Stock market: From banyan tree to the cloud

Indians do not lack trading acumen. Evidence of marketplaces or ‘mandis’ for trading commodities which attracted traders from distant lands is available in manuscripts written thousands of years ago.  It’s therefore not surprising that the country currently has a vibrant and thriving stock market ecosystem, boasting of the best-in-class trading technology and regulatory framework with a large foreign investor participation.

The journey however was not smooth and there have been many crests and troughs. The many scams that rocked markets from the ‘badla’ scam to the Harshad Mehta scam, to the more recent colocation scam have threatened to erode the credibility of stock investing ecosystem. But market participants and the regulator have learnt from past mistakes to improve the rules and trading processes to build a sound market ecosystem. ‘

The seeds of the Bombay Stock Exchange were sown in 1887 when a group of traders formed the 'Native Share and Stock Brokers Association'. The exchange, which was wound up during the depression of 1930s was- revived once again in 1935. Recognition was granted to the stock exchange in 1957 under the Securities Contract Regulation Act. The BSE is now set for a total transformation with the proposed three-phase modernisation for Online Trading and Trade Support System (OTISS) The picture of rotunda tower will be completely different in a couple of years. (Published in Business Line on June 26, 1994) PHOTO: THE HINDU ARCHIVES | Photo Credit: PAUL NORONHA

The beginning

The foundation for a formal market for trading stocks in India was laid by the passing of the Companies Act, 1850. The American Civil War and the shortage of cotton that followed played a part, too. During the war, the mills in Lancashire had to source their raw materials from other countries and they turned to cotton from Surat, whose price soared sharply between 1861 and 1865. This resulted in a sharp increase in the wealth of many cotton traders.

In 1875, a group of brokers, that had been informally trading under banyan trees and other locations across Mumbai, formed the Native Share and Stockbroker’s Association, which later went on to become the Bombay Stock Exchange; the oldest stock exchange in India and in Asia.

Rein of the Regional Stock Exchanges

In the period between 1890 and 1947, many other regional stock exchanges came in to being in Ahmedabad, Calcutta, Madras, Indore, Punjab, Uttar Pradesh, Nagpur, Hyderabad and Delhi. Other regional exchanges such as Cochin, Kanpur, Pune, Ludhiana, Guwahati, Mangalore, Patna, Jaipur, Bhubaneswar, Rajkot, Vadodara and Coimbatore were recognised in the 1980s.

The Bombay Stock Exchange was the largest then, catering to the most prosperous region in the country. But exchanges in other cities such as Calcutta, Madras, Coimbatore, Cochin and so on also did brisk business.

These regional exchanges were necessary because communication technology had not progressed a 100 years ago, and these exchanges were mandated to cater to companies and investors in specific regions.

Trading process was also quite rudimentary then. Indian stock exchanges conducted their businesses in large halls where representatives of brokers would congregate for a couple of hours to buy and sell stocks on behalf of their clients. Settled deals were noted on slips of papers and noted on the exchange black-board. Runners would be used to carry client orders from the broker’s office to the exchange ring. This system evolved into ring-based trading with open outcry system which continued until the beginning of online trading in the 1990s.

NSE, the disruptor

The beginning of the end of regional stock exchanges was marked by the launch of the National Stock Exchange’s electronic screen-based trading platform for equity and wholesale debt market in 1993-94. NSE was given permission to set up trading terminals in all parts of India, eating into the market share of all regional exchanges. NSE slashed the cost of membership and aggressively acquired sub-brokers, who were also full-time traders, all over India.

Though the BSE, too, began online trading in May 1995, the Centre did not give it permission to expand nation-wide until 1997. This two-year delay was a destiny-changer for BSE, as the NSE forged ahead during this period to become the largest stock exchange in the country. Once the ‘badla’ system of forward trading ended in 2000-2001, NSE further entrenched its position as brokers on its trading platform were more comfortable with equity futures and options which replaced badla. Thus, almost all the derivative volumes shifted to NSE.

A STOCK DEALER GIVES THUMBS DOWN WHEN THE STOCK CRASHED ON BOURSES IN MUMBAI. | Photo Credit: VIVEK BENDRE

Given the pan-Indian operations of BSE and NSE since 1990s, regional stock exchanges became redundant and witnessed a flight of investors to larger exchanges. SEBI finally rolled out an exit plan for RSEs in 2012, bringing their reign to an end.

NSE has ruled supreme in the Indian stock market for more than two decades now, accounting for 100 per cent of equity derivative volumes and almost 80 per cent of cash trading volumes. The third player, the Metropolitan Stock Exchange, has hardly made a dent in NSE’s market share. The team of professionals running NSE have done a good job of increasing transparency, user experience and ensuring protection of smaller investors. Though the recent colocation scam raises doubts over governance at the exchange, it can not obliterate the fact that NSE has played a very critical role in the growth of Indian stock market since 1993.

Finance Minister P Chidambaram with Ms. Shyamala Gopinath, Deputy Governor, RBI Mr. Ravi Narin, MD & CEO, NSE (right) and Mr. C. B. Bhave, Chairman, SEBI ringing the bell at the inauguration of ‘Currency Futures Trading’, at the National Stock Exchange (NSE) in Mumbai on Friday. | Photo Credit: PAUL NORONHA

What next for Indian exchanges

Stock markets have benefited greatly during the Covid-19 pandemic as a new set of young investors began trading in stock markets; but equity penetration at under 8 per cent continues to remain low in the country. It’s also a matter of concern that activity in the stock market is concentrated in the derivative segment and that, too, in just a handful of index futures and options.

There is clearly room for improving investor awareness about the benefits of equity investing for long-term portfolio growth and expanding the reach of stock markets. Greater demand will lead to more companies tapping the market to raise money. Broad-basing the trading activity is also called for.

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