"The Evolution of the Indian Stock Market: A Historical Perspective"
The Indian stock market has a rich and fascinating history dating back to the 18th century. It all began in the 1830s when corporate shares started being traded in Bombay with the stock of Banks and Cotton presses. The informal beginnings of stock exchanges in India date back to the 1850s when 22 stockbrokers began trading opposite the Town Hall of Bombay under a banyan tree. The shift continued as the number of brokers increased and eventually settled in 1874 at what is known as Dalal Street. This informal group 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.
After India gained independence from British rule, significant changes occurred in the stock market. The Securities Contracts (Regulation) Act was passed in 1956 to regulate the securities market. Economic liberalization policies were introduced in 1991, leading to the opening up of the Indian economy to foreign investors. This marked a turning point for the Indian stock market, which saw a surge in trading volumes and new listings.
The Securities and Exchange Board of India (SEBI) was established on April 12, 1992, to regulate the securities market and protect the interests of investors. The National Stock Exchange of India Limited (NSE) was incorporated in 1992 and was recognized as a stock exchange by SEBI in April 1993. It commenced operations in 1994 with the launch of the wholesale debt market, followed shortly after by the launch of the cash market segment.
The Securities and Exchange Board of India (SEBI) introduced the process of dematerialization of shares in 1996. Prior to the introduction of the dematerialization of shares, investors in India held physical share certificates as proof of ownership in a particular company. This system was plagued with inefficiencies, including the time and cost involved in transferring ownership of shares, the risk of physical loss or theft of share certificates, and the need for physical storage and maintenance of records.
To address these issues, the Indian government and the Securities and Exchange Board of India (SEBI) introduced the process of dematerialization of shares in 1996. This involved converting physical share certificates into electronic form and storing them in a central depository, which would be responsible for maintaining records of ownership and facilitating transfers. The process of dematerialization was facilitated by the National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL), which were established as depositories to hold and maintain electronic records of shares. Investors could open a demat account with a Depository Participant (DP) to hold their electronic shares and could buy and sell shares through the stock exchange without the need for physical share certificates.
To facilitate the process of trading electronic shares, the International Securities Identification Number (ISIN) system was introduced. The ISIN is a unique identifier assigned to each security, which enables investors to track ownership, verify the authenticity of securities, and facilitate the settlement of trades. The ISIN system was adopted in India in 1994 and is now widely used to identify and track securities traded on the Indian stock exchanges. The introduction of the dematerialization of shares and the ISIN system in India has led to significant improvements in efficiency, transparency, and investor protection. It has also enabled easier access to the capital markets for retail investors, as well as reducing the risk and cost associated with physical share certificates. Today, demat accounts and the use of ISIN numbers have become an integral part of the Indian securities market, and have contributed to the growth and development of the Indian economy.
The NSE commenced trading in derivatives with the launch of index futures on June 12, 2000, based on the popular benchmark Nifty 50 Index. The exchange introduced trading in Index Options (also based on Nifty 50) on June 4, 2001. NSE became the first exchange to launch trading in options on individual securities from July 2, 2001, and futures on individual securities on November 9, 2001.
In response to the changing needs of the market, NSE introduced trading in exchange-traded currency derivative contracts on August 29, 2008, beginning with USDINR contracts. The product had a successful debut and has consistently grown since then. As India's economy becomes increasingly integrated with the global economy and the demand for currency derivatives in other currencies continues to rise, both the Securities Exchange Board of India and the Reserve Bank of India have authorized trading in futures contracts on new currency pairs. NSE has responded by introducing trading in currency futures based on exchange rates between Euro (EUR) and INR, Pound Sterling (GBP) and INR, and Japanese Yen (JPY) and INR, in addition to the existing USDINR contracts.
The settlement cycle for trades on the National Stock Exchange (NSE) of India has also evolved over time. Initially, the settlement cycle was T+5, but it was reduced to T+3 in April 2003 to reduce settlement risk and align with international best practices. The NSE also introduced a rolling settlement system in January 2002, where settlement for trades takes place on a daily basis, reducing the risk of default. In August 2014, SEBI directed all Indian stock exchanges to move to a T+2 settlement cycle, and the NSE implemented this on April 1, 2016. In September 2020, SEBI proposed moving to a T+1 settlement cycle for all Indian stock exchanges, which would further reduce settlement risk and improve market efficiency. The first batch of securities transitioned to T+1 settlement in January 2022, and more securities are expected to transition in phases.
Today, the Indian stock market is one of the largest in the world, with the BSE and NSE accounting for over 90% of the country's stock market capitalization. The market has come a long way since its early days and has seen significant changes and growth over the years.