The history of the capital market in India dates back to the eighteenth century when East India Company securities were traded in the country. Until the end of the nineteenth century securities trading was unorganized and the main trading centers were Bombay (now Mumbai) and Calcutta (now Kolkata). Of the two, Bombay was the chief trading center wherein bank shares were the major trading stock During the American Civil War (1860-61). Bombay was an important source of supply for cotton. Hence, trading activities flourished during the period, resulting in a boom in share prices. This boom, the first in the history of the Indian capital market lasted for a half a decade. The bubble burst on July 1, 1865 when there was tremendous slump in share prices.
Trading was at that time limited to a dozen brokers; their trading place was under a banyan tree in front of the Town hall in Bombay. These stock brokers organized informal association in 1897 – Native Shares and Stock Brokers Association, Bombay. The Stock exchanges in Calcutta ad Ahmedabad also industrial and trading centers, came up later. The Bombay Stock Exchange was recognized in May 1927 under the Bombay Securities Contracts Control Act, 1925.
The capital market was not well organized and developed during the British rule because the British government was not interested in the economic growth of the country. As a result many foreign companies depended on the London capital market for funds rather than in the Indian capital market.
In the post independence period also, the size the capital market remained small. During the first and second five year plans, the government’s emphasis was on the development of the agricultural sector and public sector undertakings. The public sector undertakings were healthier than the private undertakings in terms of paid up capital but shares were not listed on the stock exchanges. Moreover, the Controller of Capital Issues (CI) closely supervised and controlled the timing, composition, interest rates pricing allotment and floatation consist of new issues. These strict regulations de-motivated many companies from going public for almost four and a half decades.
In the 1950s,Century textiles, Tata Steel, Bombay Dyeing, National Rayon, Kohinoor mills were the favorite scripts of speculators. As speculation became rampant, the stock market came to be known as Satta Bazaar. Despite speculation non-payment or defaults were very frequent. The government enacted the Securities Contracts (regulation) Act in 1956 to regulate stock markets. The Companies Act, 1956 was also enacted. The decade of the 1950s was also characterized by the establishment of a network for the development of financial institutions and state financial corporations.
The 1960s was characterized by the wars and droughts in the country which led bearish trends. These trends were aggravated by the ban in 1969 on forward trading and Badla technically called contracts for clearing Badla provided a mechanism for carrying forward positions as well as for borrowing funds. Financial institutions such as LIC and GIC helped to revive the sentiment by emerging as the most important group of investors. The first mutual fund of India, the Unit Trust of India (UTI) came into existence in 1964.
In the 1970s Badla trading was resumed under the disguised forms of hand delivery contracts – A group. This revived the market. However, the capital market received another severe setback on July 6, 1974, when the government promulgated the Dividend Restriction ordinance, restricting the payment of dividend by companies to 12 per cent of the face value or one-third of the profit of the companies that can be distributed as computed under section 369 of the Companies Act, whichever was lower. This lead to a slump in market capitalism at the BSE by about 20 per cent overnight and the stock market did not open for nearly a fortnight. Later came buoyancy in the stock markets when the multinational companies (MNCs) were forced to dilute their majority stocks in their Indian ventures in favor of the Indian public under FERA 1973. Several MNCs opted out of India. One hundred and twenty three MNCs offered shares worth Rs 150 crore, creating 1.8 million shareholders within four years. The offer prices of FERA shares were lower than their intrinsic worth. Hence, for the first the FERA dilution created an equity cult in India. It was the spate of FERA issues that gave a real fillip to the Indian stock markets. For the first time, many investors got an opportunity to invest in the stocks of such MNCs as Colagte and Hindustan Liver Limited. Then in 1977, a little known entrepreneur, Dhirubhai Ambani tapped the capital market. The scrip Reliance Textiles is still a hot favorite and dominates trading at all stock exchanges.