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.
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.