The 75th anniversary of Independence is as good an occasion as any other to study the evolution of the securities market in India, and to take stock of where it is at present. Trading in securities has had a rich history in the country. The Bombay Stock Exchange (BSE), which is the 10th oldest stock exchange in the world, and the oldest in Asia, was established in 1875. Over a period of time, India had 23 stock exchanges, headquartered in different parts of the country. These exchanges, understandably, did not have a pan-India presence.

The questionable practices in some of the Regional Stock Exchanges (RSEs), as also in the BSE, led to the setting up of the National Stock Exchange (NSE) in 1992. The BSE was owned by brokers, who were also active in the business of trading. This conflict was subsequently addressed by a process known as demutualisation, which separated the ownership function from the trading function.

Pan-India Exchange

The NSE was conceived as a technology-based pan-India exchange, with anonymous trading, and faster settlement processes. Since the ownership of the NSE was largely with public sector financial institutions, there was no conflict with the activity of trading.

There are presently seven active stock exchanges in the country. The requirements of liquidity have necessitated that functional exchanges need to have a pan-India presence. Earlier, with the misguided objective of keeping the RSEs afloat, it was mandated that anyone raising funds in the equity market, would have to list on one RSE, in addition to listing on one or both of the pan-India exchanges.

Demat

The modernisation of the securities market also saw the advent of dematerialisation, where physical share certificates were replaced by accounts with one of the two depositories, namely NSDL and CDSL. The perennial problems of loss of certificates, fraudulent transactions through forgery, and the like, became a part of history, with the process of dematerialisation. Alongside this development, the settlement process was also expedited, with India being one of the few jurisdictions which saw a T+2 settlement cycle. Even the US, a much older and a more mature market, could not move away from a T+3 settlement cycle.

Till the early 1960s, the idea of mobilising the savings of small investors, and putting them to use for productive purposes through the capital market, was not given much attention. This changed with the coming into being of the Unit Trust of India in 1963. This was conceived as an instrumentality to mobilise the savings of small investors. Unit Scheme-64 (US-64), originally an investment vehicle for small investors, came to grief with larger entities investing in those units, in order to take advantage of tax benefits. Mutual funds that came up in the public sector and in the private sector, subsequently, have, over the years, remained the preferred investment vehicle for a large number of retail investors.

It is also useful to look at how regulation of the securities market has evolved. In its earliest years, the BSE witnessed trading under a large tree, with the handful of participants adhering to an informal code of conduct. In 1956, the Securities Contract (Regulation) Act (SCRA) was passed for the purpose of preventing undesirable transactions in securities by regulating the business of dealing therein. Interestingly, options were also prohibited, and this prohibition was removed only in 1995. The SCRA of 1956 dealt in detail with the functioning and regulation of Stock Exchanges.

Formation of SEBI

In 1988, the Securities and Exchange Board of India (SEBI) was constituted as a non-statutory body, though a resolution of the Government of India. Four years later, in 1992, the recognition that SEBI needed statutory powers led to its being reborn as a statutory organisation. The proposed unification of four enactments dealing with securities should iron out inconsistencies and usher in a coherent approach.

For many years, the average Indian investor did not have an adequate appetite for equities. Indian institutions being few in number, and not having resources matching those of foreign institutions, remained minor participants in the market. The overwhelming presence of foreign institutional investors contributed to volatility, since they could leave very quickly on seeing the possibility of better returns in other jurisdictions. It is only in recent times that two positive developments have taken place. Firstly, Indian institutions have become a kind of countervailing power in the securities markets. Secondly, even though the number leaves a lot to be desired, more retail investors have come into the market either directly or through Mutual Funds.

At present, India has one of the significant equity markets in the world. With India being the fastest growing economy, it is reasonable to believe that the securities market will also keep pace. The continuing dialogue between SEBI and the investors, both Indian and foreign, should help to iron out the wrinkles, and to make Indian markets more attractive. Strict regulation, and placing the investor centre stage is the recipe for continued success.

(The writer is Chairperson, Excellence Enablers; and former chairman, SEBI, UTI and IDBI)

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