NCERT Summary: Stock Markets in India- 1

Table of Contents
1. Stock Markets
2. Stock exchanges in India - overview
3. Bombay Stock Exchange
4. National Stock Exchange of India (NSE)
5. SEBI (Securities and Exchange Board of India)
6. Primary market and instruments
7. Commodity exchanges
8. Other market participants and instruments
View more

Stock Markets

Stock exchange is an organisation that provides a regulated platform - physical or electronic - for the trading of shares and other securities. The modern stock market traces its origin to the Amsterdam Stock Exchange (1494), which established the basic idea of organised securities trading. On a stock exchange, investors buy and sell shares of listed companies through authorised stock brokers. A company lists on an exchange by meeting and maintaining prescribed listing requirements.

Basic concepts

Stock / Share: In financial terminology, stock refers to the capital a corporation raises by the issuance and sale of shares. In common usage, stocks and shares are used interchangeably.

Shareholder: Any person or organisation that owns one or more shares of a corporation.

Market capitalisation: The aggregate value of a company's issued shares at current market prices.

Stock broker: An intermediary who buys and sells securities on behalf of investors and arranges the transfer of stock from seller to buyer.

Importance of stock exchanges

• Raising long-term resources: Stock exchanges provide an efficient channel for raising long-term funds for business, supporting the corporate form of organisation.
• Mobilising savings: They help convert household savings into productive investment by providing avenues for investment in equity and debt instruments.
• Attracting foreign capital: Well-developed exchanges attract foreign currency and portfolio investment.
• Corporate discipline and governance: Listing and disclosure requirements impose discipline on companies, encouraging profitability and transparency.
• Regional development and employment: Capital mobilisation can support investment in backward regions and generate employment.
• Vehicle for investors: Exchanges provide liquidity and exit routes for investors' savings.

Stock exchanges in India - overview

The first company to issue shares in modern corporate form was the Dutch East India Company (VOC, 1602). India's capital market has grown substantially. With over 25 million shareholders, India ranks among the largest investor bases globally after the USA and Japan. There are thousands of listed companies and several thousand stockbrokers, making the Indian capital market important in degree of development, trading volume and growth potential.

There are multiple stock and commodity exchanges in India. Historically there were many regional stock exchanges; after reforms the market saw the emergence of national electronic exchanges. The major national-level institutions that re-shaped the market include the National Stock Exchange (NSE), the Over the Counter Exchange of India (OTCEI) and the Inter-Connected Stock Exchange (ISE). The most prominent exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), both located in Mumbai.

Selected exchanges and market institutions

1. Bombay Stock Exchange (BSE): Location: Mumbai; Established: 1875; Key features: Oldest stock exchange in Asia and a long-standing benchmark of the Indian market.
2. National Stock Exchange (NSE): Location: Mumbai; Established: incorporated in 1992 and commenced operations in 1994; Key features: Introduced nationwide electronic screen-based trading and became the largest exchange by turnover and a major benchmark provider.
3. Calcutta Stock Exchange (CSE): Location: Kolkata; Established: 1908; Key features: One of the older regional exchanges with historical significance.
4. Multi Commodity Exchange (MCX): Location: Mumbai; Established: 2003; Key features: Leading commodity derivatives exchange for metals, bullion and energy contracts.
5. National Commodity & Derivatives Exchange (NCDEX): Location: Mumbai; Established: 2003; Key features: Focus on agricultural commodity futures and related price discovery.
6. Indian Commodity Exchange (ICEX): Location: Mumbai; Established: 2009; Key features: Commodity derivatives trading including selected industrial products.
7. BSE Institute Limited (BIL): Location: Mumbai; Established: 2006; Key features: Educational and training arm of BSE providing courses in financial markets.
8. National Commodity Exchange Limited (NCEL): Location: Ahmedabad; Established: 2002; Key features: Platform for trading in various commodity contracts.
9. Inter-Connected Stock Exchange of India Ltd (ISE): Location: Mumbai; Established: 1998; Key features: Promoted by regional exchanges to provide a national trading platform.
10. Metropolitan Stock Exchange of India (MSEI): Location: Mumbai; Established: 2008; Key features: Multi-asset class exchange offering trading in equities, debt and derivatives.

Bombay Stock Exchange

The Bombay Stock Exchange (BSE) is located at Dalal Street in Mumbai. Established in 1875, BSE is the oldest stock exchange in Asia. It has historically hosted several thousand listed companies (references in various reports cite figures of around 5,000 and more than 6,000 at different points in time). In 2011, BSE was reported among the world's largest exchanges by market capitalisation (about US$1.6 trillion as reported in that period).

BSE provides multiple indices to measure overall market performance. Its principal index is the BSE Sensex (also called the BSE 30 index), which is a value-weighted index of 30 prominent and actively traded blue-chip companies. The Sensex base is 1978-79 = 100 and the index was introduced in 1986. The Sensex basket is periodically revised on the basis of market capitalisation, liquidity, depth, trading frequency and industry representation. Other BSE indices include BSE 100, BSE 200, BSE 500, BSE PSU, BSE MIDCAP and BSE SMLCAP.

BSE introduced an automated online trading platform named BOLT (BSE On-Line Trading) to ensure efficient, transparent trading in equity, debt instruments and derivatives. In 2005 the exchange moved from the form of an Association of Persons (AoP) to a corporate structure under the BSE (Corporatization and Demutualization) Scheme, 2005, becoming The Bombay Stock Exchange Limited.

Classification of companies listed on BSE

Sensex

Sensex (Sensitive Index) is a value-weighted index composed of 30 companies, with base year 1978-79 = 100. It represents 30 large, actively traded stocks across key sectors and is widely regarded as a barometer of the Indian stock market and economy.

Demutualization

Demutualization means separating ownership, management and trading rights of an exchange. Under demutualization, ownership is divested from brokers and exchanges become corporate entities. The Government made provisions (laws and schemes) in the reform period (notably in the early 2000s) requiring exchanges to be demutualised; the process clarifies governance and reduces conflicts of interest between owners and members.

National Stock Exchange of India (NSE)

The National Stock Exchange (NSE) was set up following recommendations of the Pherwani Committee (1991). The Government of India authorised IDBI to establish the exchange in 1992. NSE was promoted by leading financial institutions, incorporated in 1992, recognised as a stock exchange in 1993, and commenced operations in 1994. It is located in Mumbai and introduced nationwide electronic screen-based trading which transformed market access and transparency.

Promoters of NSE included prominent institutions such as Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI), ICICI, LIC, GIC, SBI Capital Markets, Stock Holding Corporation of India, and Infrastructure Leasing & Financial Services (IL&FS).

Nifty

The leading benchmark index of the NSE is the S&P CNX Nifty (commonly Nifty 50), a 50-stock index representing 21 sectors of the economy. It provides a diversified measure of market performance for large-cap companies. The CNX Nifty Junior (or Nifty Next 50) refers to the next tier of 50 companies by market capitalisation that do not form part of the Nifty 50.

Other national and regional platforms

Inter-Connected Stock Exchange (ISE): Promoted by regional stock exchanges to provide a national trading platform and connect regional markets to a broader market.

Indonext: An initiative promoted by BSE, the Federation of Indian Stock Exchanges and several regional exchanges (for example, Madras, Bangalore, Ludhiana, Vadodara) to improve liquidity and marketability of stocks listed on regional exchanges (RSEs).

Over the Counter Exchange of India (OTCEI): Created as a public limited company under the Companies Act, OTCEI provides listing facilities particularly for small and medium-sized companies and was promoted by institutions including Unit Trust of India, IDBI and IFCI.

SEBI (Securities and Exchange Board of India)

The Securities and Exchange Board of India (SEBI) is the regulator of India's capital markets. SEBI was established as an autonomous body in 1988 and was given statutory status by the SEBI Act, 1992. Its primary mandate is to regulate and develop capital markets and to protect the interests of investors in securities.

Section 11(1) of the SEBI Act obliges the Board to protect investor interests. SEBI's responsibilities include regulating stock exchanges and market intermediaries (such as stock brokers and merchant bankers), registering and supervising mutual funds, registering Foreign Institutional Investors (FIIs), enforcing disclosure and corporate governance norms, and taking action against fraudulent and unfair trade practices. SEBI has its head office in Mumbai and regional offices in New Delhi, Kolkata and Chennai.

Powers and enhancements

SEBI's powers and institutional strength were enhanced in 2002, which included measures to strengthen the Board (enlarging it and appointing additional full-time directors) and granting powers for inspections, searches and seizures, and imposition of monetary penalties on erring intermediaries.

Reforms and market integrity

Major market scandals such as the 1992 Harshad Mehta scam and the 2000 Ketan Parekh episode prompted a series of regulatory and market reforms aimed at improving transparency, reducing market manipulation, and protecting small investors.

• Transparency and computerisation: Electronic trading and improved disclosure norms were introduced to sharpen price discovery and reduce opacity.
• Insider trading rules: SEBI enacted provisions against insider trading to curb unfair access to unpublished price-sensitive information.
• Restrictions on forward (contango) trading - "Badla": The removal and restriction of speculative mechanisms such as badla aimed to reduce manipulation.
• Settlement cycles: Introduction of rolling settlements and the adoption of T+2 (trade date plus two business days) reduced settlement risk.
• Capital adequacy and governance: SEBI introduced capital adequacy norms for brokers, reconstituted exchange governing boards, and strengthened rules to make client-broker relationships transparent.
• Mutual funds and ratings: SEBI registers and regulates mutual funds and introduced codes of conduct for credit rating agencies.
• Clause 49: Introduced in the listing agreement, it mandates corporate governance reforms such as the requirement for independent directors on boards.

SEBI initiatives - anchor investors and IPOs (2009)

In 2009 SEBI introduced the anchor investor concept for Initial Public Offerings (IPOs). Under this rule institutional investors can be allotted a substantial portion (up to 30% of the institutional quota) of an IPO in advance of the public offer. Anchor investors pay an initial amount (25% of their application) at application time and the balance shortly after the issue closes. Anchor subscriptions are subject to a mandatory one-month lock-in period from allotment to reduce early sell-offs and enhance stability.

Capital market reforms since 1991

• Statutory status for SEBI: Provided regulatory clarity and enforcement powers to oversee capital markets.
• Electronic trading and rolling settlement: Increased efficiency and reduced speculative settlement arbitrage.
• Foreign Institutional Investors (FIIs): Permitted in 1992, facilitating foreign portfolio inflows.
• Clearing and settlement infrastructure: Creation of clearing houses and settlement guarantee funds to reduce counterparty risk.
• Dematerialisation: Compulsory dematerialisation of share certificates reduced paperwork and settlement delays.
• Corporate governance: Strengthening via listing agreements and mandatory disclosures.
• Regulation of Participatory Notes (PNs): SEBI imposed restrictions to manage speculative flows through offshore instruments.

Primary market and instruments

Primary market is where new securities are issued directly by companies to investors to raise fresh capital. Two common processes are:

• Initial Public Offering (IPO): When a company offers its shares to the public for the first time.
• Follow-on Public Offer (FPO): When an already-listed company issues additional shares to raise more capital.

Types of shares

Common (ordinary) shares: Represent ownership in a company and usually carry voting rights. Dividends on common shares are discretionary and depend on company profits and policy. In liquidation, common shareholders are paid after creditors and preferred shareholders.

Preferred shares: Have certain preferential rights over common shares. Typical features include:

• Dividend priority: Preferred shareholders receive dividends before common shareholders.
• Liquidation preference: In liquidation, preferred shareholders have higher claim on assets compared with common equity.
• Enhanced rights (occasionally): Some preferred shares carry special voting or conversion features.

Derivatives

Definition: A derivative is a financial instrument whose value is derived from an underlying asset such as equities, bonds, currencies or commodities. Derivatives are used for hedging, speculation and price discovery.

Major classes:

• Futures: Binding contracts obligating the buyer to purchase, and the seller to sell, a specified quantity of an underlying asset at a predetermined price on a specified future date.
• Options: Contracts that give the holder the right, but not the obligation, to buy (call) or sell (put) an underlying asset at a specified price within a defined time period.

Buyback of shares

Buyback is the process by which a company repurchases its own outstanding shares from the open market or from shareholders. The repurchased shares are generally cancelled or held as treasury shares, reducing the number of shares in circulation.

Reasons and effects:

• Use of surplus cash: Companies with excess cash may buy back shares when they believe their stock is undervalued or when alternative investments are limited.
• Earnings per share (EPS) enhancement: Reducing outstanding shares increases EPS, often improving per-share metrics.
• Signalling: A buyback at a premium to market price may signal management's confidence in future prospects.

Process and restrictions: Buybacks are typically funded from company reserves; regulations generally restrict borrowing to finance buybacks. In India, buybacks were permitted from 1998 under specified regulatory conditions.

Rolling settlement

Definition: Rolling settlement is a mechanism where trades executed on each trading day are settled separately on a continuous basis. The common international cycle adopted by Indian markets has been Trade date + 2 business days (T+2), meaning trades settle within two working days of execution.

• Daily settlement: Transactions of each day are cleared and settled separately, avoiding accumulation across days.
• Settlement cycle: T+2 reduces counterparty and market risk compared with longer settlement cycles.
• Reduction of speculation: Faster settlements reduce the scope for carry-forward speculative positions created by deferred settlement systems.

Commodity exchanges

Commodity exchanges provide organised platforms for trading in commodity futures and related derivatives and play a vital role in price discovery for agricultural and industrial commodities.

Major commodity exchanges in India

• National Commodity & Derivatives Exchange (NCDEX)
• Multi Commodity Exchange (MCX)
• National Multi-Commodity Exchange of India Ltd (NMCEIL)
• ACE Derivatives and Commodity Exchange
• Indian Commodity Exchange (ICEX)

Features of national-level commodity exchanges

• Demutualised structure: Most operate as demutualised entities with clear separation of ownership and management.
• Online trading: Screen-based electronic trading platforms enable nationwide participation.
• Multi-commodity trading: Multiple commodity contracts (agri, metals, energy) are available on a single exchange.
• National reach: Traders can participate from across the country through brokers and electronic access.

Regulation of commodity markets

The Forward Markets Commission (FMC) was the statutory regulator for commodity futures under the Forward Contracts (Regulation) Act, 1952. FMC's roles included monitoring and disciplining exchanges, collecting trading information, inspecting records and withdrawing recognition where necessary. Reforms have proposed strengthening FMC's statutory powers; for example, the Forward Contracts (Regulation) Amendment Bill, 2010 sought to make the regulator more independent and to raise penalties for contraventions.

Other market participants and instruments

Mutual funds

Mutual fund is a pooled investment vehicle that collects money from investors and invests in a diversified portfolio of securities. Mutual funds charge management fees and offer two principal structures:

• Open-ended funds: Issue and redeem units on demand at the fund's Net Asset Value (NAV); no fixed maturity.
• Closed-ended funds: Issue a fixed number of units through an offer and list on exchanges; units trade in the secondary market and redemption happens at specified intervals or at winding up.

Foreign Institutional Investors (FIIs)

FIIs are foreign organisations - banks, insurance companies, pension funds, hedge funds and mutual funds - that invest in financial assets abroad. In India, FIIs invest through the Portfolio Investment Scheme (PIS) and must register with SEBI. At various times FIIs have been major providers of equity and debt financing; for example, in some years FIIs' net investment in India ran into tens of billions of dollars (a reported figure around $30 billion of cumulative investment flows in 2010 appears in market accounts). SEBI prescribes registration norms and investment limits for FIIs and their sub-accounts.

Reasons FIIs favour India: A growing economy, high corporate profits, reform-friendly policies and comparatively brighter growth prospects than some other markets.

Global Depository Receipts (GDRs)

Global Depository Receipts (GDRs) are instruments that allow companies to raise equity capital in foreign markets. GDRs are denominated in major currencies (dollars, euros) and are listed on international exchanges such as London or Luxembourg. Proceeds raised via GDRs may be used for capital expenditure, repayment of earlier external borrowings, financing imports of capital goods, investment in software or equity investment in joint ventures.

GDRs are sometimes referred to as euro issues and provide Indian firms access to a broader investor base and foreign currency resources.

Concluding note: A well-functioning set of stock and commodity exchanges, supported by robust regulation, settlement infrastructure and transparency, is essential for efficient mobilisation and allocation of capital. The post-1991 reforms in India, the growth of electronic trading platforms and regulatory strengthening under SEBI have materially improved market integrity, access and investor protection, while new instruments and institutional participants continue to deepen and broaden the market.