The Secondary Market

Secondary market is a market in which existing securities are resold or traded. This market is also known as the stock market. In India the secondary market consists of recognized stock exchanges operating under rules, by laws and regulations duly approved by the government. These stock exchanges constitute an organized market where securities issued by the central and state governments, public bodies and joint stock companies are traded. A stock exchange is defined under section 2 (3) of the Securities Contracts (Regulation) Act 1956 as any body of individuals whether incorporated or not, constituted for the purposes of assisting, regulating or controlling the business of buying selling or dealing in securities.

Functions of the Secondary Market:

1) To facilitate liquidity and marketability of the outstanding equity and debt instruments
2) To contribute to economic growth through allocation of funds to the most efficient channel through the process of disinvestment to reinvestment.
3) To provide instant valuation of securities caused by changes in the internal environment (that is, companywide and industry wide factors). Such valuation facilities the measurement of the cost of capital and the rate of return of the economic entities at the micro level.
4) To ensure measure of safety and fair dealing to protect investors’ interest
5) To induce companies to improve performance since the market price at the stock exchanges reflects the performance and this market price is readily available to investors.

Development of the Stock Market in India:

The origin of the stock market in India dates back to the end of the eighteenth century when long term negotiable securities were first issued. The real beginning, however, occurred in the middle of the nineteenth century, after the enactment of the Companies Act in 1850 which introduced the feature of limited liability, and generated investor interest in corporate securities.

The native Share and Stock Brokers’ Association, now known as Bombay Stock Exchange (BSE) was formed in Bombay (now Mumbai) in 1875. This was followed by the formation of association / exchanges in Ahmedabad (1874), Calcutta (now Kolkata) (1908), and Madras (now Chennai) (1937). In order to promote the orderly development of the stock market, the central government introduced a comprehensive legislation called the Securities Contracts (Regulations) Act 1956.

The Calcutta Stock Exchange (CSE) was the largest stock exchange in India till the 1960s. In 1961, there were 1,203 listed companies across the various stock exchanges of the country. Of these, 576 were listed on CSE and 297 on BSE. However, during the later half of the 1960s, the relative importance of CSE declined while that of BSE increased sharply.

Till the early 1990s, the Indian secondary market comprised regional stock exchanges with BSE heading the list. The Indian stock market was plagued with many limitations, such as the following.

(1) Uncertainty of execution prices
(2) Uncertain delivery and settlement periods
(3) Front running that is, trading ahead of a client based on knowledge of the client order.
(4) Lack of transparency
(5) Absence of risk management
(6) Systemic failure of the entire market and market closures due to scams
(7) Club mentality of brokers.
(8) High transaction costs
(9) Kerb trading – private off market deals.

Post reforms Stock Market Scenario

After the initiation in 1991 the Indian secondary market now has a three tier form
1) Regional stock exchanges
2) National Stock Exchange (NSE)
3) Over the Counter Exchange of India (OTCEI)

The NSE was set up in 1994. It was the first modern stock exchange to bring in new technology, new trading practices, new institutions, and new products. The OTCEI was set up in 1992 as a stock exchange providing small and medium sized companies the means to generate capital.

In all, there are, at present 23 stock exchanges in India – 19 regional stock exchanges, BSE, NSE, OTCEI and the Inter connected Stock Exchange of India (ISE). The ISE is a stock exchange of stock exchanges. The 19 regional stock exchanges are located at Ahmedabad, Bangalore, Bhubaneshwar, Kolkata. Cochin, Coimbatore, Delhi, Guwahati, Hyderabad, Indore, Jaipur, Kanpur, Ludhiana, Chennai, Mangalore, Pune, Patna, Rajkot and Vadodara. They operate under the rules, by laws and regulations approved by the government and SEBI.