts capital market training and certification, in collaboration with reputed management institutes and universities. It offers over 40 courses on various aspects of the capital market and financial sector. More than 20,000 people have attended the BTI programmes.

Hours of Operation
08:00 09:00 09:00 09:30 09:55 15:30 15:30 15:50 15:50 16:05 16:05 16:35 16:35 16:50 16:50 17:35 17:35 -------Beginning of the Day Session Login Session Trading Session Position Transfer Session Closing Session Option Exercise Session Margin Session Query Session End of Day Session

Awards
The World Council of Corporate Governance has awarded the Golden Peacock Global CSR Award for BSEs initiatives in Corporate Social Responsibility (CSR). The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and March 31 2007 have been awarded the ICAI awards for excellence in financial reporting. The Human Resource Management at BSE has won the Asia Pacific HRM awards for its efforts in employer branding through talent management at work, health management at work and excellence in HR through technology

NATIONAL STOCK EXCHANGE

The National Stock Exchange of India Limited (NSE), is the largest stock exchange in India in terms of daily turnover and number of trades, for both equities and derivative trading. Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India, and between them are responsible for the vast majority of share transactions. The NSEs key index is the S&P CNX Nifty, known as the Nifty, an index of fifty major stocks weighted by market capitalisation. NSE 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. There are at least 2 foreign investors NYSE Euronext and Goldman Sachs who have taken a stake in the NSE. As of 2006, the NSE VSAT terminals, 2799 in total, cover more than 1500 cities across India. In October 2007, the equity market capitalization of the companies listed on the NSE was US$ 1.46 trillion, making it the second largest stock exchange in South Asia. NSE is the third largest Stock Exchange in the world in terms of the

number of trades in equities. It is the second fastest growing stock exchange in the world with a recorded growth of 16.6%. NSE has played a catalytic role in reforming the Indian securities market in terms of microstructure, market practices and trading volumes. The market today uses state-of-art information technology to provide an efficient and transparent trading, clearing and settlement mechanism, and has witnessed several innovations in products & services viz. demutualisation of stock exchange governance, screen based trading, compression of settlement cycles, dematerialisation and electronic transfer of securities, securities lending and borrowing, professionalisation of trading members, fine-tuned risk management systems, emergence of clearing corporations to assume counterparty risks, market of debt and derivative instruments and intensive use of information technology. In recognition of the fact that technology will continue to redefine the shape of the securities industry, NSE stresses on innovation and sustained investment in technology to remain ahead of competition. NSEs IT set-up is the largest by any company in India. It uses satellite communication technology to energise participation from around 200 cities spread all over the country. In the recent past, capacity enhancement measures were taken up in regard to the trading systems so as to effectively meet the requirements of increased users and associated trading loads. With upgradation of trading hardware, NSE today can handle up to 15 million trades per day in Capital Market segment. In order to capitalise on in-house expertise in technology, NSE set up a separate company, NSE Technology Services Ltd. which is expected to provide a platform for taking up all IT related assignments of NSE. NEAT is a state-of-the-art client server based application. At the server end, all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users. The trading server software runs on a fault tolerant STRATUS main frame computer while the client software runs under Windows on PCs. NSE is one of the largest interactive VSAT based stock exchanges in the world. Today it supports more than 2000 VSATs and 3000 leased lines across the country. The NSE- network is the largest private wide area network in the country and the first extended C- Band VSAT network in the world. Currently more than 9000 users are trading on the real time-online NSE application. There are over 15 large computer systems which include non-stop fault-tolerant computers and high end UNIX servers, operational under one roof to support the NSE applications. This coupled with the nationwide VSAT network makes NSE the countrys largest Information Technology user.

Origins
The National Stock Exchange of India 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. In April 1993, it was recognized as a stock exchange under the Securities Contracts (Regulation) Act, 1956. NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment of the NSE commenced operations in November 1994, while operations in the Derivatives segment commenced in June 2000.

NSE Family
NSE has remained in the forefront of modernization of Indias capital and financial markets, and its pioneering efforts include: Being the first national, anonymous, electronic limit order book (LOB) exchange to trade securities in India. Since the success of the NSE, existent market and new market structures have followed the NSE model. Setting up the first clearing corporation National Securities Clearing Corporation Ltd. in India. NSCCL was a landmark in providing innovation on all spot equity market (and later, derivatives market) trades in India. Co-promoting and setting up of National Securities Depository Limited, first depository in India. Setting up of S&P CNX Nifty. NSE pioneered commencement of Internet Trading in February 2000, which led to the wide popularization of the NSE in the broker community. Being the first exchange that, in 1996, proposed exchange traded derivatives, particularly on an equity index, in India. After four years of policy and regulatory debate and formulation, the NSE was permitted to start trading equity derivatives Being the first and the only exchange to trade GOLD ETFs (exchange traded funds) in India. NSE has also launched the NSE-CNBC-TV18 media centre in association with CNBCTV18.

Markets
Currently, NSE has the following major segments of the capital market: Equity Futures and Options Retail Debt Market Wholesale Debt Market Currency futures

Hours of Operation
NSEs normal trading sessions are from 09:00am to 03:30pm on all days of the week except Saturdays, Sundays and holidays declared by the Exchange in advance.

Indices
NSE also set up as index services firm known as India Index Services & Products Limited (IISL) and has launched several stock indices, including: S&P CNX Nifty CNX Nifty Junior CNX 100 (= S&P CNX Nifty + CNX Nifty Junior) S&P CNX 500 (= CNX 100 + 400 major players across 72 industries) CNX Midcap (introduced on 18 July 2005 replacing CNX Midcap 200)

Certifications
NSE also conducts online examination and awards certification, under its programmes of NSEs Certification in Financial Markets (NCFM). Currently, certifications are available in 19 modules, covering different sectors of financial and capital markets. Branches of the NSE are located throughout India.

NSE Milestones

November 1992 Incorporation April 1993 Recognition as a stock exchange May 1993 Formulation of business plan June 1994 Wholesale Debt Market segment goes live November 1994 Capital Market (Equities) segment goes live March 1995 Establishment of Investor Grievance Cell April 1995 Establishment of NSCCL, the first Clearing Corporation June 1995 Introduction of centralised insurance cover for all trading members July 1995 Establishment of Investor Protection Fund October 1995 Became largest stock exchange in the country April 1996 Commencement of clearing and settlement by NSCCL April 1996 Launch of S&P CNX Nifty June 1996 Establishment of Settlement Guarantee Fund November 1996 Setting up of National Securities Depository Limited, first depository in India, co-promoted by NSE November 1996 Best IT Usage award by Computer Society of India December 1996 Commencement of trading/settlement in dematerialised securities December 1996 Dataquest award for Top IT User December 1996 Launch of CNX Nifty Junior February 1997 Regional clearing facility goes live November 1997 Best IT Usage award by Computer Society of India May 1998 Promotion of joint venture, India Index Services & Products Limited (IISL) May 1998 Launch of NSEs Web-site: www.nse.co.in July 1998 Launch of NSEs Certification Programme in Financial Market August 1998 CYBER CORPORATE OF THE YEAR 1998 award February 1999 Launch of Automated Lending and Borrowing Mechanism April 1999 CHIP Web Award by CHIP magazine October 1999 Setting up of NSE.IT January 2000 Launch of NSE Research Initiative February 2000 Commencement of Internet Trading June 2000 Commencement of Derivatives Trading (Index Futures) September 2000 Launch of Zero Coupon Yield Curve November 2000 Launch of Broker Plaza by Dotex International, a joint venture between NSE.IT Ltd. and i-flex Solutions Ltd. December 2000 Commencement of WAP trading June 2001 Commencement of trading in Index Options July 2001 Commencement of trading in Options on Individual Securities November 2001 Commencement of trading in Futures on Individual Securities

December 2001 Launch of NSE VaR for Government Securities January 2002 Launch of Exchange Traded Funds (ETFs) May 2002 NSE wins the Wharton-Infosys Business Transformation Award in the Organization-wide Transformation category October 2002 Launch of NSE Government Securities Index January 2003 Commencement of trading in Retail Debt Market June 2003 Launch of Interest Rate Futures August 2003 Launch of Futures & options in CNXIT Index June 2004 Launch of STP Interoperability August 2004 Launch of NSEs electronic interface for listed companies March 2005 India Innovation Award by EMPI Business School, New Delhi June 2005 Launch of Futures & options in BANK Nifty Index December 2006 Derivative Exchange of the Year, by Asia Risk magazine January 2007 Launch of NSE CNBC TV 18 media centre March 2007 NSE, CRISIL announce launch of IndiaBondWatch.com June 2007 NSE launches derivatives on Nifty Junior & CNX 100 October 2007 NSE launches derivatives on Nifty Midcap 50 January 2008 Introduction of Mini Nifty derivative contracts on 1st January 2008 March 2008 Introduction of long term option contracts on S&P CNX Nifty Index April 2008 Launch of India VIX April 2008 Launch of Securities Lending & Borrowing Scheme August 2008 Launch of Currency Derivatives

VISHAL KUMAR Assistant Professor in Commerce Dev Samaj College for Women Ferozepur City-(Punjab) Mobile No.-9914023332 Email : vkfzr@hotmail.com

Abstract
Stock Exchange is an institution that plays a vital role in the economic development of a country. History is witness to the fact that in those countries where there are strong and well regulated Stock Exchanges, the economy of those countries has grown at much faster pace as compared to other countries, where Stock Exchanges are either not existed or defunct. Stock Exchange is an important institution of Capital Market and pivotal around which every activity of the economy of the country revolves. Stock Exchanges are continuously involved in capital generation process and ensure un-interrupted flow of capital originating from the household investors to the industry and government houses. It also ensures that capital flows into the most profitable channels. Stock Exchanges thus provide a mechanism for the collection of savings and provide the same to industry