Evolution of Capital Markets in India

The Origin
The advent of western styled business practices in India in the early 18th century commence with the establishment of the East India Companys office in India. Towards the close of 18th century, the East India Company naturally dominated business in securities and loan transactions. Evidence of the existence of trading in stocks of banks and certain companies is available in price quotations in contemporary newspapers. By 1830s, there was perceptible rise in the volume of business in loans of corporate stocks and shares. In 1836, the Englishman of Calcutta reported quotations of 4%, 5% and 6% loans of East India Company as well as shares of Bank of Bengal. Shares of the banks like Corporation bank, Chartered Mercantile Bank, Chartered Bank, Oriental bank, and the old Bank of Bombay were traded. In 1839, the trading list was broader in Calcutta, where newspapers gave the quotations of the banks like Union Bank, Agra bank and business ventures like Bengal Bonded Warehouse, the Docking Company and Steam Tug Company. Between 1840-50, banks recognized nearly half a dozen of brokers and merchants in bombay. In 1850, The companies Act introducing limited liability was enacted and the era of joint stock enterprises began in India. The American Civil War of 1860-65 had widespread impact on the fledging Indian share market. The supply of cotton to Europe was totally stopped, and India, especially Bombay, the cotton belt, became the major supplier. There was an unlimited demand for Indian cotton. Exports doubled between 1861-65. The price of the cotton shot up as the civil war progressed. The bulk of these exports were paid in bullion. The largest flow was in 1864-65, the last year of the war. The flush of gold bullion spawned numerous ventures in a wave of speculation. Companies were floated for every imaginable purposebanks, financial associations, land reclamation trading, cotton cleaning, pressing, hotels, shipping, and streamer companies etc. Every company that was floated commanded a premium. Share prices rose sharply even at that time. A share of Colaba Land Company during the boom period of the 1860s rose from Rs 10,000 at par to Rs 120,000 and that of Backbay Shares went up from Rs 2,000 to Rs 54,000. Bombay, at that time, was a major financial centre having housed 31 banks, 20 insurance companies and 62 joint stock companies. Brokerage business became attractive, and in 1860 there were 60 brokers. Their acknowledged leader was Premchand Roychand who was the first broker to read and speak English. He was a genius and a brilliant financial strategist. He was called the Napoleon of Finance. Reports on stock markets around that time indicate that an ordinary broker in 1864 earned about Rs 200 per day, a huge sum in those days. The boom period came to an abrupt end on 1st july 1865. In Jul 1865, what was then used to be called the share mania ended with burst of the stock market bubble. Innumerable companies failed; only a few were left solvent in Bombay. Never I witnessed in any place a run so widely distributed nor such distress followed so quickly on the heels of such prosperity thus wrote Richard Temple, who served as the Governor of Bombay at that time. An interesting aspect is that despite the collapse of the stock market, most of the brokers met their payment commitments.

Pre- Independence Period

In the aftermath of the crash, banks, on whose building steps share brokers used to gather to seek stock tips and share news, disallowed them to gather there, thus forcing them to find a place of their own, which later turned into the Dalal Street. A group of brokers formed the stock exchange in Jul 1875, which led to the formation of a trust known as the Native Share and Stock Brokers Association.

1872- Indian Contract Act passed. 1874- With the rapidly developing share trading business, brokers used to gather at a street under a banyan tree near the town hall (now well known as "Dalal Street") for the purpose of transacting business. 1875- "The Native Share and Stock Brokers' Association" (also known as "The Bombay Stock Exchange") was established in Bombay 1880's- Development of cotton mills industry and set up of many others 1894- Establishment of "The Ahmedabad Share and Stock Brokers' Association" 1880 - 90's - Sharp increase in share prices of jute industries in 1870's was followed by a boom in tea stocks and coal 1908- "The Calcutta Stock Exchange Association" was formed 1920- Madras witnessed boom and business at "The Madras Stock Exchange" was transacted with 100 brokers. 1921- Imperial Bank of India formed by amalgamating Bank of Bengal, Bombay and Madras. 1923- When recession followed, number of brokers came down to 3 and the Exchange was closed down. 1927- BSE got recognized under Bombay Securities Contracts Control Act, 1925.

1934 RBI Act passed. Establishment of the Lahore Stock Exchange 1935- RBI established on April 1. 1936- Merger of the Lahore Stock Exchange with the Punjab Stock Exchange 1937- Re-organisation and set up of the Madras Stock Exchange Limited (Pvt.) Limited led by improvement in stock market activities in South India with establishment of new textile mills and plantation companies

1940- Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited was established 1944- Establishment of "The Hyderabad Stock Exchange Limited" 1947- "Delhi Stock and Share Brokers' Association Limited" and "The Delhi Stocks and Shares Exchange Limited" were established and later on merged into "The Delhi Stock Exchange Association Limited"

Post Independence Scenario

1947- Capital Issues (Control) Act passed.- This act aimed to modulate and channelise investments in desired directions, and helped maintain the health of the capital market. To do so, the Controller of Capital Issues was empowered as the sanctioning authority for any reorganization of the capital structure of public limited companies through the issue of shares whether fresh of additional, including at a premium, rights or bonus and debentures, etc. In other words, companies wanting to make any change in their capital structures had to obtain prior approval of their proposals from the Controller of Capital Issues. While examining such proposals, the Controller of Capital Issues acted as a last checkpost to make sure that the company had obtained al government and mandatory clearances, such and industrial licenses, approval from financial institutions, etc. The office is now defunct. 1949- RBI was nationalised. Its basic function is "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage." 1950- Stock Market was Satta Bazar. Tata steel, Bomabay Deing, Century textiles, National Rayon & Kohinoor Mills were favourite scrips of speculators. Despite speculation non-payment or defaults were very frequent. 1950s- Decade of establishment and development of financial institutions and state financial corporations. 1955- SBI was formed as RBI acquired controlling interest in Imperial Bank of India. 1956- Indian Companies Act and Securites Contracts (Regulation) act (SCRA) were passed. SCRA was an Act to prevent undesirable transactions in securities by regulating the business of dealing therein, 1[***] by providing for certain other matters connected therewith. 1957- Imposition of Wealth and Expenditure Tax by Mr. T. T. Krishnamchari, the FM, led to huge fall in markets. 1957- Only 8 exchanges were recognized under SCRA, 1956. They include Bombay, Calcutta, Delhi, Madras, Bangalore, Ahmedabad, Hyderabad, Indore. 1958-59- Dividend freeze & Tax on bonus issues.

1960s- Characterized by Wars and Droughts 1962- War with china 1963- Introduction of Gold Control Act. 1964- UTI came into existence 1966- Sir Phiroze Jamshedji Jeejeebhoy became chairman of BSE: Sir Phiroze Jamshedji Jeejeebhoy was the Chairman of the Bombay Stock Exchange (BSE) from 1966, until his death in 1980. He was one of the longest serving members of the BSE, and significantly impacted the course of its development. His word was law and he had a great deal of influence over both brokers and the government. He was a good regulator and many crises were averted due to his wisdom and practicality.The building the Exchange is currently housed in is located at Dalal Street in downtown Mumbai, and bears his name - Phiroze Jeejeebhoy Towers. 1966- Ban on forward trading in commodities. 1969- Ban on Badla trading. 1970- Badla trading was resumed under the disguised forms of hand delivery contracts A group. This revived the market.. 1973- FERA Act was passed. 1974- 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. 1977- Entry of Dhirubhai Ambani: He can be said to be the father of modern capital markets. The Reliance public issue and subsequent issues on various Reliance companies generated huge interest. The general public was so unfamiliar with share certificates that Dhirubhai is rumoured to have distributed them to educate people. 1978- Dilution of control by MNCs under FERA Act. 123 MNCs offered shares worth Rs 150 cr, creating 1.8 million shareholders in 4 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. Some MNCs opted out of India. 1980s- A Decade of Explosive Growth 1984- Budget by V.P. Singh, flooding the markets with new issues: Mr. V.P. Singhs fiscal budget in 1984 was path-breaking for it started the era of liberalization. The removal of estate

duty and reduction of taxes led to a swell in the new issue market and there was a deluge of companies in 1985. 1988- Set up of SEBI as an administrative arrangement. Many more stock exchanges were established during 1980's, namely: Cochin Stock Exchange (1980) Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982) Pune Stock Exchange Limited (1982) Ludhiana Stock Exchange Association Limited (1983) Gauhati Stock Exchange Limited (1984) Kanara Stock Exchange Limited (at Mangalore, 1985) Magadh Stock Exchange Association (at Patna, 1986) Jaipur Stock Exchange Limited (1989) Bhubaneswar Stock Exchange Association Limited (1989) Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989) Vadodara Stock Exchange Limited (at Baroda, 1990) Coimbatore Stock Exchange Meerut Stock Exchange

1991- Reform Agenda by Dr. Manmohan Singh 1992- SEBI Act was passed, with SEBI being given the statutory power. CCI was abolished. The broad objectives include -To protect the interests of the investors in securities -To promote the development of securities markets and to regulate the securities markets

1992- Harshad Mehta Scam. 1992- Incorporation of NSE & set up of OTCEI. : Following the recommendations of the High Powered Study Group on Establishment of New Stock Exchanges, the National Stock Exchange of India (NSE) was promoted by financial institutions with an aim to provide access to investors all over the country. NSE was incorporated in Nov 1992 as a tax paying company, the first of

such stock exchanges in India, since stock exchanges earlier were trusts, being run on no-profit basis. NSE was recognized as a stock exchange under the Securities Contracts (Regulations) Act 1956 in Apr 1993. It commenced operations in wholesale debt segment in Jun 1994 and capital market segment (equities) in Nov 1994. The setting up of the National Stock Exchange brought to Indian capital markets several innovations and modern practices and procedures such as nationwide trading network, electronic trading, greater transparency in price discovery and process driven operations that had significant bearing on further growth of the stock markets in India. OTCEI: The traditional trading mechanism prevailed in the Indian stock markets gave way to many functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly long settlement periods and benami transactions, which affected the small investors to a great extent. To provide improved services to investors, the country's first ringless, scripless, electronic stock exchange - OTCEI - was created in 1992 by country's premier financial institutions - Unit Trust of India, Industrial Credit and Investment Corporation of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance Corporation of India, General Insurance Corporation and its subsidiaries and CanBank Financial Services.

1994- Shift from Floor trading to Electronic Trading. 1994- NSE commences its operations in Wholesale Debt Segment in June & equities segment in November. 1995- SCRA 1956, amended for introduction of options trading. 1996- Depositories Act was passed. Set up of NSDL: To speed the securities settlement process, The Depositories Act 1996 was passed that allowed for dematerialisation (and rematerialisation) of securities in depositories and the transfer of securities through electronic book entry. The National Securities Depository Limited (NSDL) set up by leading financial institutions, commenced operations in Oct 1996. Regulations governing selection of various types of market intermediaries as depository participations were made. Subsequently, Central Depository Services (India) Limited promoted by Bombay Stock Exchange and other financial institutions came into being. 1996- Risk Containment at clearing corporation: The largest exchange, NSE, adopted risk management through novation at the clearing corporation. Other exchanges also substantially improved their risk containment mechanisms. Set up of NSCCL (National Securities Clearing Corporation of India Limited). 2000- Burst of IT bubble and Ketan Parekh Scam. 2000- Launch of Derivatives Trading on June 12. 2000- Internet Trading permitted from february. 2001- Badla discontinued from 1st July & rolling settlement introduced in all scrips.

2004- Introduction of KYC. 2004- Introduction of STT.