A Trading Cycle For A Sequence Of Shares

Past and Present of Indian capital market

Past and Present of Indian capital market

Introduction-

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The earliest records of security dealings in India are meager and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century.

By 1830′s business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850.

The 1850′s witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60.

In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the ‘Share Mania’ in India begun. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87).

At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the “Native Share and Stock Brokers’ Association” (which is alternatively known as “The Stock Exchange “). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.

The Second World War broke out in 1939. It gave a sharp boom which was followed by a slump. But, in 1943, the situation changed radically, when India was fully mobilized as a supply base.

On account of the restrictive controls on cotton, bullion, seeds and other commodities, those dealing in them found in the stock market as the only outlet for their activities. They were anxious to join the trade and their number was swelled by numerous others. Many new associations were constituted for the purpose and Stock Exchanges in all parts of the country were floated.

The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited (1940) and Hyderabad Stock Exchange Limited (1944) were incorporated.

In Delhi two stock exchanges – Delhi Stock and Share Brokers’ Association Limited and the st of the exchanges suffered almost a total eclipse during depression. Lahore Exchange was closed during partition of the country and later migrated to Delhi and merged with Delhi Stock Exchange.

Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.

Most of the other exchanges languished till 1957 when they applied to the Central Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad and Indore, the well established exchanges, were recognized under the Act. Some of the members of the other Associations were required to be admitted by the recognized stock exchanges on a concessional basis, but acting on the principle of unitary control, all these pseudo stock exchanges were refused recognition by the Government of India and they thereupon ceased to function.

Thus, during early sixties there were eight recognized stock exchanges in India (mentioned above). The number virtually remained unchanged, for nearly two decades. During eighties, however, many stock exchanges were established: Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982), and Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990) and recently established exchanges – Coimbatore and Meerut. Thus, at present, there are totally twenty one recognized stock exchanges in India excluding the Over the Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL).

The Table given below portrays the overall growth pattern of Indian stock markets since independence. It is quite evident from the Table that Indian stock markets have not only grown just in number of exchanges, but also in number of listed companies and in capital of listed companies. The remarkable growth after 1985 can be clearly seen from the Table, and this was due to the favouring government policies towards security market industry.

Delhi Stocks and Shares Exchange Limited – were floated and later in June 1947, amalgamated into the Delhi Stock Exchnage Association Limited.

National stock exchange-

With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock market trading system on par with the international standards. On the basis of the recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others.

Trading at NSE can be classified under two broad categories:

(a) Wholesale debt market and

(b) Capital market.

Wholesale debt market operations are similar to money market operations – institutions and corporate bodies enter into high value transactions in financial instruments such as government securities, treasury bills, public sector unit bonds, commercial paper, certificate of deposit, etc.

There are two kinds of players in NSE:

(a) Trading members and

(b) Participants.

Recognized members of NSE are called trading members who trade on behalf of themselves and their clients. Participants include trading members and large players like banks who take direct settlement responsibility.

Trading at NSE takes place through a fully automated screen-based trading mechanism which adopts the principle of an order-driven market. Trading members can stay at their offices and execute the trading, since they are linked through a communication network. The prices at which the buyer and seller are willing to transact will appear on the screen. When the prices match the transaction will be completed and a confirmation slip will be printed at the office of the trading member.

NSE has several advantages over the traditional trading exchanges. They are as follows:

• NSE brings an integrated stock market trading network across the nation.

• Investors can trade at the same price from anywhere in the country since inter-market operations are streamlined coupled with the countrywide access to the securities.

• Delays in communication, late payments and the malpractice’s prevailing in the traditional trading mechanism can be done away with greater operational efficiency and informational transparency in the stock market operations, with the support of total computerized network.

Unless stock markets provide professionalized service, small investors and foreign investors will not be interested in capital market operations. And capital market being one of the major sources of long-term finance for industrial projects, India cannot afford to damage the capital market path. In this regard NSE gains vital importance in the Indian capital market system.

The origin of the stock market in India goes back to the end of the eighteenth century when long-term negotiable securities were first issued. However, for all practical purposes, the real beginning occurred in the middle of the nineteenth century after the enactment of the companies Act in 1850, which introduced the features of limited liability and generated investor interest in corporate securities.

An important early event in the development of the stock market in India was the formation of the native share and stock brokers ‘Association at Bombay in 1875, the precursor of the present day Bombay Stock Exchange. This was followed by the formation of associations/exchanges in Ahmedabad (1894), Calcutta (1908), and Madras (1937). In addition, a large number of ephemeral exchanges emerged mainly in buoyant periods to recede into oblivion during depressing times subsequently.

Stock exchanges are intricacy inter-woven in the fabric of a nation’s economic life. Without a stock exchange, the saving of the community- the sinews of economic progress and productive efficiency- would remain underutilized. The task of mobilization and allocation of savings could be attempted in the old days by a much less specialized institution than the stock exchanges. But as business and industry expanded and the economy assumed more complex nature, the need for ‘permanent finance’ arose. Entrepreneurs needed money for long term whereas investors demanded liquidity – the facility to convert their investment into cash at any given time. The answer was a ready market for investments and this was how the stock exchange came into being.

Stock exchange means any body of individuals, whether incorporated or not, constituted for the purpose of regulating or controlling the business of buying, selling or dealing in securities. These securities include:

(i) Shares, scrip, stocks, bonds, debentures stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ii) Government securities; and

(iii) Rights or interest in securities.

The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE) are the two primary exchanges in India. In addition, there are 22 Regional Stock Exchanges. However, the BSE and NSE have established themselves as the two leading exchanges and account for about 80 per cent of the equity volume traded in India. The NSE and BSE are equal in size in terms of daily traded volume. The average daily turnover at the exchanges has increased from Rs 851 crore in 1997-98 to Rs 1,284 crore in 1998-99 and further to Rs 2,273 crore in 1999-2000 (April – August 1999). NSE has around 1500 shares listed with a total market capitalization of around Rs 9, 21,500 crore.

The BSE has over 6000 stocks listed and has a market capitalization of around Rs 9, 68,000 crore. Most key stocks are traded on both the exchanges and hence the investor could buy them on either exchange. Both exchanges have a different settlement cycle, which allows investors to shift their positions on the bourses. The primary index of BSE is BSE Sensex comprising 30 stocks. NSE has the S&P NSE 50 Index (Nifty) which consists of fifty stocks. The BSE Sensex is the older and more widely followed index.

Both these indices are calculated on the basis of market capitalization and contain the heavily traded shares from key sectors. The markets are closed on Saturdays

And Sundays. Both the exchanges have switched over from the open outcry trading system to a fully automated computerized mode of trading known as BOLT (BSE on Line Trading) and NEAT (National Exchange Automated Trading) System.

It facilitates more efficient processing, automatic order matching, faster execution of trades and transparency; the scrip’s traded on the BSE have been classified into ‘A’, ‘B1′, ‘B2′, ‘C’, ‘F’ and ‘Z’ groups. The ‘A’ group shares represent those, which are in the carry forward system (Badla). The ‘F’ group represents the debt market (fixed income securities) segment. The ‘Z’ group scrip’s are the blacklisted companies. The ‘C’ group covers the odd lot securities in ‘A’, ‘B1′ & ‘B2′ groups and Rights renunciations. The key regulator governing Stock Exchanges, Brokers, Depositories, Depository participants, Mutual Funds, FIIs and other participants in Indian secondary and primary market is the Securities and Exchange Board of India (SEBI) Ltd.

History of Indian stock exchange-

Do you know that the world’s foremost marketplace New York Stock Exchange (NYSE), started its trading under a tree (now known as 68 Wall Street) over 200 years ago? Similarly, India’s premier stock exchange Bombay Stock Exchange (BSE) can also trace back its origin to as far as 125 years when it started as a voluntary non-profit making association.

News on the stock market appears in different media every day. You hear about it any time it reaches a new high or a new low, and you also hear about it daily in statements like ‘The BSE Sensitive Index rose 5% today’. Obviously, stocks and stock markets are important. Stocks of public limited companies are bought and sold at a stock exchange. But what really are stock exchanges? Known also as the stock market or bourse, a stock exchange is an organized marketplace for securities (like stocks, bonds, options) featured by the centralization of supply and demand for the transaction of orders by member brokers, for institutional and individual investors.

The exchange makes buying and selling easy. For example, you don’t have to actually go to a stock exchange, say, BSE – you can contact a broker, who does business with the BSE, and he or she will buy or sell your stock on your behalf.

Indian venture capital market-

Market Basics Venture capital is very different from traditional sources of financing. Venture capitalists finance innovation and ideas, which have a potential for high growth but with inherent uncertainties. This makes it a high-risk, high-return investment. Apart from finance, venture capitalists provide networking, management and marketing support as well. In the broadest sense, therefore, venture capital connotes human as well as financial capital. In the global venture capital industry, investors and investee firms work together closely in an enabling environment that allows entrepreneurs to focus on value creating ideas. Venture capitalists, meanwhile, drive the industry through ownership of the levers of control in return for the provision of capital, skills, information and complementary resources. This very blend of risk financing and handholding of entrepreneurs by venture capitalists creates an environment particularly suitable for knowledge and technology-based enterprises.

Scientific, technological and knowledge-based ideas – properly supported by venture capital – can be propelled into a powerful engine of economic growth and wealth creation in a sustainable manner. In various developed and developing economies, venture capital has played a significant developmental role. India, along with Israel, Taiwan and the US, is recognized for its globally competitive high technology and human capital. India’s recent success story in software and IT is almost a fairy tale when considering obstacles such as inadequate infrastructure, expensive hardware, restricted access to foreign skills and capital, and limited domestic demand. It also indicates the potential India has in terms of knowledge and technology-based industry.

India has the second largest English speaking scientific and technical manpower in the world. Some of its management (IIMs) and technology institutes (IITs) are known globally as centers of excellence. Every year, over 115,000 engineers graduate from government-run and private engineering colleges. Many also graduate with diploma courses in computers and other technical areas. Management institutes produce 40,000 management graduates annually. All of these candidates are potential entrepreneurs.

It is also important to recognize that while India is doing very well in IT and software, it is still behind in terms of product and packaged development. Many experts believe that just as the US did in the semiconductor industry in the eighties; it is time for India to move to a higher level in the value chain.

This is not expected to happen automatically. The sequence of steps in the high technology value chain is information, knowledge, ideas, innovation, product development and marketing. Basically, India is still at the level of ‘knowledge’. Given the limited infrastructure, low foreign investment and other transitional problems, it certainly needs policy support to move to the third stage – i.e., ideas – and beyond, towards innovation and product development. This is crucial for sustainable growth and for maintaining India’s competitive edge. This will take capital and other support, which can be provided by venture capitalists.

India also has a vast pool of existing and on-going scientific and technical research carried out by a large number of research laboratories, including defence laboratories as well as universities and technical institutes. A suitable venture capital environment – which includes incubation facilities – can help a great deal in identifying and actualizing some of this research into commercial production.

The development of a proper venture capital industry, particularly in the Indian context, is needed if high quality public offerings (IPO’s) are to be achieved. In the present situation, an individual investor becomes a venture capitalist of a sort by financing new enterprises and undertaking unknown risks. Investors also get enticed into public offerings of unproven and at times dubious quality. This situation can be corrected by venture-backed successful enterprises accessing the capital market. This will also protect smaller investors.

Venture capital is very different from traditional sources of financing. Venture capitalists finance innovation and ideas, which have a potential for high growth but with inherent uncertainties. This makes it a high-risk, high-return investment. Apart from finance, venture capitalists provide networking, management and marketing support as well. In the broadest sense, therefore, venture capital connotes human as well as financial capital. In the global venture capital industry, investors and invested firms work together closely in an enabling environment that allows entrepreneurs to focus on value creating ideas. Venture capitalists, meanwhile, drive the industry through ownership of the levers of control in return for the provision of capital, skills, information and complementary resources. This very blend of risk financing and handholding of entrepreneurs by venture capitalists creates an environment particularly suitable for knowledge and technology-based enterprises.

Scientific, technological and knowledge-based ideas – properly supported by venture capital – can be propelled into a powerful engine of economic growth and wealth creation in a sustainable manner. In various developed and developing economies, venture capital has played a significant developmental role. India, along with Israel, Taiwan and the US, is recognized for its globally competitive high technology and human capital. India’s recent success story in software and IT is almost a fairy tale when considering obstacles such as inadequate infrastructure, expensive hardware, restricted access to foreign skills and capital, and limited domestic demand. It also indicates the potential India has in terms of knowledge and technology-based industry.

India has the second largest English speaking scientific and technical manpower in the world. Some of its management (IIMs) and technology institutes (IITs) are known globally as centers of excellence. Every year, over 115,000 engineers graduate from government-run and private engineering colleges. Many also graduate with diploma courses in computers and other technical areas. Management institutes produce 40,000 management graduates annually. All of these candidates are potential entrepreneurs.

It is also important to recognize that while India is doing very well in IT and software, it is still behind in terms of product and packaged development. Many experts believe that just as the US did in the semiconductor industry in the eighties; it is time for India to move to a higher level in the value chain.

This is not expected to happen automatically. The sequence of steps in the high technology value chain is information, knowledge, ideas, innovation, product development and marketing. Basically, India is still at the level of ‘knowledge’. Given the limited infrastructure, low foreign investment and other transitional problems, it certainly needs policy support to move to the third stage – i.e., ideas – and beyond, towards innovation and product development. This is crucial for sustainable growth and for maintaining India’s competitive edge. This will take capital and other support, which can be provided by venture capitalists.

India also has a vast pool of existing and on-going scientific and technical research carried out by a large number of research laboratories, including defence laboratories as well as universities and technical institutes. A suitable venture capital environment – which includes incubation facilities – can help a great deal in identifying and actualizing some of this research into commercial production.

The development of a proper venture capital industry, particularly in the Indian context, is needed if high quality public offerings (IPO’s) are to be achieved. In the present situation, an individual investor becomes a venture capitalist of a sort by financing new enterprises and undertaking unknown risks. Investors also get enticed into public offerings of unproven and at times dubious quality. This situation can be corrected by venture-backed successful enterprises accessing the capital market. This will also protect smaller investors.

Conclusions-

Indian capital market is more volatile and its response highly according to the scenario changes in the world capital market responses.

Reference:

1.      Over view of capital market in India. (Books, articles)

Chinmoy ghosh

Lecturer accounting and finance.

About the Author

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