Basics of Stock Market 7: Role of stock exchanges in India

Now, you have a got a firm understanding of how SEBI plays a major role in the financial markets in India. Let’s understand what Stock exchanges do, the one entity which is fully regulated under SEBI’s guidelines. Every day millions of trades happen in India and all these trades are processed through an entity known as a stock exchange. As of 2021, there are 9 stock exchanges that are recognized by SEBI, where NSE being the most traded and with the most turnover one.


Table of contents

The story of stock exchange in India



Securities trading in India goes back to the 18th century when the East India Company started trading in loan securities. The stocks of banks and cotton presses were initially traded in 1830 in Bombay. The story takes back to 1850 where 22 stockbrokers began trading opposite the town hall of Bombay under a banyan tree. The tree still stands in the area which is now known as the Horniman circle. This street later came to be called Dalal Street (meaning in Hindi “Broker Street”).


This continued to increase and finally, in 1874 they formed an informal group called the Native share and share brokers association, which later organized itself as the Bombay stock exchange in 1875. Thus, making the Bombay stock exchange (BSE) the oldest stock exchange in Asia and was the first to be granted permanent recognition under the securities contract regulation Act, 1956.


The Bombay stock exchange was followed by Ahmedabad stock exchange in 1894 (traded shares of textile mills), Calcutta stock exchange in 1908 (traded shares of plantations and jute mills), and Madras stock exchange in 1920.


Since post-independence, the BSE dominated trading with high volume. But had low transparency and inefficiency in clearing and settlement systems. Adding these factors plus many other macro factors, SEBI was born in 1988 as a non-statutory body and was made a statutory body in 1992.


The birth of NSE



You might be wondering, if BSE is the oldest and the most traded one, then why do we have other exchanges, particularly why we need a National stock exchange? This all began after the Harshad Mehta scam in 1992, where there was an urgent and immediate need to bring more transparency to the stock market. One way was to bring in a large competitor big enough to compete with BSE.


Thus, NSE was born in 1992 and was recognized as a stock exchange in 1993, and trading in NSE began in 1994. NSE, unlike our old-fashioned BSE, NSE brought one major change into trading. They made all the trading to be electronic, thereby eliminating any paper trading or share certificates. In response to this, BSE caught up and brought an electronic trading system known as BSE online trading (BOLT) in 1995.


On 13 May 2013, NSE launched India’s first dedicated debt platform to provide a trading platform for debt-related products. The provides an opportunity for retail investors to invest in corporate bonds.


NSE’s trading system is a state-of-the-art application having an uptime of 99.99% processing more than a billion messages every day with sub-millisecond response time. The technological advancement in NSE is huge. When NSE started in 1994, it was handling 2 orders (trades) per second. This increased to 60 orders a second in 2001. Today, NSE can handle 1,60,000 orders/messages per second, with infinite ability to scale up at short notice on demand.


Launching Index



The BSE launched its sensitivity index, the Sensex, now known as BSE Sensex, in 1986 with 1978-79 as its base year. The index compromised of 30 companies measuring the overall performance of the exchange. The index reached a level of 1000 in July 1990, 4000 in March 1994, and 6000 in February 2000.


NSE launched its index called CNX nifty, now known as Nifty 50, in 1996. It compromises 50 stocks and functions as the performance measure of the exchange. NSE also launched first of its kind, electronic trading and derivatives, and as usual, BSE followed the trend.


NSE joined hands with Industrial Development Bank of India Limited (IDBL) and Unit trust of India to form National Securities Depository Limited (NSDL) which is India’s first electronic securities depository (where our shares will be stored in electronic format) after its launch. After this, BSE launched a Central depository and securities limited (CDSL) for its electronic security depository.


The present situation of NSE and BSE


Today, BSE is measured as the world's 9th largest stock exchange with a market capitalization of $3.96 trillion, while NSE having a market capitalization of over $3.77 trillion making it the world’s 10th largest stock exchange. Over 5000 companies are listed in BSE and 1500 companies in NSE. In terms of trading volume, both the exchanges are all most equal.


Just for a comparison, the US stock exchanges, New York stock exchange has a market capitalization of $26.32 trillion (the largest) and Nasdaq has a market capitalization of 19 trillion (2nd largest). As of April 2018, 6 crores (60 million) retail investors (people like you and me) had invested their savings in the stock market in India. To bring to a perspective, that’s just 1.3% of India’s total population who have invested in the stock market. For comparison, the percentage is 27% in the United States and 10% in China.


Role of stock exchanges in Capital Market



Attracting investors


Exchanges are a place where big institutional investors come, and small retail investors also participate. So, exchanges ensure investor's protection, regulating all the trading transactions, indirectly attracting a large number of investors in the capital market thereby increasing their trust and confidence.


Capital and economic growth


The formation and channelizing of funds to various industries which are involved in the production and manufacturing of various goods and services is beneficial for the economy. This enhances the capital formation and development of national assets.


Liquidity in the system


One of the main factors while trading is liquidity. You need to find buyers when you sell and find sellers when you’re buying. These exchanges facilitate stock liquidity as a prime factor so that you can trade anytime during trading hours. After bringing trading online (Dematerialization-DEMAT) of securities, the trading is now a more smooth and seamless experience.


Safety and security


Since there are millions of trades happening every minute, investment safety is a major priority. Since now all the trades are taking online, there will be a lot of loopholes. They work as per rules and regulations provided by the securities contract regulation act 1956. SEBI keeps a watchful eye on these operations. The authorities make sure the best practices are followed and minimize the risk for investors to safeguard their confidence.


Modern technological advancement


Pre 1996, trading was done in paper form, material form. Thus, physical share certificates were issued back then when you’re buying a share. This made trading limited to the offices where the trades had to be done. This created investors for other parts in a dark cloud. But with the modern online trading system, all the price movement is in front of your eyes, and you can make the most of it. The modern stock exchange has facilitated more information gathering and advanced technology for having safe marketability for the participants.


Barometer of a country


The stock exchanges are considered to be the barometer of a nation’s economy. The economy of a country is symbolized by the most significant stock exchange of that country. The stock exchange helps to represent the countries situation in terms of the economy at the national and international levels. BSE is mostly considered by overseas investors to get an idea of the economic condition of the country.


Rules and regulation


There are a lot of rules and regulations which are to be maintained by the corporates. The exchanges facilitate this action by taking information from listed companies in order to avoid any malpractices in the system. They also facilitate periodic auditing of the firms through annual and quarterly reports.


Redistribution of wealth


Since all types of investors come to participate in exchanges, whether big institutional investors or small retail investors like you and me, all have equal power in buying a share before the eyes of the exchange. Everyone must go through the same process in buying/selling the share This keeps a uniform distribution of wealth and enhances the freedom of trading for all.


Generate employment


Since there are a lot of intermediaries working between retail investors and exchanges, this creates a lot of employment opportunities for people. Different people like stockbrokers, agents, sub-broker, etc. work with these exchanges.


Conclusion



The exchanges play a very crucial role in shaping the stock market as well as shaping the country’s economy. As you can see, the stock exchanges have been around for almost 150 years and counting. Thus, the advancement and reliability of our exchanges is the trust we need to keep and through technological advancement, the process of trading is made much simpler now.


The exchanges are the place where our brokers connect and sell/ buy shares of a company. We trade through a broker to buy/sell a share. The broker goes to the exchange and does the trades for us. But have you ever wondered why you see fluctuations in price every day, every hour, every minute, every second? Why is the price moving up and down every second? Who controls this and can the price suddenly fall down like a steep fall? We shall explore the answers to all these questions in our next article.

Stay tuned!

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