The Indian stock market has undergone a sea change with the opening up of the economy and economic reforms. With competition swaying the entire market, stock exchanges have been no exception.
The national reach of BSE and NSE and cutthroat competition between them, threatened the existence of the regional stock exchanges (RSEs). The volume of business on the RSEs which accounted for 9.2 percent of the total turnover in 1995-96. plummeted to 3.5 per cent in 1998-99. Trading at stock exchanges in Guwahati, Magadh, Indore, Mangalore, and Rajkot came to a halt even though trading at all these stock exchanges too had been automated. The survival of these RSEs, which once had a secure position, had now become a cause for concern. So these RSEs formed the Federation of Indian Stock Exchanges (FISE) in early 1996. The eroding market share, dwindling volume, and declining profitability of members at the RSEs left the FISE with two options: join hands with the BOLT expansion plan or maintain status quo and wait until the capital market.
It was impossible for most of the RSEs to become members of either BSE or NSE. Hence, to improve market efficiency and facilitate trading among the RSEs, FISE proposed an Inter Connected Market System (ICMS). It sought technical assistance from the US International Development – Financial Institutions Reforms and Expansion (USAID – FIRE) Project, administered by Price Waterhouse. With its assistance, the Interconnected Stock Exchange of India (ISE) was set up as the twenty third stock exchange in the country.
The ISE, promoted by 15 RSEs, opened a new national segment of trade to all members of the exchanges while retaining the regional segments of trading at these exchanges. The ISE was granted recognition under the Securities Contracts (Regulation) Act, 1956 by SEBI in November 1998. ISE commenced its trading operations on February 26, 1999. The 15 participating exchanges of ISE have about 4,500 members and about 3,500 securities listed on them. ISE is the stock exchange of stock exchanges, members of the participating stock exchanges being only traders on ISE.
ISE has provided a highly automated trading system open to all the registered traders of the participating exchanges with direct access to its national level trading platform on an equal footing regardless of the location of the participating exchange and of the status of the exchange in terms of turnover, financial strength, and so on. It has not only a professionally qualified managing director and a full time director, but also a public representative as the chairman of the exchange.
ISE has a uniform trading and settlement cycle and a settlement guarantee fund. It is a centralized national level market for trading in securities, with decentralized operations as the participating regional stock exchanges continue to be centers for trading, clearing, and settlement as also for redressal of grievances of investors and others.
ISE contributed a meager turnover of Rs 545 crore in 1999-2000, Rs 233 crore during 2000-01 and Rs 55 crore in 2001-02. This stock exchange has also failed to make its presence felt in the Indian stock market.
Regional Stock Exchanges:
One significant aspect of the Indian capital market is the existence of as many as 19 regional stock exchanges – the highest in the world. RSEs existed in developed markets also but ultimately, they had to shut down or merge with the principal exchanges. Over 20 stock exchanges existed in the UK until 1973. By 1965, the regional exchanges joined together to form the Federation of Stock Exchanges an amalgamated to become a fully unified stock exchange in 1973.
Australia has six exchanges which got together and established the Australia Associated Stock Exchanges (AASE), a company limited by its guarantee, to represent them at the national level. In 1987, the Australian Stock Exchange (ASX) commenced operations, with the six capital city exchanges as its wholly owned subsidiaries. In Italy, all securities listed on the Milan Stock Exchange and nine other RSEs were transferred to a national computerized order-driven trading system under the Italian Stock Exchange in 1991. Today, the Italian stock market is a computerized system which has no specific location.
In India, the area of operation and jurisdiction of the regional stock exchanges were specified. The emergence of a number of regional stock exchanges was the result of India’s geographical and telecommunications limitations.