Stock Exchange Notes: National Stock Exchange of India, OTCEI, Bombay Stock Exchange etc. Role and objectives of stock exchanges and how OTCEI is different from other stock exchanges.
QUESTION: Discuss in detail the origin, growth and weaknesses of stock exchange in India?
ANSWER: STOCK EXCHANGE: Stock exchanges are the organized and regulated markets for various securities issued by corporate sector and other institutions. The stock exchanges enable free purchase and sale of securities as commodity exchange and allow the trading in the commodities.
According to Securities Contract (Regulation) Act, 1956
“Stock exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling in securities”.
ORIGIN/GROWTH OF STOCK EXCHANGES IN INDIA:
National stock exchange of India was set up the Government of India on the recommendation of the Pherwani Committee in 1991.
Since then there has been lots of changes in the stock exchanges are witnessed. Actually, the stock exchange in India originated in 1800 and have developed since then in the different stages:
- 1840-1865: In the initial stages, the East India company floated shares through a very small group of the brokers. Between the years 1840-1850 there were only half a dozen brokers but in, 1850 the number rose to about 60 brokers. In 1860, the entire market was attracted with the concept of shares which lasted till 1865.
- 1866-1890: This period also saw a drastic change in the history of stocks and led to the foundation of regular market for securities. The Bombay market becomes the leading and most organized stock exchange in India. A number of code of conduct were developed by the brokers during this period.
- 1901-1935: The share investment grew during this period because of development in the political field. The Industrial enterprises grew after the Swadeshi Movement led by Mahatma Gandhi. Also Calcutta became a major trading centre. New ventures were ploated and in 1920 another stock exchange was established in Madras.
- 1935-1965: The industrial development planning was done during this period and two more stock exchanges, one at Hyderabad and another at Delhi was established.
- 1965-1990: With the advent of industrialization, 12 more stock exchanges were set up.
- 1990-till present: To regular the ever increasing stock markets in India and to protect in investor’s interest, the government of India has set up securities and exchange board of India, under the SEBI Act, 1992. The National stock exchange of India was also incorporated in November 1992 with an equity capital of 25 crore. NSE has started functioning in stock market from the year ending 1994.
WEAKNESSES OF STOCK EXCHANGES IN INDIA:
- LACK OF PROFESSIONALISM: The majority of stock brokers lack professionalism. They lack proper education, business skills, infrastructural facilities etc. which inhibits them to provide proper service to clients. They are not to guide and counsel their clients in the manner expected of them.
- DOMINATION OF FINANCIAL INSTITUTIONS: Indian stock markets are dominated by a few financial institutions. The UTI, LIC, GIC are the main players in Indian stock markets. The buying and selling of these institutions set the tone in the market. The market goes bullish if financial institutions start buying shares. On the other hand, it becomes bearing on the selling of the securities.
- POOR LIQUIDITY: Indian stock exchanges suffer from poor liquidity. A small numbers of scrips are regularly traded in stock exchange. A recent survey into frequency of trading showed that shares of 207 companies were traded once a week, shares of 396 companies were traded once in a fortnight, shares of 954 companies were traded once a month and shares of 959 companies were traded once in a year.
These statistics shows the poor liquidity of most of the shares.
- DOMINATION OF BIG OPERATORS: Some big operators influence the settlement of stock exchanges in India. In Bombay stock exchange 3-4 operators used to call the shots. The case of Harshad Mehta is well known in India. He created bullish conditions in Indian stock exchanges in the first quarter of 1992 and BSE sensex nearly downed in every short period. The artificial increases in prices of shares adversely affected the investing public and people suffered huge losses. It is the weakness of Stock exchanges working that some operators can create this sentiment as per their liking.
- LESS FLOATING STOCKS: There is a scarcity of floating stock in the Indian stock exchanges. The shares and debentures offered for sale are a small portion of total stocks. The financial institutions and joint stock companies which control over 75% of the scrips do not offer them for sale. The UTI, GIC, LIC etc. indulge more in purchasing than in selling. It creates scarcity of stocks for trading. The markets tends to be violative and amendable or adaptable to manipulations in absence of adequate floating stocks for trading.
- SPECULATIVE TRADING: The trading in stock exchanges in mainly speculative in nature. The operators try to derive benefit out of short-term price fluctuations. At Bombay stock exchange upto 5% and at other exchanges upto 10% transactions are genuine investment goals. The brokers try to create a sentiment in the market which will be beneficial to them. The genuine investors try to keep away from such markets.