Mark Twain once said that the world is segregated into two types of people – those who have seen the majestic Taj Mahal with their own eyes and those who have not. The same analogy could be drawn for investors who may or may not have invested in the stock market in India.
As of 2020, the exchange volume in the Indian stock market equates to less than 3% of the overall global market capitalisation. However, if you look closely, the stock market in India offers potential and promising investment opportunities.
So, let us take a look at who started stock market in India and what is the current state of this establishment.
The Stock Market in India Started from Humble Beginnings
Historians can trace back the beginning of the stock market in India to the 18th century. Many attribute its humble beginnings to the trading in loan securities that was initiated by the East India Company. The 1830s saw some sort of the start of the stock market in India with corporate shares being traded with the stock of Cotton presses and Bank in erstwhile Bombay.
The first recorded instance of informal stock trading in India began in the 1850s. It is said that 22 stockbrokers sat under a banyan tree opposite the town hall in Bombay and started to trade. Later the same year saw the introduction of the Companies Act. This encouraged investor interest in corporate securities. Moreover, the concept of limited liability also emerged around this time.
Between 1850 and 1874, the number of stockbrokers in India continued to multiply. Even though they changed their location of trading often, they finally settled at a place which is the Dalal Street today, -the epicentre of the stock market in India.
The Native Share and Stockbrokers Association was formed as an informal group. It later christened itself the Bombay Stock Exchange (BSE) in 1875 sowing the roots of the stock market in India.
Among the established stock markets in India, the Bombay Stock Exchange is the oldest in Asia having been granted permanent recognition under the Securities Contract Regulation Act, of 1956.
The Birth of a Series of Stock Exchanges in India
Following the establishment of the BSE in 1894, a series of stock exchanges began to grow around the country. The Ahmedabad Stock Exchange was the first of the lot that focussed on trading in shares of textile mills.
The Calcutta Stock Exchange was the next one to be established in 1908. The institution concentrated on trading shares of plantations and jute mills.
1920 saw the Madras Stock Exchange opening its doors for trading.
A Change in the Stock Market in India in the Post-independence Era
There existed 23 stock exchanges across major cities in India in the post-independence era other than the Bombay Stock Exchange. However, in the last 75 years of an independent India, only the following stock exchanges are recognised trading institutions other than the BSE and the NSE:
- Calcutta Stock Exchange Ltd.
- Magadh Stock Exchange Ltd.
- Metropolitan Stock Exchange of India Ltd.
- India International Exchange (India INX)
- NSE IFSC Ltd
Once India gained its independence, the BSE was the single entity that dominated the volume of trading in the stock market in India. Despite the strong and robust growth journey of the BSE, the establishment lacked transparency and was plagued with operational challenges with their clearing and settlement systems. It demanded the need for a financial market regulator, an independent body that would be responsible to ensure that BSE was following the necessary industry guidelines and practices.
This need led to the launch of the Sensex or Sensitive Index in 1986 and the BSE National Index in 1989. SEBI or the Securities and Exchange Board of India, a non-statutory body was born in 1988. SEBI received its statutory status when after the SEBI Act was enacted 30 January 1992.
The NSE or the National Stock Exchange was founded in 1992 and officially opened doors to trading in 1994. It was established to ensure that the stock market in India was not dominated by a single entity only. It also helped to add transparency to the Indian stock market for prospective and existing traders and investors.
In 1994, the National Stock Exchange started dealing in the WDM or the Wholesale Debt Market and the equities segment. In 2000, the NSE started trading in the derivatives segment.
The NSE migrated from the open-floor system to the electronic trading system in 1995. There was a merger between the Forward Markets Commission (FMC) and SEBI in 2015. It was done to strengthen the commodities market regulations, facilitate participation from both domestic and foreign institutional investors and help launch new investment products in the stock market in India.
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The Growth Story of the BSE and NSE
The stock market in India witnessed phenomenal growth and both the NSE and the BSE have played critical roles in its success story.
The bulk of the trading in the stock market in India happens at the BSE and the NSE exchanges. Despite a difference of more than a century between these two historic trading centres, both establishments follow similar trading processes, mechanisms, operating hours, clearing and settlements.
According to data released in February 2022, the BSE had 5,246 listed firms whereas the NSE has 1,300 securities available for trade. All companies of repute are listed on either one or both of these stock exchanges in India.
NSE is the largest stock market in India in terms of sheer volume. However, the BSE is currently the world’s 11th largest stock exchange with a market capitalisation of approximately US$ 1.7 trillion. The market capitalisation of the NSE stands at US$ 1.65 trillion.
The flagship benchmark of the NSE is known as the Nifty50 and Sensex for the BSE. Both stock exchanges are competitors for order flow which reflects in the reduced costs, increase in market efficiency and subsequent innovations in trading. The arbitrageurs present help to keep the stock prices under check on both the stock exchanges.
Let’s take a look at the key parameters that are similar to both the NSE and the BSE in India.
Trading Mechanisms:
While the trading in the stock market in India took place in open floor formats to begin with, both the stock exchanges have now moved to open electronic limit order book, which is then matched by the trading computer to ensure accuracy and authenticity of the trade.
The order flow drives the total process, so there is no real place for market makers in the system anymore. It means that the investors’ place the market orders, which in turn are automatically matched with the best limit orders. In this system, both the seller and the buyer are able to trade while retaining their anonymity.
The benefit of the order driven market lies in the fact that it brings more market transparency simply by displaying all the buy and sell orders in the trading system. Having said that, eliminating the presence of market makers can mean non-execution of all orders.
Despite the evolution of the stock market in India, stockbrokers or brokerage firms have not vanished from the system yet. Investors today have the option to place their orders through licensed brokers in India.
Several brokers today offer the added facility of online trading to their retail customers. Institutional investors have the benefit of using the DMA or the direct market access option to place their orders by utilising the trading terminals provided to them by the brokers. These orders go directly into the stock market trading system.
Settlement and Trading Hours:
The t+3 rolling settlement was first followed by equity spot markets. It implies that a trade will be settled in three days after it is executed. For instance, if a trade takes place on a Monday, it was settled on Thursday in the same week. However, this was later changed to t+2 days and now since 2022 it has been shifted to t+1 settlement cycle. Stock trading takes place between 9:55 am and 3.30 pm Indian Standard Time on both the NSE and the BSE between Monday and Friday.
The shares must be delivered to the investor in a dematerialized form. Both the NSE and the BSE have their own clearing houses. It serves as a central counterparty, which means that all settlement risks are absorbed by the clearing house of the respective stock exchanges.
Market Indexes:
The stock market in India has two prominent market indexes for equities. The BSE has the Sensex and the NSE has the Nifty. Given the establishment of the BSE over a century ago, the Sensex is the older of the two that has 30 firms listed on it. The Sensex came into effect in 1986 but provides time series data from April 1979 onwards.
50 shares are listed on the Standard and Poor’s CNX Nifty of the NSE, which was created in 1996. This provides time series data from July 1990 onwards.
Market Regulation:
The Securities and Exchange Board of India (SEBI) shoulders the overall responsibility for the development, regulation, and supervision of the stock market in India. It is an independent body formed in 1992 and is authorised to lay down guidelines and rules to regulate the Indian stock market in any manner that it deems fit. SEBI enjoys enormous power and has the right to impose penalties in the event of a breach by any market participant and also ban any participant for fraudulent practices.
Who Can Invest in the Stock Market in India?
Indians with a Demat account can invest in the Indian stock market. It was only in the 1990s that the stock market in India became open to international investments. There are two categories of foreign investors who are eligible to invest in the Indian stock market. It can be initiated through foreign direct investments (FDIs) and foreign portfolio investments (FPIs).
It is classified as an FDI when the foreign investor actively participates in the daily operation and management of the Indian company. The government of India initiated a ceiling on the FDI limit. Over the last few years, the central government has progressively opened and the ceiling on FDIs has also increased gradually.
When the investor does not have any control over the operations or management, the investments are categorised as FPI. When foreign investors wish to make portfolio investments in India, they need to be registered as institutional investors (FIIs) or as a sub-account of one of the registered FIIs in India. SEBI accepts both registrations and allows such entities to invest in the stock market.
The FIIs primarily have their investments locked in a range of mutual funds, pension funds, endowments, sovereign wealth funds, insurance companies, banks, and asset management companies in India. It is because SEBI does not permit FIIs to make any direct investments in the stock market in India.
Additionally, FIIs are able to invest in unlisted securities outside stock exchanges. However, they must avail prior approval of the price by the Reserve Bank of India before proceeding with the transaction. However, FIIs can invest in units of mutual funds and derivatives traded on any stock exchange in India.
The Bottom Line
The stock market in India is an emerging market that promises tremendous growth in the future. Having said that, only a tiny percentage of household savings by Indians are invested in the domestic stock market.
No doubt there is no dearth of opportunities that the stock market in India has to offer to prospective investors. The history of the Indian stock market and how it has evolved over the decades bears strong testimony to this.
It is expected that the data and insights of the transparency of this investment avenue along with the possibility to earn high returns in the short and long term will pull in more investors, both domestic and international, in the future.
The mantra is to select the right stocks, build a diversified portfolio, and manage the risk efficiently with the right guidance from the experts before you decided to take a plunge into the stock market in India.
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