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E5-E6 Core Chapter-2 Chapter-2 AN INTRODUCTION TO INDIAN STOCK MARKET, STOCK EXCHANGES AND SEBI BSNL, India For Internal Circulation Only 1 E5-E6 Core Chapter-2 AN INTRODUCTION TO INDIAN STOCK MARKET, STOCK EXCHANGES AND SEBI India has a well developed capital market system, by far one of the best in the developing world. It comprises term-lending institutions or development financial institutions like the Industrial Development Bank of India (IDBI), the Industrial Finance Corporation of India Ltd (IFCI) and the Industrial Credit and Investment Corporation of India (ICICI) which provide long-term debt capital to the industry, investment financial institutions like the Life Insurance Corporation of India (LICI) and the Unit Trust of India (UTI) which also provide long-term finance, commercial banks which are also involved in providing long-term finance, a plethora of State-level development and investment oriented institutions and more recently venture capital funds providing finance to Greenfield ventures involved in high-tech industries. Equally important is the fast growing stock market activity which ahs witnessed unprecedented growth in the 1980s and the beginning of 1990s. Developments in Indian Economy The capital market works in the given economic industrial milieu. Indian economy for over three decades after independence was dominated by the public sector which was considered as the major vehicle for economic and industrial development. The trend has, however, changed since the mid 80s with liberalization of Government policies and greater freedom given to the private sector in most of the sectors, including the basic sector comprising iron and steel, power and road construction, among others. The policy of progressively deregulating the economy has led to the emergence of stock markets as a major instrument of finance for industry and trade. The Indian economy during the eighties had grown at a much faster rate and the average annual growth rate was 5.5 per cent as against the almost stagnant annual average growth rate of 3.5 per cent witnessed for the earlier three decades. In the nineties, the economy touched a growth rate of about 6.5 per cent. Equally important is the fact that the savings ratio in the economy has been high. Gross domestic savings as a percentage of gross BSNL, India For Internal Circulation Only 2 E5-E6 Core Chapter-2 domestic products zoomed more or less progressively from a low level of 10.2 per cent in 1950-51 to 23.2 per cent in 1978-79 and has been around 20-22 per cent thereafter. India is thus blessed with a growing pool of savings. Industry has been growing at a significant rate of about 8 per cent in the eighties and about 10 percent in the nineties as against 5 percent in the earlier decades. The driving force for the industrial growth is a large and growing domestic market accounting for about 94 per cent of aggregate demand basically emanating from a thriving class of about 150-200 million peo0ople with standards of living comparable with their counterparts in developed economies. The agricultural sector, which dominated the economy for a long-term, no more does so. The overall dominance of the primary sector comprising agriculture and mining has come down while secondary and tertiary sectors are having a greater share of the economic activity. While the shares of the primary sector in the net domestic product declined from 50.1 per cent in 1970-71 to 36.15 percent towards the end of eighties, that of the secondary sector rose from 19.7 per cent to 25.54 per cent and of the tertiary sector from 30.2 to 38.31 per cent during the same period. Service sector has assumed a far greater importance now, and is expected to grow faster. Stock Exchanges in India: Developments and Operations India can boast of being one of the oldest stock markets in Asia. Nearly 200 years ago, trading in securities used to take place. The first stock ex change, however, came to be established in 1875 in Bombay when the stock brokers, aghast at their plight following the severe depression in securities industry, decided to form an association for protecting the character, status and interest of native share and stock brokers and of providing a hall or building for the use of members of such an association. The process of establishment of stock exchanges gradually spread to other cities of the country like Ahmedabad, Calcutta, and Madras etc. As a result, in the initial years of regulation of the Securities Contracts (Regulation) Act, 1956 the first all-India BSNL, India For Internal Circulation Only 3 E5-E6 Core Chapter-2 legislation regulating the stock exchanges in the country there were eight recognized stock exchanges in the country. For nearly two decades, thereafter, the number virtually remained unchanged. The decade of eighties, however, saw the birth of a number of new recognized stock exchanges in the country. In 1996, there were 22 stock exchanges in India. With the cult of equity spreading fast to the four corners of the country, prospects of many more stock exchanges springing up in the country are bright and there could easily be over 40 stock exchanges humming with activity all over the country by the end of the century. The argument by a section that establishment of more stock exchanges is not conducive for the development of efficient systems of functioning of the securities industry, ignores the fact that the communication facilities in the country are now satisfactory and also that a direct and close regulating authority easily accessible to the investors inspires confidence in investment in stock market instruments. Number of shareholders The growth in the number of direct shareholders in the country has also been phenomenal during the last one decade. It has grown steadily from about 10 lakhs or so about ten years ago to about 1.2 to 1.5 crores currently. The country has thus the second largest shareholding population in the worled next only to the United States of America which has about 5 crores shareholders and subscribers to mutual funds and significantly ahead of countries like Japan, the United Kingdom and France, all with a population of about one crore. With new shareholders joining every year, in absolute term, India can perh aps boast of having the largest shareholding population in the world in the first decade of the next century. It may, however, be noted that 5 crore shareholders estimated to be in the country by the end of the century would constitute only 5 per cent of the population. The country has also a large number of debenture holders whose figure can currently be estimated to be about 50 lakhs. These also add to the stock market activity. Most of the debenture holders are prospective shareholders as they hold convertible debentures awaiting conversion into equity shares. Non-convertible debentures are also becoming BSNL, India For Internal Circulation Only 4 E5-E6 Core Chapter-2 popular in India. With the liberalization of the interest rate on debenture, they may assume greater role. Number of Listed Companies The relatively less stringent conditions have led to emergence of a large number of listed companies in the country. In 1996, there were 5,999 companies listed on the Bombay Stock Exchange. On all India basis, more than 9000 companies are listed on the various stock exchanges in the country. India thus occupies the second position in the world next only to the United States of America which has about 10,000 listed companies. What is, however, required to be noted is that the paid-up capital of about 40 per cent of these companies in quite low. Turnover The turnover in the Indian stock exchanges has zoomed to great heights during the last ten years. On the Bombay Stock Exchange, which accounts for about two-thirds of the business in the country, the daily turnover was very low in seventies. The total turnover on the BSE was Rs.5,796 crore in 1984-85 which rose to Rs.36,012 crore by 1990-91 and then doubled to Rs.71,777 crore in 1991-92. The year 1993-94 witnessed the highest turnover of Rs.84,536 crore. After that, it started declining, particularly due to the banning of forward trading. In 1995-96, the turnover on the BSE was Rs.50,664 crore and it has touched Rs.78,989 crore during April-December 1997. Daily turnover increased sharply until 1994, and then declined for the next two years. It again rose in 1997 (April-December) to a high level. What is more exciting about the Indian stock markets is the number of deals put through in a day. On an average, about 45,000 deals were executed in a day on the Bombay Stock Exchange and about 45,000 deals on the International Stock Exchange of London. The boom period, June to October, 1990, often saw the number of deals shoot above 80,000 a day and taking into account the fact that trading is confined to only t wo hours in BSNL, India For Internal Circulation Only 5 E5-E6 Core Chapter-2 a day, the Bombay Stock Exchange registered the highest per hour velocity of transactions next perhaps only to Taipei. Membership of the Stock Exchange Individuals as well as companies can become the members of stock exchanges in India. A member may function as a broker buying and selling securities on behalf of others for a commission, or a principal buying and selling securities on behalf of others for a commission, or a principal buying and selling securities on his own account. As a principal, a member can enter into a contract only with the other member of the stock exchange unless he is authorized by any other person. The members operating on stock exchanges, particularly the Bombay Stock Exchange could be categorized as follows: Brokers: Brokers buy or sell securities, as agents of their clients on the f \loor of the exchange for a commission not exceeding 2.5 per cent of the value of the transaction. Sub-brokers are authorized assistants of the brokers, and buy or sel securities on behalf of a member or broker of the stock exchange. Taravaniwalas: Taravaniwalas operate in the stock exchanges as principals to make profits from the buying and selling of the securities on their own account. They specialize in few securities, maintaining their continuous marketability and liquidity. Some taravaniwalas specialize in non-cleared securities, i.e. those securities which are not on the active lsit. They are also called dealers in noncleared securities. Budliwalas: Budliwalas provide financial support to the members of the stock exchange. They earn backwardation charges from the members who have sold stock and obtain securities from them to give delivery at the time of clearing. On the other hand, they earn contango charges from the members who borrow from them to take delivery of securities bought by them. Arbitrageurs: arbitrageurs buy and sell securities in more than one stock exchange to take advantage of the price differentials in such exchanges. BSNL, India For Internal Circulation Only 6 E5-E6 Core Chapter-2 Odd-lot-dealers: a lot consists of 100 shares when the face value is Rs.10 or 10 shares when the face value is Rs.100. a lot consisting of shares other than 100 or 10 is an odd-lot. Odd-lot dealers buy and sell such odd-lots. Odd-lot dealer would buy odd-lots at a lower price, convert dealers buy and sell such add-lots and sell at a higher price to earn his profit. Organization of Stock Exchanges: The stock exchanges in India can take any one of the following forms: (a) a public limited company, or (b) a company limited by guarantee, or (c) a voluntary, non-profit making association. A governing body is constituted to administer a stock exchange. The governing body acts like a board, and it has full power of interpretation of rules, buylaws etc, and take decision on matters relating to the conduct of stock exchange and its members. Its function also includes the management of the exchange s assets and funds. In tune with the developments the world over, complexion of the governing boards of India stock exchanges too is undergoing a change, with more of non-broker directors being inducted into the board rooms of the stock exchanges. Presently , non-broker directors being inducted into the board rooms of the stock exchanges. Presently, nonbroker directors who are generally representatives of the Ministry of Finance, Department of Company Affairs, financial institutions and the Securities and Exchange Board of India and some leading personalities drawn from different professionals like chartered accountancy, law etc., constitute about one-third of the strength of these boards. Most of these non-broker directors have made significant contributions in the deliberations and policy making processes of stock exchanges and are no longer considered to be aliens in these forums. There is a realization in informed quarters that their strength needs to be increased to about one-half of the size of the board, as is normally the pattern in most of the developed markets of the world. What is particularly significant is that the non-broker directors are nominated either directly by the Government or with their approval which doubly ensures that they always BSNL, India For Internal Circulation Only 7 E5-E6 Core Chapter-2 act in the public interest. Even the presidents and vice-presidents at most of the stock exchanges are also nominated by the Government from among the elected stockbroker directors. Day-to-day administration of stock exchanges is entrusted to executive directors of several stock exchanges appointed with the approval of the Government. There is a move to appoint executive directors at all the stock exchanges so that the day-to-day administration is not looked after by elected stockbroker presidents, not all of whom may always be able to rise above partisan and sectional interests. Powers of the executive director at the Bombay Stock Exchange are almost concurrent with those of the governing board and the question of clothing the executive directors at the other stock exchanges with similar powers is under consideration. There are a number of sub-committees other than the arbitration and defaulter committees at all the stock exchanges which continuously attend to the work of improvement of the market and betterment of services rendered by stock exchanges. Securities and Exchange Board of India (SEBI): A major development in the Indian stock market which deserves a particular mention was the establishment of the Securities and Exchange Board of India (SEBI), on the lines of the Securities and Investment Board of the U.K. SEBI which was established on the 12 April, 1988 is required to take a holistic view of the Indian Securities markets. The stringent advances in the capital market activities and the growing complexities of the market related problems have necessitated the emergence of this institution. SEBI has been given a legal status, as a supervisory body, in 1992. it is required to regulate and promote the securities market by: Providing fair dealings in the issues of securities and ensuring a market place where funds can be raised at a relatively low cost; BSNL, India For Internal Circulation Only 8 E5-E6 Core Chapter-2 Providing a degree of protection to the investors and safeguard their rights and inte4rests so that there is a steady flow of savings into the market; Regulating and developing a code of conduct and fair practices by intermediaries in the capital market like brokers and merchant banks with a view to making them competitive and professional. BSNL, India For Internal Circulation Only 9 E5-E6 Core Chapter-2 QUESTIONS: 1. Name few term-lending Institutions of the past and present. 2. Narrate the developments in Indian Economy with reference to capital Market. 3. Write short note on Stock exchanges in India . 4. Give comparative statics of number of shareholders. 5. What do you understand by listed companies? 6. Who are the members operating on Stock Exchanges? 7. What are the forms of Stock Exchanges in India? 8. Who can become non-broker directors in Stock Exchanges? 9. State the procedures for appointment of Directors. 10. Write short note on SEBI. BSNL, India For Internal Circulation Only 10

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