Evolution:
In the early 19th century, there was a noticeable increase in the value of corporate securities of banks and cotton presses in India. However, very few brokers were recognized by banks to perform trades. The Civil War in the US during 1861-64 changed the trading scenario for India. With a drop in US imports of raw cotton to Britain, reliance shifted to Bombay, and it became a significant supplier to Britain. The scene changed from a handful of brokers in Bombay to become the chief trading centre in India, hosting 250 brokers at a time. This period also known as India’s first boom cycle, lasted for about half a decade. However, this period highlighted the importance of a share trading institution. In 1875 brokers got together to form the Bombay Stock Exchange (BSE), the oldest stock exchange in Asia.
Formation of the BSE was followed up with a rapid expansion of textile mills, mainly cotton and jute, throughout the country. The development led to the formation of new exchanges both in Ahmedabad and Kolkata. Indian businesses in the early 1900s developed further because of a boycott of British-made goods (Swadeshi movement) and the establishment of companies like Tata Iron and Steel Company. In addition, the World Wars helped India rise as a key supplier of various commodities. World War II saw most stock exchanges experience a sharp fall followed by the scrips of major companies like Tata Steel fluctuating wildly in the 1950s. The 1980s saw tremendous growth in the securities market in India with the introduction of successful public sector bonds and issues of Reliance Industries Ltd and L&T.
BSE now boats more than 5000 companies listed on it consistently over the last 20 years and is the 10th largest stock exchange globally by market capitalization. The exchange also introduced a new platform for Small and Medium-sized Enterprises (SMEs) in 2012 according to the rules of SEBI and now has more than 300 companies listed on its SME platform.
Segments:
In terms of sectoral composition, the capital markets in India have seen a massive change in the past three decades. Before globalization, the BSE Sensex index was dominated by manufacturing companies featuring 26 out of 30 companies. However, as the service sector grew, many non-government companies in the sphere of finance and information technology rose, and the number of manufacturing companies fell by half to about 13 companies in 2018.
The S&P BSE 500 Index also showed increased mutual funds owned by public shareholders from around 12% in 2015 to 19% in 2019. This change could be attributed to multiple factors, including an increase in financialization after the 2016 demonetization, product innovation by AMCs in the form of SIPs, and improved reach of channel partners to help small investors invest.
There has been consistent growth in the participation of retail investors in owning equities, with the number of Demat accounts or Dematerialized Accounts as of January 2021 standing at 51.5 million as compared to 40.8 million at the end of FY20 35.9 million in FY19. After March 2019, shares of Indian listed companies can only be held in Demat account since amended provisions listed by SEBI to disallow the transfer of securities in physical form.
The government securities market called the ‘G-Sec’ Market is the oldest and most significant component of the Indian debt market in market capitalization, outstanding securities, and trading volumes. G-Secs market plays a significant role in the Indian economy. It provides the yardstick for determining interest rates in the country through yields on government securities, also referred to as the risk-free rate of return. The initiation of the Negotiated Dealing System (NDS) which is an electronic trading platform in 2002 by RBI, played a significant role in improving efficiency in the market. G-Secs can now be bought through NDS-OM (NDS Order Matching), OTC markets with NDS-OM reporting, or stock exchanges with recent developments.
In the foreign investment market, we see that foreign portfolio investors have remained below 5% despite lifting various restrictions imposed on foreign investor holdings by RBI in 2018. To expand its investor base and attract long-term overseas investments, a separate route was proposed by RBI called the Voluntary Retention Route that enables foreign investors to avoid macro-prudent hurdles that exist for FPI.
The next largest segment, the corporate bond market, consists of bonds issued by public sector undertakings and private corporations. It is smaller than the G-Sec market in terms of trading volume and size, and its penetration has been between 15%-20% of India’s GDP. Moreover, the market is relatively less developed than most developing countries because of the reliance of corporations on banks as the primary source of working capital. Hence, to attract new investors, including foreign portfolio investors and banks-more reforms are required, including incentives for market makers to improve the liquidity of bonds in the secondary market.
The BSE and NSE are the major exchanges that provide trading in futures and options for indexes, individual stocks, currencies, and commodities. The market started in June 2000 with the trading of index futures contracts on NSE and BSE. Currency derivatives were introduced in 2008 in dollar-rupee currency futures as the exchange-traded currency futures contracts facilitate easy access with increased transparency and efficient price discovery. It also re-launched its derivatives segment by enabling trading of Index and Stock Futures on its BOLT Terminal. It was in response to requests from trading members for a common front end from which equities and equity derivatives could be traded.
Challenges:
The BSE still faces specific challenges they have to resolve. Firstly, they have to identify areas of the regulatory municipality because India has too many regulators, including RBI, IRDA. Pension Fund Regulatory and Development Authority. They should improve incentives for foreign companies to list in India and make investments in companies listed abroad seamless.
India has a young population and has a fast-growing economy. Still, regulations need to become clear and precise, and the red tape eased to fully reap the benefits of the demographic dividend and help India achieve the goal of becoming a US$5 trillion economy.
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