The History of Stock Exchanges in India

Stock markets are fascinating entities and not for the least because they help investors make money! They are interesting institutions in themselves and those in India have a rich history.

The Securities Contracts (Regulation) Act of 1956defines a stock exchange as “any body of individuals, whether incorporated or not, constituted before corporatization and demutualization” or “a body corporate incorporated under the Companies Act, 1956 whether under a scheme of corporatization and demutualization or otherwise,” for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.

Just to clarify, “corporatization” means the succession of a recognized stock exchange, which was a body of individuals or a society, by another stock exchange, which is an incorporated company. Meanwhile, “demutualization” means the segregation of ownership and management from the trading rights of the members of a recognized stock exchange in accordance with a scheme approved by the Securities and Exchange Board of India (SEBI).

A deep history

Security trading in India goes back to the 18th century when the East India Company began trading in loan securities. Corporate shares started being traded in the 1830s in Bombay (now Mumbai) with the stock of Bank and Cotton presses. The simple and informal beginnings of stock exchanges in India take one back to the 1850s when 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 Horniman Circle.

The venue then shifted to banyan trees at the Meadows Street junction, which is now known as Mahatma Gandhi Road, a decade later. The shift continued taking place as the number of brokers increased, finally settling in 1874 at what is known as Dalal Street. This as yet informal group known as the Native Share and Stockbrokers Association organized themselves as the Bombay Stock Exchange (BSE) in 1875. The BSE is the oldest stock exchange in Asia and was the first to be granted permanent recognition under the Securities Contract Regulation Act, 1956.

The BSE was followed by the Ahmedabad Stock Exchange in 1894 which focused on trading in shares of textile mills. The Calcutta Stock Exchange began operations in 1908 and began trading shares of plantations and jute mills. The Madras Stock Exchange followed, being set up in 1920.

Modern history

In the post-independence era, the BSE dominated the volume of trading. However, the low level of transparency and undependable clearing and settlement systems, apart from other macro factors, increased the need of a financial market regulator, and the SEBI was born in 1988 as a non-statutory body. It was made a statutory body in 1992.

After the Harshad Mehta scam in 1992, there was a pressing need for another stock exchange large enough to compete with the BSE and bring transparency to the stock market. This gave birth to the National Stock Exchange (NSE). It was incorporated in 1992, become recognized as a stock exchange in 1993, and trading began on it in 1994. It was the first stock exchange on which trading took place electronically. In response to this competition, BSE also introduced an electronic trading system known as BSE On-line Trading (BOLT) in 1995.

The BSE launched its sensitivity index, the Sensex, now known as the S&P BSE Sensex, in 1986 with 1978–79 as the base year. This is an index of 30 companies and is a benchmark stock index, measuring the overall performance of the exchange. The index reached the level of 1,000 in July 1990, 2,000 in January 1992, 4,000 in March 1992, 5,000 in October 1999, and 6,000 in February 2000. The exchange introduced equity derivatives in 2000. Index options were launched in June 2001, stock options in July 2001, and stock futures in November 2001. India’s first free-float index, BSE Teck, was launched in July 2001.

Its competitor, NSE, launched its benchmark exchange, the CNX Nifty, now known as Nifty 50, in 1996. It comprises of 50 stocks and functions as the performance measure of the exchange. In terms of electronic screen-based trading and derivatives, it beat BSE by launching first of its kind products and services.

The current stock exchange scenario

BSE and NSE are not the only stock exchanges in India. After the country gained independence, 23 stock exchanges were added not including the BSE. However, at present, there are only seven recognized stock exchanges. Apart from the BSE and NSE, they are:

• Calcutta Stock Exchange Ltd.
• Magadh Stock Exchange Ltd.
• Metropolitan Stock Exchange of India Ltd.
• India International Exchange (India INX)
• NSE IFSC Ltd.

All other exchanges have been granted exit by SEBI.

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