In this essay we will discuss about Stock Exchange in India. After reading this essay you will learn about: 1. Meaning of Stock Exchange 2. Features of Stock Exchange 3. Functions 4. History 5. Major Problems in Trading 6. Measures Suggested.

Contents:

  1. Essay on the Meaning of Stock Exchange
  2. Essay on the Features of Stock Exchange
  3. Essay on the Functions of Stock Exchange in India
  4. Essay on the History of Stock Exchanges in India
  5. Essay on the Major Problems in Trading in Indian Stock Exchange
  6. Essay on the Measures Suggested for the Reform of the Stock Exchange

1. Essay on the Meaning of Stock Exchange:

Industrial securities market can be broadly divided into two parts, i.e., namely, primary markets or new issues market (NIM) and secondary markets or stock markets. Thus the primary market or NIM deals with new securities, i.e., with those securities which were not available earlier and are made available before the investing public for the first time.

On the other hand, the stock market is a potential market for those old securities which are already issued and also granted stock exchange quotation. Thus the stock exchanges usually provide a systematic regular and continuous market for both buying and selling of old securities.

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The main differences between NIM and stock exchanges are mostly related to:

(a) Types of securities dealt,

(b) Nature of financing and

(c) The organisation of the entity.

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By the term stock exchange, we mean a market where stocks, shares and other kind of securities are bought and sold. In this market owners can dispose of their securities as per their likings. The present large scale production system favours formation of joint stock company or corporate form of organisation which is quite suitable for securing large amounts of capital from those people who possess surplus funds and are willing to take risk and invest them profitably as per their own convenience and temperament.

The buyer of stocks and securities can realise their invested capital by selling those stocks and shares to others ready to buy the same at the prevailing price in the stock exchanges. Thus the stock exchange or market is a designated place where shares, stocks and other securities arc bought and sold. Stock market or exchange is, therefore, an important institution for running the corporate type of firm in a smooth manner.

2. Essay on the Features of Stock Exchange:

It would be better to identify some of important features of stock exchange.

Following are some of these features:

(i) Voluntary Association:

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Stock exchange can be termed as voluntary association where various individuals join together and thereby form a private or public limited company so as to initiate the activities of stock exchange.

(ii) Recognition and Registration:

The stock market must be recognised by the government under the Securities Contract (Regulation) Act, 1956. Moreover, the stock exchange may or may not be registered under the Act.

(iii) Membership:

Membership of stock exchange is open as per Rule 8 of the Securities Contract (Regulation) Act, 1956. The stock exchange has framed by-laws to settle disputes etc. which the members have to follow.

(iv) Conduct of Business:

The stock exchange does not involve itself in the business of buying and selling of securities rather it provides facilities for buying and selling of securities for its members.

(v) Management of Stock Exchange:

The management of stock exchange is entrusted to its governing body whose composition differs from one another. The body functions as per the constitutional provisions and by-laws of stock exchange.

3. Essay on the Functions of Stock Exchange in India:

The stock market or stock exchanges are usually discharging some important functions for the orderly and systematic growth of capital market.

The following are some of these important functions:

(i) Nexus between Savings and Investment:

Stock markets establish nexus between savings and investments of the community. The community savings are rightly mobilised and channelized by the stock exchanges of the country for its investment into those sectors and companies which the community at large feels secure especially on the basis of its past performance, good return, capital appreciation etc.

The preference of investors for a particular industry or for a particular individual unit is reflected in the share price, which again determine the mode of investment.

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Stack exchanges render valuable services for the preliminary distribution of new issues of capital and also arrange offers for sale of existing securities, in a most systematic and orderly fashion. Members of stock exchange also help in floatation of new issues as brokers and underwriters throughout the country.

(ii) Market Place:

Another important function of stock markets or exchanges is to provide a market place for the purchase and sale of securities to the original subscriber and a huge number of buyers for attaining its free transferability. As the purchase and sale of securities are centralised in that market so the purchaser usually get a ready seller and the seller usually get a ready purchaser at a competitive price for making necessary transaction on their securities.

(iii) Continuous Price Formation:

Establishing a process of continuous price formation is another important function of stock exchanges or markets. As a large number of buyers and sellers are operating in such market, the collective judgement of such a large number of people brings changes in the level of prices of securities in small graduations in an unending process.

Accordingly, stock markets can act as a barometer of the state of health of the economy of a nation through its continuous price formation which helps an investor to take a right decision at appropriate time.

(iv) Market Making:

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The stock markets establish a system of market makers at par with all leading stock exchanges of the world. In this system, the market makers usually take the responsibility of making of market of specific shares, i.e., for buying and selling a specific share at definite prices.

This system also protects the investors from its exploitation by the stock brokers and ensure transaction of shares at best possible market rates and also ensure prompt execution of transaction and liquidity. Thus this system offers protection to investors and also liquidity to all shares.

(v) Uniform System of Settlement:

Another important function of stock exchanges is to unify all stock exchanges on a national basis for introducing a uniform system of one-week settlement. This system reduces the risk of price movements in share and also checks the tendency towards over-speculation and over concentration of trading activity in a few shares.

(vi) Management Information System:

The stock markets usually introduce a well designated management information system (MIS) so as to feed the stock exchanges with sufficient information relating to trading volume and prices, trading concentration in certain securities, speculation etc. Such information are very much helpful for the authorities to restrict and regulate the stock market properly.

(vii) Evaluation of Securities:

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The stock markets usually provide a correct mechanism through which price of various securities offered by different business undertakings are determined through proper evaluation of its present future income yielding capacity.

(viii) Protecting investor’s interest:

It is mandatory for all stock exchange to frame rules, regulations and bye-laws for ensuring reasonable degree of security and safety to the investors to make all transactions fair and secure.

(ix) Capital formation:

Stock exchanges provides the services to the investors by collecting their savings and by channelizing these savings into investment in securities of various business firms and companies and thereby paves the path for capital formation and also for proper investment of capital.

4. Essay on the History of Stock Exchanges in India: Nature of Transaction and Speculation:

The history of stock exchange in India can be traced back at Bombay where the first organised stock exchange in India started to work and when the Native Share Stock Brokers’ Association, popularly known as Bombay Stock Exchange was formed to serve its purpose by the brokers of Bombay.

After that the Ahmedabad Stock Exchange was started in 1894 in order to facilitate the dealings of shares of textile mills established there. Again, in 1908, the Calcutta Stock Exchange was started to arrange a ready market for shares of jute mills and plantation industries.

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There was spurt in speculative activity in India during the Second World War and thereby the number of stock exchanges has increased from 7 in 1939 to 21 in 1945. Over and above these organised exchanges, some unorganised exchanges, known as Kerb markets, were also functioning in the country as per usages and conventions.

As per the Securities Contract (Regulation) Act of 1956, the Government of India has recognised 15 stock exchanges. Among all these stock exchanges, Bombay Stock Exchange is the premier exchange in the country, which transacts nearly 70 per cent of total transactions made in all the stock exchanges of the country.

Thus stock exchanges provide an organised market for transactions in shares and other securities. There are 22 stock exchanges in the country, out of which 20 SEs are regional ones with allocated areas. Two other SEs set up in the post-reform era, viz., National Stock Exchange (NSE) and the Over the Counter Exchange of India (OTCEI) are mandated to have nationwide trading.

The NSE and OTCEI have adopted screen based trading system (SBTS). The NSE and OTCEI have started nationwide SBTS, which provided completely transparent trading mechanism. This has been followed by regional stock exchanges. As on 31st March 1997, 9,890 companies were listed in stock exchanges.

The NSDL was set up in October 1996 under the Depository Act, 1996 with the objective of ensuring free transferability of securities with speed, accuracy and security. This Act has made the securities of public limited companies freely transferable and also provides for maintenance of ownership records in the book entry form. Thus the stock exchanges of India has been progressing at a satisfactory rate with the support of the Government and are also meeting the requirements of public limited companies in its security related affairs.

Nature of Transaction:

The nature of transaction in all stock exchanges is not similar as it is guided by procedures adopted and the settlement of transactions done in various stock exchanges.

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However, in an Indian stock exchange, any typical investment business transaction has to pass through the following four stages:

(i) Placing an order through a member broker with a broker in the form of either “fixed order” (order executed at the price indicated by the client) or “Limit Order” (fixing limits of price by the clients beyond which broker cannot go) in a very precise, clear and unambiguously either orally or by phone and to be confirmed immediately in writing.

(ii) Executing of the order by the broker through bargain and listing the bargain in the official daily list of stock exchange.

(iii) Reporting the deal to the client by the broker after the deal is transacted and recorded in the books of the brokers by sending a contract note, giving details of the security purchased or sold and the price, the broker’s commission, date of settlement etc.

(iv) Settling transactions either through ready delivery transaction method (where payment has to be made immediately on the transfer of securities or within a period of one to seven days) or through clearing house or by hand delivery i.e., cash or through forward delivery transaction method (where settlement is done on a fixed day, i.e., either fortnightly or weekly) and the forward contracts are cleared through clearing house.

Speculation and Stock Exchange:

The idea of speculation in a stock exchange indicates purchase and sale of a security or share at a particular point of time with the sole object of making windfall profit by its sale or purchase at another point of lime. In India, stock exchanges are very much subjected to speculation. In stock market, two types of transactions are held normally, viz., investment transactions and speculative transactions.

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By investment transaction, we mean purchase or sale of securities which are done with the long term prospect relating to their yield and price. But in a speculative transaction actual buying or selling of securities are not done normally and thereby the delivery of securities or the payment made as per ruling price are also very rare; rather only the difference in prices between buying and selling are paid.

Now-a-days, there are predominance of speculative transactions over the investment transactions in the stock exchanges in India as the former requires smaller amount of money and the latter requires larger volume of money for making full payment against purchase of securities.

5. Essay on the Major Problems in Trading in Indian Stock Exchange:

Indian stock exchanges are subjected to certain serious problems or defects. These are:

(i) Lack of Integration:

In India, there are a number of stock exchanges which are scattered throughout the country. But there is lack of proper integration among these stock exchanges. Although Bombay Stock Exchange (BSE) dominates over all the stock exchanges as it conducts more than 70 per cent of the total transactions of all exchanges but due to lack of proper integration between the stock exchanges, the prices of shares and stocks vary considerably between different markets at the same point of time.

(ii) Weak Management of SE:

Indian stock exchanges are suffering from weak and deficient management and also certain flaws in their structure. The stock exchange is usually managed by the member-brokers for their own benefits. The Governing Body of a stock exchange is not having any concern or willingness for introducing any reforms in trading.

It does not give much care to investor’s complaints. The Executive Director (ED) of a stock exchange has also failed to perform its regulatory functions freely as it is very much responsible to Governing Body.

(iii) Arbitrary Classification of Specified and Non specified Shares:

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In India, most of the major stock exchanges have been following an arbitrary practice of classifying listed shares into “specified” group and “unspecified” group. Specified shares are getting certain special facilities such as settlement period, carry forward and clearing which promotes speculation.

This type of categorization favours granting of artificial encouragement to a few large companies which has economic justification in it.

(iv) Discriminatory Margins:

Indian stock exchanges (SEs) are levying margins on all speculative transactions which are highly discriminatory in character, as the margins are varying extensively from share to share and also from day to day, ranging between 0 to 40 per cent.

Again, the system of imposition of margins has also failed to control excessive speculation in stock exchanges. Moreover, the margin system has also failed to provide reasonable guarantee to the financial integrity of the market.

(v) Adoption of the Settlement System and Carry Forward System (Badla):

In India, various stock exchanges are adopting different settlement system which is responsible for high price fluctuations and high risk exposure. This leads to over-speculation in the market. Moreover, the carry forward system in India is introduced with the objective to promote speculation in a specified group of shares and also to promote spurious kind of share trading. In a carry forward system it is possible to postpone forward premium or charge, popularly known as “Badla” in India.

The “badla” is a free market rate which may now be as high as 36 per cent. In India, the badla financing is becoming very much attractive and as per Dr. L.C. Gupta’s estimates, about Rs 300 to 400 crore may be involved in such type of badla financing. The carry forward system along with badla financing is highly beneficial to the stock brokers as it adds to their income both directly or indirectly.

But at the same time, this system promotes speculation and in certain cases over speculation in certain market. Thus, on an average, the carry forward system is unjustifiable and unhealthy which ultimately leads to spurious speculation and this goes against the interest of the speculators.

(vi) Ignoring Investors’ Interest:

Indian stock exchanges are so designed that it provides much benefit to the brokers and ignores the genuine interests of the investors. The confidence of the investors on such market is very weak as the brokers are always cheating the investors on price of shares and they are also not getting a fair deal in their transactions of shares. Complain from the investors remain uncared and unattended. 

6. Essay on the Measures Suggested for the Reform of the Stock Exchange:

Following are some of the important measures suggested by Dr. L.C. Gupta for making necessary changes in the current trade practices in Indian stock exchanges in his “Export study of Trading in shares in stock Exchanges”:

(i) Uniform System of One-Week Settlement:

In order to unify all stock exchanges in India on a national basis, all the SE should introduce a uniform system of one-week settlement. This uniform system will reduce the risk missing out of price movements in shares and also check the strong tendency towards over speculation and over-concentration of trading activity in a few shares.

The uniform system will remove the complaint of long delay on the part of investors and also reduce the cost and delay. This system will also pave the way for easier inter-market transactions.

(ii) Market Making:

The system market makers should be introduced in stock exchanges in India at par with the all leading stock exchanges of London and New York. In this system the market makers usually take the responsibility of market making for specific shares, i.e., for buying and selling a specific share at definite prices.

Being an integral part of trading mechanism and all other arrangements, he protects the investors from its exploitation by the stock brokers and ensures the transactions of shares at best possible market rates and also ensure prompt execution of transactions and liquidity. This system will provide protection to investors and also liquidity to all shares.

(iii) Margin Trading and Marking to the Market System:

As the margin trading system adopted by Indian SEs is defective and has failed to prevent the problem of default and over-speculation, Dr. Gupta suggested two alternatives against this system. The first one suggests to adopt the margin trading system of USA in which commercial banks provide financial support to the extent of 50 per cent to the buyer in the stock market trading after necessary pledging of shares with a bank. But this system may not be acceptable to the Government at present as the country has experienced a huge problem of securities scam in the recent past.

The second alternative i.e., the marking to the market system on a daily basis is a complete system to check bankruptcy and will provide guarantee towards financial integrity of the market at all times. In this system, if there is any change in price of stocks at the close of trading, one side will get a debit for a loss and the other side will get a credit for a gain. If there is a continuous debit to a member’s account regularly then it will reflect a negative balance in its account at a point of time.

Once such negative balance, is reflected, then and there the member is stopped from making any further business. In the existing system, even a bankrupt member may continue to trade in securities. But to introduce this marking to the market system, it requires total computerisation of trade data.

(iv) Abolishing the System of Carry Forward:

The present practice of the system of carry forward adopted by the Indian SEs has led to over-speculation in the stock market. With the abolition of this system, the stock exchanges will be free from many problems.

(v) Formation of Governing Body (GB) and Management of Stock Exchange:

The formation of GB should be done in a rational way. The Executive Director of a Stock Exchange must either be appointed by the Government or by SEBI as per the advice from the panel of independent experts, so that he can have indepen­dent control over stock brokers.

The composition of GB of stock exchanges should also be changed between the broker-directors and non-broker directors in ratio of 50: 50 to make it more objective, direct and strong.

(vi) Introducing Management Information System:

The stock exchanges in the country should introduce a well designed management information system (MIS) so as to feed the SEs with sufficient information relating to trading volume and prices, trading concentration in certain securities, trading concentration by some SE members, speculation etc. Such information will also help the authorities to restrict and regulate the stock markets properly.