Secondary Equity Market (Stock market)

The origin of the stock market in India goes back to that 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 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 association /exchanges in Ahmedabad (1894), Calcutta (1908) Madras (1937). In addition a large number of ephemeral exchanges mainly in buoyant periods to recede into oblivion during depressing times subsequently.

The most important development in the Indian stock Market was the establishment of the National Stock Exchange (NSE) in 1994. Within a short period, it emerged as the largest stock exchange in the country surging ahead of the Bombay Stock Exchange (BSE) which was historically the dominant stock exchange in India.

The NSE has cast its shadow over most of the regional stock exchanges, jeopardizing their very existence. In a bid to survive the regional stock exchanges have set up subsidiaries which in turn have become institutional members of NSE as well as BSE. For example, the Bangalore Stock Exchange has set up a subsidiary called the BGSE Financial Services Limited which is an institutional member of NSE a well as BSE. Members of the Bangalore Stock Exchange can trade on NSE as well as BSE through the BGSE Financial Services Limited.

Since the National Stock Exchange and the Bombay Stock Exchange loom large over the Indian stock market, it may be instructive to learn about their distinctive features.

The National Stock Exchange

1. The NSE is a ringless national computerized exchange
2. The NSE gas two segments: the Capital Market segment and the Wholesale Debt Market segment. The Capital Market segment covers equities, convertible debentures and retail trade in non-convertible debentures. The Wholesale Debt Market segment is a market for high value transactions in government securities, PSU bonds, commercial papers and other debt instruments.
3. The trading members in the Capital Market segment are connected to the central computer in Mumbai through satellite link-up using VSATs (Very Small Aperture terminals). The trading members in the Wholesale Debt market segment are linked through dedicated high speed lines to the central computer at Mumbai.
4. The NSE has opted for an order-driven system. When an order is placed by a trading member, the computer automatically generates a unique order number and the member can take a print of order confirmation slip containing this number.
5. When a trade takes place, a trade confirmation slip is printed at the trading member’s work station. It gives details like quantity, price code number of counterparty and so on.
6. The identity of trading members is not revealed to others when he places an order or when his pending orders are displayed. Hence, large orders can be placed on the NSE.
7. Members are required to deliver securities and cash by a certain day. The payout day is the following day.
8. All trades on NSE are guaranteed by the National Securities Clearing Corporation (NSCC). This means that when A buys from B, NSCC becomes the counterparty to both legs of the transaction. In effect, NSCC becomes the seller to A and the buyer from B. This eliminates counterparty risk.

The Bombay Stock Exchange:

Established in 1875, the Bombay Stock Exchange (BSE) is one of oldest organized exchanges in the world with a long colorful and chequered history. Its distinctive features are as follows:

1. The BSE switched from the open outcry system to the screen-based system in 1995. It accelerated its computerization program n response to the threats from the NSE.
2. Jobbers play an important role on the BSE. A jobber is a broker who trades on his own account and hence offers a two-way quote or a bid-ask quote. The bid price reflects the price at which the jobber is wiling to buy and the ask price represents the price at which the jobber is willing to sell.
3. Investors have to transact via a jobber/broker. The jobber /broker feeds his buy/sell quotes in his computer terminal, which is linked to the main server at the BSE. Since both jobbers and brokers feed their orders, the BSE has adopted a quote-driven system and an order driven system.