The Evolution of Stock Market in India

Abstract:

Stock market in India has a long and chequered history. Bombay

Stock Exchange, the first stock exchange of the country was
established as early as in 1875, predating the Tokyo Stock
Exchange by three years. Over these years Indian stock market has
passed through diverse fortunes.

Introduction:
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The stock market in India dates back to the 18 century when the
securities of the East India Company were traded in Mumbai and
Kolkata. Stock broking was not very popular in those days and in
Mumbai, during 1840 and 1860, there were only half a dozen
brokers recognised by the banks and merchants. The securities
traded were mainly shares, debentures and bonds representing
titles to property or promises to pay issued on the condition of
transfer from one person to another.

The real beginning of trading in corporate securities came in 1850

when the Companies Act, introducing joint stock companies with
limited liability, was passed. The following period witnessed rapid
development of commercial enterprises, which made investments in
stocks and shares popular. In Mumbai and Kolkata, shares of
banks, cotton mills and loan securities of East India Company were
being transacted.

The export proceeds in gold and silver served as fresh capital for a
number of new ventures. Many new companies were started in a
variety of fields such as banking, land reclamation, trading, cotton
cleaning, pressing, shipping and construction. Banks were following
a reckless lending policy during this period. The excessive
speculation coupled with the reckless lending policy resulted in a
stock market boom. Any scrip that was floated in the 1860s
commanded a very high premium. The steep rise in the share prices
attracted a lot of people to the stock market.

The boom and burst of the Indian economy had its impact on the
share brokers too. The number of brokers increased significantly
and it stood at 250 in 1865. This brought brokers in Mumbai
together to form the first formally organised stock exchange in the
country-The Bombay Stock Exchange. It was formed as a society
named Native Share and Stock Brokers Association, in 1875.
Subsequently, stock exchanges were set up at Ahmedabad, Kolkata
and Madras in 1894, 1905 and 1908 respectively.

Period of Repression:( 1947 -80)

In this period, the indian economy had inherited a poor economy

but, india was better endowed than any other colony. To a large
extent, financial system also had a limited role in providing
incentives for savings and capital accumulation as interest rates
were controlled and household savings were pre-empted through
high levels of statutory reserve and liquidity ratio. The industry
depended less on mobilisation of resources through shares and
debentures on account of the administered interest rate structure,
and the credit deployment by the banks and financial institutions
were at relatively low rates of interest. During the 1950’s and
1960’s, the demand for long- term funds was not significant, partly
due to weak industrial base and partly due to the low saving rate.
In terms of the participation of investors also, this period did not
witness substantial progress. However, this period was
characterised by the enactment of a number of basic legislations
covering different aspects of the securities market, i.e., Capital
Issues (Control) Act, 1947; Securities Contracts (Regulation) Act,
1956; Companies Act, 1956; and the Foreign Exchange Regulation
Act (FERA), 1975The number of share owning population as a
proportion of total population registered a nominal rise from 0.12
per cent in 1955 to 0.36 per cent in 1980.
Period of Change (1980-1992):

The period from 1980 to 1992 can be termed as a period of change,

signifying the widening and deepening of the capital market in
India. Since the mid-eighties, debentures emerged as a powerful
instrument of resource mobilisation in the primary market. The
introduction of public sector bonds since 1985-86 imparted an
additional fillip to the stock market. The mutual fund industry was
widened, by permitting banks to set up mutual funds as
subsidiaries. All these resulted in the growth of stock market in
terms of number of exchanges, listed companies, their paid-up
capital and market capitalisation. It also witnessed the emergence
of several specialised institutions such as the Securities and
Exchange Board of India. The BSE, which was an association of
brokers, imposed entry barriers leading to elevated costs of
intermediation. Trading at that time was mainly through ‘open
outcry’ on the trading floor and there was no price-time priority, so
users of the market were not assured that a trade was executed at
the best possible price. Moreover, there existed inefficiencies in
clearing and settlement procedures. The market mainly followed
fortnightly settlement cycle, in which, trading was supposed to take
place for a fortnight until a predetermined expiration date.

Period of Transformation (1992- ):

The period from 1992 onwards witnessed several policy initiatives

which refined the structure and operations of the stock market. The
process of economic reforms and liberalisations set in motion in the
mid-eighties was accelerated in the wake of severe foreign exchange
crisis, declining industrial production, galloping inflation and rising
fiscal deficit. Since 1992 India has experienced two stock market
booms one in 1992-93 and the other in 1999-2000.The first boom
reflected the price deregulation and was driven by the liberalisation
wave. During this period many firms found it cheaper to raise funds
from the capital market causing a rapid increase in the number of
listed firms from 6925 in 1992 to 9077 in 1995. Also, the share of
market capitalisation in GDP rose from 32 per cent in 1992 to 46
per cent in 1995. Equity finance however declined thereafter till
1999. The main causes for this decline are: investors’ realisation
that stock prices are over valued in the primary market, a decline in
the public confidence in the equity market due to a series of scams
and malpractices during 1992-93, and reduced inflow of foreign
capital due to Mexican and South Asian crisis.