A STUDY ON ROLE OF NATIONAL STOCK EXCHANGE IN CAPITAL

MARKET

Author1- Khyati Kochhar

Abstract
Stock Exchange is a hub of primary and secondary market playing a crucial role in the economy.
Stock exchange provides a place to the buyers and sellers of the shares and securities. For this
purpose National stock exchange was established by the leading institutions in mid 1990s with
the main aim to provide a modern and fully automated screen based trading system with national
reach. National Stock Exchange has set up facility that serves as a model for securities industry
in terms of system and procedures. Presently, the Capital Market segment of National Stock
Exchange provides an efficient and transparent platform for trading of equity, preference shares,
debentures, exchange traded funds as well as retail government securities. Many researches had
taken place with respect to individual market prices, market efficiency, market index, S&P CNX
Nifty etc; plantar of studies in context to National Stock Exchange has been conducted. But the
Role of NSE in Capital Market is a study which focuses on the importance of establishment of
National Stock Exchange.

Introduction
Stock exchange is a structured market where bonds, shares, government securities and
debentures of trading units are been repeatedly transacted. Stock exchange is a place that
provides buyers and sellers to transact the transactions. Along with this stock exchange also
indicates the health of the economy i.e. good or bad health of the economy. Increase and
decrease in the prices of shares indicated the path of growth or downtrodden of the economy, like
if the prices of share are rising it means that country is running on the path of growth and
prosperity. Stock exchange plays a very vital role in the economy and it is the focal point for
primary and secondary market. As stock exchange is an organized security market it provides
marketability and price continuity for shares and also helps in fair evaluation of securities.

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Therefore we can say that, stock exchange helps in systematic flow and distribution of savings
between different types of investments. Some of them are listed below.

 Raising capital for the businesses

 Mobilizing savings for further investment
 Facilitating growth of the company
 Profit sharing
 Corporate governance
 Creating investment opportunities for the small investors
 Raising government capital for development projects
 Barometer of the economy

Stock exchanges are prearranged souk, either conglomerate or a joint organization, where
members of the organization meet/gather to trade company stocks or any form of securities. The
members may act either as agents for their customers or as a principals for their own account.
There are other functions of stock exchange as well like they also facilitates for the issue and
redemption of securities and other financial instruments which includes the payment of dividend
and income. The trade which is done on exchange is only by the members and the stock broker
do not have a seat on the exchange and the record keeping is central but trade is linked to
physical place because modern markets are fully computerized.
In India, the stock exchange is a segment of capital market which performs a crucial and a vital
role in mobilizing and channelizing resources which remain otherwise scattered. Therefore the
stock exchanges tap the new resources and encourage a broad based investment in the capital
structure of industries. Thus stock exchange is an imperative organ in a present society and
without a stock exchange a modern democratic economy cannot exist.
The stock exchange is a sector which benefits the entire economy, entire community like
producers, savers, investors and many in a variety of way. It helps the producers to raise capital
which directly or indirectly gives lucrative employment to millions of people on the one hand
and on the other hand it helps the consumers to get the range of goods needed by them. Along
with this it also provides opportunities to the savers to store the value as provisional domicile of
purchasing power or as a permanent abode of purchasing power in the form of financial assets. It

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also helps the savers who put their savings in commercial firms and non-banking financial
intermediaries because these institutions avail themselves from services of stock exchange to
invest the money collected.

Fundamental Concepts
National Stock Exchange (NSE) is a stock exchange which is situated at Mumbai, India.
National stock exchange was set up in the mid 1990s as a demutualized electronic exchange. It is
one of the 16th largest stock exchange in the world in terms of market capitalization and leading
in India by number of traders and daily turnover for both equities and derivative trading.
National stock exchange is chaired by S.B. Marthur who has been the former chairman of Life
Insurance Corporation of India. NSE is covering number of cities and towns across the whole
country. National stock exchange was established by foremost institutions to provide a modern
and fully automated screen based trading system within national reach. With this stock exchange
has brought about incomparable speed, transparency and efficiency along with market integrity.
Stock exchange has set up amenities that serve as a model for the securities industries in respect
to systems, procedures and practices.

As stated above, National Stock Exchange was started by a clutch of leading Indian financial
institutions with the aim to bring transparency to the Indian market and has a diversified
shareholding comprising Indian and global investors. The domestic investors include LIC, GIC,
SBI and IDFC, while global investors include MS Strategic (Mauritius) Limited, Tiger Global
Five Holdings, Citigroup Strategic Holdings and Norwest Venture Partners X FII-Mauritius.
Therefore, in equity, debt and equity derivatives services are offered like trading, clearing and
settlement services.
National Stock Exchange has a huge market capitalization of more than US $1.5 trillion and the
number of securities available for trading are 3091 as on June 2014.National stock exchange and
Bombay stock exchange are the two significant Stock Exchange in India but NSE’s flagship
index, the S&P CNX Nifty, is used extensively by investors in India and as well as from around
the world to take exposure to the Indian equities market.
NSE has brought a paradigm shift in Financial Market
National stock exchange has played a vital function in reforming the Indian securities market. In
today’s era, every market is using highest level of information technology to provide an efficient
and translucent trading. It also provide clearing and settlement mechanism and also has
witnessed several innovations in products and services viz., compression of settlement cycles,
screen based trading, securities lending and borrowing, intensive use of information technology,
fine tuned risk management systems, demutualization of stock exchange governance, market of
debt and derivatives instruments, emergence of clearing corporations to assume counterparty
risks and lastly electronic transfer of securities. NSE deals with Equities, Derivatives and Debt
as its products.
Equities deal with Mutual funds, Indices, Exchange traded funds, Indices, IPOs (Initial Public
Offerings), Security lending and Borrowing Scheme. It is a public market which provides fully
computerized trading system to the investors so that it becomes safe and easy mode to invest. An
equity investment means the buying and selling of shares to gain income from daily fluctuations,
dividends and capital gains. The type of participants in the stock market ranges from small
traders to long term investors.
Derivatives deal with Equity Derivatives, Currency Derivatives, and Interest Rate Futures. It is a
financial instrument or an agreement between two parties and its value is determined by the price
called underlying. Futures and options are the most common types of derivative contracts.
Debt deals with Wholesale Debt market, Retail Debt market and corporate bonds. Debt is the
money borrowed by one party from another party. For making large purchases many corporations
use this debt method. Debt is an option to borrow money which has to be paid back later with some
interest on the borrowed amount.

Capital Market Segment (CMS) On November 3, 1994 NSE started trading in the capital
market (CM) segment and within a year it established itself as the largest stock exchange in the
country in terms of trading volumes. “Capital market is a market which deals with the buying
and selling of equity and debt instruments, it channel savings and investment between suppliers
of capital and users of capital. Since capital is a vital component for generating economic output
it includes primary markets, where stocks and bond issues are sold to investors and secondary
markets which trade the existing securities. The Capital Market segment of NSE provides an
efficient and transparent platform for trading of equity, preference shares, debentures, warrants,
exchange traded funds as well as retail Government securities.”

Derivative Segment (DS) On June 12, 2000 NSE commenced its trading in the derivatives and it
“provides trading in futures and options based on bench mark index S&P CNX Nifty and CNX-
IT as well as options and futures on single stocks (currently on 51 stocks) and futures on interest
rate. The turnover in the derivatives segment has witnessed considerable growth placing NSE on
the map of global derivatives market. From the very beginning, NSE established itself as the sole
market leader in this segment in the country with more than 99% market share.”

Wholesale Debt Market Segment (WDMS) “The Exchange started its trading operations in
June 1994 by enabling the WDM segment of the Exchange. For trading of a wide range of fixed
income securities that include government securities, treasury bills, bonds issued by public sector
undertakings (PSUs), floating rate bonds, zero coupon bonds, commercial papers, certificates of
deposit, corporate debentures, state government loans, SLR and units of mutual funds etc a
trading platform is being provided by WDM segment. To further encourage wider participation
of all classes of investors, including the retail investors, the Retail Debt Market segment (RDM)
was launched on January 16, 2003 to provide a nationwide, anonymous, order driven, screen
based trading system. In the first segment all outstanding and newly issued central government
securities are traded in the retail debt market section. Other securities like state government
securities, T-bills etc. were added in successive phases.”

Literature Review
In general, a literature review is a means to explain and analyze investigation that has been
conducted and studies that have been published on the research topic. In this chapter, literature
review would provide an overview of previous research on Stock Exchange, Stock Market, and
Capital Market.

Gupta (1972) examined that there is a need to regulate the volume of speculation, as it is crucial
to serve the needs of liquidity and price continuity for proper working of stock exchanges in
India. It suggests “draft of corporate securities in more than one stock exchange at the same time
to improve liquidity. The study also wishes the cost of issues to be low, in order to protect small
investors.”
Panda (1980) has studied the role of stock exchanges in India before and after independence.
The study reveals that joint stock sector companies cover the forth-fifth of the total listed stocks.
The study concluded that investment in securities was no longer the monopoly of any particular
class or of a small group of people. It engrossed the attention of a large number of 24 small and
middle class individuals. It was observed that a large proportion of savings went in the first
occurrence into purchase of securities already issued.
Anshuman and Chandra (1991) studied that the small shareholders was being favored by the
government policy in terms of allotment of shares. They disagree such a policy because it caused
various lacunae such as higher issue and servicing costs and lesser vigilance about the
functioning of companies because of inadequate knowledge. After this study they suggested that
for better functioning of Capital Market there is a need to eliminate this bias which would help in
strengthening investor protection. With comparative allocation being advocated by SEBI, a shift
in the policy is already apparent. However, there appears to be some re-thinking on proportional
allocation after the recent experiences which clearly demonstrate that such a policy could result
in highly skewed ownership patterns.

Amanulla and Kamaiah (1995), attempted to compare the market efficiency of Bombay,
Madras, Calcutta Stock Exchange and Ahmadabad and Delhi Stock Exchanges by using market
integration approaches. The results showed that there is no evidence in favor of market efficiency
of Bombay, Madras and Calcutta Stock Exchanges, while the results confirm the existence of
market efficiency in Ahmadabad and Delhi Stock Exchanges. It was assumed that market
efficiency was due to quick transmission of information along with reliable operational
efficiency. Thus rapid informational network and operational efficiency may pave the way
towards market efficiency. They considered the provision for liquidity of capital and continuous
market for securities as prime functions from the point of view of investors. In an efficient
market, all the appropriate information about a firm that is obtainable to market participants is
expected to be fully and instantly absorbed and reflected in its share price.
Mohan, G. et al (2002) analyzed the change in volatility in the Indian stock market. They
studied the introduction of future trading using daily closing prices of Nifty and weekly closing
prices of Satyam Computers Ltd. The individual stocks seem to be slightly more volatile and
their volatility has become less and less dependent on past volatility and more dependent upon
the current period. The average long-term volatility has decreased at an index level.

Sitabhra Sinha and Raj Kumar Pan (2006) analyzed the nature of fluctuations in the Indian
financial market. They have studied the price returns of individual stocks, with tick-by-tick data
from the National Stock Exchange (NSE) and daily closing price data from the two largest
exchanges in India National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
They found that “the price returns in Indian markets follow a fat-tailed cumulative distribution,

consistent with a power law having exponent α ∼ 3, similar to that observed in developed

markets. However, the distributions of trading volume and the number of trades have a different
nature than that seen in the New York Stock Exchange (NYSE). Further, the price movement of
different stocks is highly correlated in Indian markets.”

In 2007, Statistics from the NSE showed that “retail investors have been the largest participants
in the derivatives markets in the past four-five years, accounting, on average, for around 60 per
cent of all derivatives based activity.”

John, Moutusi, Prabha (2014) has studied the recent capital market activities conducted in the
developing countries. The survey of this study has focused on the experiences of three regions
i.e. Southeast Asia, Latin America and Sub-Saharan Africa. The sections which were included in
the research were developments in public equity markets, private equity, bond markets and
efforts to integrate capital markets at the regional level.

Justification of Study
Capital occupies a position so dominant to the economic theory of production and distribution
that it is natural to assume, it occupies a very important place in the contribution of economic
growth. It is usually observed that economic growth and capital accumulation has a significant
correlation and addition to the stock of capital can inflame faster rate of growth. A high rate of
capital formation results in rapid growth in the production and income. Capital Market means the
market for all the financial instruments; short term and long term. It is the market where
borrowing and lending of long term funds takes place and deals in both debt and equity.
The capital market plays an important role immobilizing saving and channel is in them into
productive investments for the development of commerce and industry. As such, the capital
market helps in capital formation and economic growth of the country.
The capital market acts as an important link between savers and investors. The savers are lenders
of funds while investors are borrowers of funds. The savers who do not spend all their income
are called. “Surplus units” and the borrowers are known as “deficit units”. The capital market is
the transmission mechanism between surplus units and deficit units. It is a conduit through which
surplus units lend their surplus funds to deficit units.
Funds flow into the capital market from individuals and financial intermediaries which are
absorbed by commerce, industry and government. It thus facilitates the movement of stream of
capital to be used more productively and profitability to increases the national income.
Surplus units buy securities with their surplus funds and deficit units sells securities to raise the
funds they need. Funds flow from lenders to borrowers either directly or indirectly through
financial institutions such as banks, unit trusts, mutual funds, etc. The borrowers issue primary
securities which are purchased by lenders either directly or indirectly through financial
institutions.
The capital market prides incentives to savers in the form of interest or dividend and transfers
funds to investors. Thus it leads to capital formation. In fact, the capital market provides a market
mechanism for those who have savings and to those who need funds for productive investments.
It diverts resources from wasteful and unproductive channels such as gold, jewellery, real estate,
conspicuous consumption, etc. to productive investments.
A well-developed capital market comprising expert banking and non-banking intermediaries
brings stability in the value of stocks and securities. It does so by providing capital to the needy
at reasonable interest rates and helps in minimizing speculative activities.
The capital market encourages economic growth. The various institutions which operate in the
capital market give quantities and qualitative direction to the flow of funds and bring rational
allocation of resources. They do so by converting financial assets into productive physical assets.
This leads to the development of commerce and industry through the private and public sector,
thereby inducing economic growth.
In an underdeveloped country where capital is scarce, the absence of a developed capital market
is a greater hindrance to capital formation and economic growth. Even though the people are
poor, yet they do not have any inducements to save. Others who save, they invest their savings in
wasteful and unproductive channels, such as gold, jewellery, real estate, conspicuous
consumption, etc.
Such countries can induce people to save more by establishing banking and non-banking
financial institutions for the existence of a developed capital market. Such a market can go a long
way in providing a link between savers and investors, thereby leading to capital formation and
economic growth.
The stock exchange is important constituents of capital market. The establishment of NSE and
BSE has been the turning point in the working of Capital Market. These institutions performs a
very crucial role in the economic life of a country, acting as a free market for securities where
prices are determine by the forces of supply and demand.
Stock exchange is a vital organ in a modern society, without a stock exchange a modern
democratic economy cannot exist. For this reason, NSE was incorporated in 1992. The capital
market (equities) segment commenced operations in November 1994 and operations in
derivative segment commenced in June 2000. The main mission of NSE was to establish a
nationwide trading facility for equities, debt instruments and hybrids by providing a fair, efficient
and transparent securities market to investors by using electronic trading system.
As we can say that the stock exchange is now seen increasingly for what it really is, namely an
essential financial infrastructure for any economy.

CONCLUSION
NSE has a market capitalization of more than US$1.65 trillion, making it the world’s 12th-largest
stock exchange as of 23 January 2015.[1] NSE's flagship index, the Nifty, the 50 stock indexes, is
used extensively by investors in India and around the world as a barometer of the Indian capital
markets. NSE offers trading, clearing and settlement services in equity, equity derivatives, and
debt and currency derivatives segments. It is the first exchange in India to introduce electronic
trading facility thus connecting together the investor base of the entire country. NSE has 2500
VSATs and 3000 leased lines spread over more than 2000 cities across India.
On 22 July 2015, NSE filed Rs 100 crores suit against Money life.[9] However, on 9 September
2015, the Bombay High Court dismissed the case and fined NSE Rs50 lakhs in this defamation
case against Money life (www.moneylife.in).[10] The High Court asked NSE to pay Rs1.50 lakhs
to each journalist Debashis Basu and Sucheta Dalal and the remaining Rs47 lakhs to two
hospitals. On 8 July 2015, Sucheta Dalal wrote an article on Money life alleging that some NSE
employees were leaking sensitive data related to high-frequency trading or co-location servers to
a select set of market participants so that they could trade faster than their competitors. NSE
alleged defamation in the article by Money life.

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