Stock Exchanges in India – UPSC Economy Notes

Stock exchanges in India represent the bustling nerve centers of the country’s financial landscape, where the heartbeat of economic activity reverberates with every trade. These institutions serve as platforms where buyers and sellers converge to exchange securities, ranging from stocks and bonds to derivatives and commodities. The evolution of India’s stock exchanges reflects the nation’s journey from a colonial economy to a dynamic global player. From the establishment of the Bombay Stock Exchange (BSE) in 1875, laying the cornerstone of organized trading, to the National Stock Exchange (NSE) revolutionizing market dynamics with its electronic trading platform in 1994, India’s stock exchanges have continuously adapted to changing times, embodying resilience, innovation, and growth. Today, these exchanges play a pivotal role in channeling investments, fostering capital formation, and shaping the trajectory of India’s financial markets on the global stage.

India’s capital market has a rich history dating back to the early 17th century, with the Dutch East India Company issuing shares in 1602. As of today, India boasts a substantial number of shareholders, a myriad of listed companies, and numerous stockbrokers. The Indian capital market holds global significance in terms of development, trading volume, and growth potential.

There are five major stock exchanges in the country:

1. Bombay Stock Exchange (BSE):
2. National Stock Exchange (NSE):
3. United Stock Exchange (USE):
4. Metropolitan Stock Exchange of India (MSE):
5. India International Exchange (INX):

These stock exchanges play a crucial role in mobilizing capital, providing liquidity to securities, and contributing to the overall economic development of India. They offer diverse investment avenues and contribute to the functioning and growth of the Indian capital market.

Bombay Stock Exchange (BSE):

The Bombay Stock Exchange (BSE) holds a significant place in the financial landscape, being Asia’s first stock exchange and the 11th largest stock exchange globally, boasting an overall market capitalization of $2.3 trillion as of 2018. BSE, headquartered in Mumbai, serves as a crucial platform for the trading of a diverse array of financial instruments.

Key Features of BSE:

1. Establishment:
   • BSE was established in 1875 and has played a pivotal role in the development of India’s capital market over the years.
2. Market Capitalization:
   • With more than 5000 companies listed, BSE contributes significantly to the Indian financial ecosystem. Its market capitalization reflects its prominence on the global stage.
3. S&P BSE SENSEX:
   • BSE is home to the widely tracked equity index, the S&P BSE SENSEX (formerly SENSEX). This benchmark index is a key indicator of the overall performance of the Indian stock market and is used by investors, analysts, and policymakers.
4. International Presence:
   • The S&P BSE SENSEX is traded internationally on the EUREX, a leading derivatives exchange, and on exchanges in BRICS nations, including Brazil, Russia, China, and South Africa.
5. Trading System:
   • BSE employs an automatic online trading system known as BOLT (BSE Online Trading). This system facilitates efficient and seamless trading operations.
6. Initial Public Offering (IPO):
   • In 2017, BSE underwent an Initial Public Offering (IPO) and got listed on the National Stock Exchange (NSE). This move marked a significant development in the history of the exchange.

BSE continues to be a driving force in India’s financial markets, providing a platform for investors to buy and sell various financial instruments, including equities, derivatives, debt instruments, and mutual funds. The exchange’s rich history, diverse offerings, and international collaborations contribute to its status as a key player in the global financial arena.

National Stock Exchange (NSE):

The National Stock Exchange (NSE) is a prominent stock exchange located in Mumbai, India. Established in 1992, NSE has played a crucial role in reshaping the Indian securities market, introducing transparency, efficiency, and market integrity.

Key Features of NSE:

1. Establishment:
   • NSE was founded in 1992, and since its inception, it has been instrumental in bringing about reforms in the Indian securities market.
2. Market Capitalization:
   • NSE commands a substantial market capitalization, nearly equivalent to BSE, despite having fewer listed companies. Approximately 1600 companies are listed on NSE.
3. Transparency and Reform:
   • NSE was established by a consortium of leading Indian financial institutions with the objective of introducing transparency to the Indian capital market. The exchange has played a pivotal role in enhancing market efficiency and integrity.
4. Ownership and Investors:
   • NSE’s ownership includes a mix of domestic and global institutions and companies. Notable domestic investors in NSE include LIC, GIC, State Bank of India, and IDFC Ltd. Foreign investors, including Citigroup, also hold stakes in the exchange.
5. Benchmark Index – Nifty:
   • NSE’s benchmark index is the Standard and Poor’s CRISIL NSE Index 50, commonly known as S&P CNX Nifty or simply Nifty. The Nifty comprises 50 well-diversified stocks, representing leading sectors of the Indian economy.
6. CNX Nifty Junior:
   • The CNX Nifty Junior is another index on NSE, consisting of 50 companies and representing the second tier of stocks in terms of market capitalization.
7. Market Dominance:
   • Alongside BSE, NSE is one of the most significant stock exchanges in India. Together, they handle the majority of share transactions in the country.

NSE’s commitment to transparency, innovation, and investor protection has positioned it as a key player in India’s financial landscape. The exchange continues to be a driving force behind the development of the Indian capital market, providing a platform for diverse financial instruments and investment opportunities.

Metropolitan Stock Exchange of India (MSE):

The Metropolitan Stock Exchange of India (MSE) was originally known as MCX-SX. It commenced operations in 2008 but transitioned into a full-fledged exchange with equity trading in 2013. The exchange went public with an Initial Public Offering (IPO) in 2012.

Key Information about MSE:

1. Inception and Transition:
   • MSE began operations in 2008 and initially focused on specific segments. However, it expanded to include equity trading, becoming a comprehensive stock exchange in 2013.
2. Initial Public Offering (IPO):
   • In 2012, MSE conducted an Initial Public Offering (IPO), allowing the public to invest in the exchange.

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United Stock Exchange of India (USE):

The United Stock Exchange of India (USE) is an Indian stock exchange, positioned as the fourth pan-India exchange for trading financial instruments. USE’s shareholder base includes 21 Indian public sector banks, private banks, international banks such as Standard Chartered, and corporate houses. It primarily deals in currency futures.

Key Information about USE:

1. Launch and Operations:
   • USE was launched in 2010 and is recognized as the fourth pan-India exchange. It facilitates the trading of financial instruments in India.
2. Shareholder Base:
   • The exchange is backed by a diverse group of shareholders, including Indian public sector banks, private banks, international banks, and corporate entities.

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India International Exchange (INX 2017):

India International Exchange (INX) is India’s first international stock exchange, inaugurated in 2017. It is situated at the International Financial Services Centre (IFSC) within the Gujarat International Finance Tec-City (GIFT City). INX operates as a wholly-owned subsidiary of the Bombay Stock Exchange (BSE).

Key Features of INX:

1. Location:
   • INX is located within the International Financial Services Centre (IFSC) in GIFT City, Gujarat.
2. Ownership:
   • Being a subsidiary of the Bombay Stock Exchange (BSE), INX benefits from the expertise and infrastructure of one of India’s leading stock exchanges.
3. Technology and Offerings:
   • INX boasts one of the world’s most advanced technology platforms, with a rapid turn-around-time of 4 microseconds. It operates for 22 hours a day, allowing international investors and Non-Resident Indians (NRIs) to trade seamlessly from anywhere across the globe. INX offers a range of financial instruments, including equity, currency, commodity, and interest rate derivatives. Future plans include the offering of depository receipts and bonds.

INX’s strategic location and cutting-edge technology position it as a key player in the global financial market, providing a platform for international investors to engage in diverse trading activities.

BSE SME and NSE Emerge:

Both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) introduced platforms dedicated to Small and Medium-sized Enterprises (SMEs) in 2012. These platforms aim to facilitate fundraising and listing for small and medium enterprises, providing them with access to equity capital for growth and expansion. BSE named its platform the “BSE SME Exchange,” while NSE referred to its platform as “Emerge.”

Key Features of BSE SME Exchange and NSE Emerge:

1. Purpose:
   • These platforms are specifically designed to cater to the financing needs of small and medium-sized enterprises. They offer these businesses an avenue to raise equity capital, which was previously limited primarily to debt financing.
2. Opportunity for SMEs:
   • BSE SME Exchange and NSE Emerge provide SMEs with the opportunity to access public funding, allowing them to fuel their growth and expansion plans.
3. Investor Engagement:
   • The platforms also serve as an investment opportunity for investors looking to identify and invest in promising SMEs at an early stage.
4. Awareness and Education:
   • There is a recognition that SMEs often lack awareness about equity capital, stock markets, and alternative funding options beyond traditional banking. These platforms aim to bridge this gap by providing education and access to capital markets.

Sensex (S&P BSE SENSEX):

The S&P BSE SENSEX, commonly referred to as Sensex, is a key stock market index that reflects the performance of the Bombay Stock Exchange (BSE). Here are some essential details about Sensex:

1. Origin and Name:
   • The term “Sensex” is a combination of the words “Sensitive” and “Index.” The base period for S&P BSE SENSEX is 1978-79, with a base value of 100 index points.
2. Composition:
   • Sensex comprises the 30 largest and most actively traded blue-chip stocks representing various sectors on the BSE. These stocks are selected based on market capitalization.
3. Dynamic Composition:
   • The composition of the Sensex is periodically revised, with companies being replaced by others. New sectors may also find representation, reflecting the evolving economy.
4. Market Barometer:
   • Sensex is widely regarded as a mirror or barometer of the Indian stock markets and the overall economy. Its movements are closely monitored to gauge the performance and sentiment of the market.
5. Counterpart:
   • The counterpart of BSE Sensex on the National Stock Exchange is NSE Nifty (NSE fifty).

Sensex serves as a crucial indicator of market trends and economic conditions, making it a key reference point for investors, analysts, and policymakers.

Securities and Exchange Board of India (SEBI):

SEBI, the Securities and Exchange Board of India, plays a crucial role in regulating and overseeing the functioning of the capital markets in India. Here are key aspects of SEBI and its responsibilities:

1. Establishment and Statutory Basis:
   • SEBI was established in 1988 and gained a statutory basis in 1992 through the enactment of the SEBI Act 1992, which was passed by the Parliament.
2. Regulatory Scope:
   • SEBI’s regulatory scope extends to stock exchanges, intermediaries (such as stockbrokers), mutual funds, and Foreign Institutional Investors (FIIs) participating in Indian stock trading.
3. Investor Protection:
   • As per Section 11(1) of the SEBI Act, one of SEBI’s primary duties is to protect the interests of investors in securities. This involves ensuring a fair and transparent market environment.
4. Education and Training:
   • SEBI actively promotes investors’ education and conducts training programs for intermediaries in the securities markets, including brokers, credit rating agencies, and underwriters.
5. Prohibition of Unfair Practices:
   • SEBI has the authority to prohibit unfair and fraudulent trade practices related to securities markets. It also addresses issues related to insider trading, imposing monetary penalties on market intermediaries found engaging in such practices.
6. Regulation of Acquisitions and Takeovers:
   • SEBI regulates substantial acquisitions of shares and takeover of companies. This includes overseeing major transactions, such as the acquisition of shares of IDBI Bank by Life Insurance Corporation of India in 2018.
7. Inspections and Audits:
   • SEBI conducts inspections, inquiries, and audits of stock exchanges, intermediaries, and self-regulatory organizations in the securities market. This helps ensure compliance with regulations and standards.
8. Regional Presence:
   • SEBI operates from its head office in Mumbai and has regional offices in New Delhi, Kolkata, and Chennai, facilitating effective regulatory oversight across the country.
9. Enhanced Powers:
   • Over the years, SEBI’s powers have been enhanced, including additional provisions in 2002 and 2014. These enhancements include appointing more full-time directors and granting increased powers for conducting activities like search and seizure.
10. Regulation of Credit Rating Agencies:
    • SEBI also regulates credit rating agencies, ensuring that they adhere to standards and provide accurate assessments of the creditworthiness of financial instruments.

SEBI’s regulatory framework is pivotal in maintaining the integrity of the Indian capital markets, protecting investors, and fostering fair and transparent market practices.

Securities Laws (Amendment) Act, 2014 and SEBI’s Role in Investor Protection:

Securities Laws (Amendment) Act, 2014: The Securities Laws (Amendment) Act, 2014, is a significant legislative measure in India aimed at empowering the securities market regulator, SEBI, with enhanced powers to effectively combat fraudulent investment schemes, particularly Ponzi schemes. The Act also introduces provisions for the establishment of special fast-track courts to expedite legal proceedings related to securities fraud.

SEBI’s Role as Protector of Investors: Investor protection is a key aspect of SEBI’s mandate. Safeguarding the interests of investors contributes to the credibility and integrity of the financial and securities markets. SEBI has undertaken various measures and initiatives to fulfill its role as a protector of investors:

1. Registration and Regulation of Intermediaries:
   • SEBI registers and regulates intermediaries such as brokers, portfolio managers, and merchant bankers to ensure that they adhere to prescribed standards and ethical practices.
2. Monitoring Credit Rating Agencies:
   • SEBI records and monitors the activities of credit rating agencies, ensuring that they provide accurate assessments of the creditworthiness of financial instruments.
3. Registration and Regulation of Investment Schemes:
   • SEBI registers and regulates investment schemes, including mutual funds and venture capital funds, to ensure their proper functioning and compliance with regulations.
4. Fraud Prevention and Market Integrity:
   • SEBI is tasked with preventing frauds and unfair trading practices in the securities market, thereby maintaining market integrity and instilling confidence among investors.
5. Regulation of Major Transactions and Takeovers:
   • SEBI regulates major transactions and takeovers of companies, overseeing these processes to protect the interests of shareholders and investors.
6. Investor Awareness and Education Programs:
   • SEBI conducts investor awareness and education programs to inform investors about market dynamics, investment options, and their rights. The Securities Market Awareness Campaign is a notable initiative in this regard.
7. Inspection and Audit of Exchanges:
   • SEBI conducts inspections and audits of stock exchanges to ensure compliance with regulatory standards and to identify and address any irregularities.
8. Assessment of Fees and Charges:
   • SEBI is responsible for the assessment of fees and other charges levied by market participants, ensuring a fair and transparent fee structure.
9. Ban on Insider Trading:
   • SEBI enforces regulations to prevent insider trading, maintaining a level playing field for all market participants.
10. Strengthening Corporate Governance:
    • SEBI works towards strengthening corporate governance practices in listed companies, ensuring transparency, accountability, and protection of shareholder interests.

SEBI’s slogan, ‘An informed investor is a safe investor,’ underscores the importance of investor awareness in creating a secure investment environment. The Securities Market Awareness Campaign is a testament to SEBI’s commitment to educating investors on various aspects of the securities market.

FAQs

1. What are the major stock exchanges in India?

Answer: The major stock exchanges in India include the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). BSE is the oldest stock exchange in Asia, while NSE is the largest in terms of trading volume and market capitalization.

2. How does a stock exchange operate in India?

Answer: Stock exchanges in India provide a platform for buying and selling securities such as stocks, bonds, and derivatives. They facilitate transparent and orderly trading through electronic trading systems. Investors can place orders through brokers, and transactions are executed based on prevailing market prices.

3. What is the role of SEBI in regulating stock exchanges in India?

Answer: The Securities and Exchange Board of India (SEBI) is the regulatory authority overseeing stock exchanges in India. Its primary role is to protect the interests of investors and ensure the integrity of the market. SEBI formulates regulations, monitors compliance, and enforces disciplinary actions against entities violating market rules.

4. How are stock prices determined on Indian stock exchanges?

Answer: Stock prices on Indian stock exchanges are determined by supply and demand dynamics. Factors such as company performance, economic indicators, investor sentiment, and global market trends influence stock prices. Market participants, including investors and traders, continuously buy and sell securities, leading to price discovery through the forces of supply and demand.

5. What are the trading hours for stock exchanges in India?

Answer: Stock exchanges in India typically operate from Monday to Friday, with trading hours divided into pre-market, regular market, and post-market sessions. The pre-market session starts before the regular market hours, allowing investors to place orders. The regular market session runs from morning to afternoon, during which most trading activity occurs. Post-market session allows for additional trading after regular market hours, albeit with limited liquidity.

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