History of the Indian Stock Market

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Stock Markets are one of the most important parts of today’s global economy. Most countries depending on their stock market for more than 50% of their GDP. 

As per the WORLD BANK, the Annual Stock market Capitalization to GDP stood at a staggering 55.2% in 2015.

India is also a country where the Stock Market contributes hugely to the country’s growth. This is why it is considered by many as one of the fastest growing Emerging Markets in the world.

That being said stock markets haven’t always been such big players and only in the recent years have they come into prominence. Hence, it is important to take a deep dive into the History of stock markets in India.

Beginning of Stock Trading in India

Here is a step-by-step recollection of events that led to the development of stock market in India:

Corporate shares started being traded in the 1830s in Bombay (now Mumbai) with the stock of Bank and Cotton presses.

Stock trading informally began in the mid-1850s in India with stories going around that the first group of 22 stockbrokers would gather under a Banyan tree opposite the Town Hall of Bombay to trade shares of a company for profit. The venue shifted to Meadows Street junction a decade later.

The venues kept shifting and this led to an increase in the number of brokers. It finally settled in at what’s known as Dalal Street nowadays. This informal group then organized itself to form the Bombay Stock Exchange (BSE) in 1875 which is also the oldest stock exchange in Asia.

This boosted trading in other parts of the country with a whole host of exchanges opening up in various places. Here is a list of exchanges that followed the footsteps of the BSE:

  • Ahmedabad Stock Exchange – Founded in 1894 it solely focused on trading shares of textile mills.
  • Calcutta Stock Exchange- Founded in 1904 started trading shares of various plantation mills
  • Chennai Stock Exchange – Founded in 1920.

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Modern History of Stock Exchanges

It was not until the 1990s that the stock market in India started to take shape to become what it is at present. Most of the modern-day traders are often accustomed to the luxuries of online trading where you can buy and sell stocks at the very click of a button but it’s important to understand that it has not always been the case.

Back in the day stock trading was not as efficient and sophisticated as it’s now and before the National Stock Exchange came into picture there used to be a concept of ring trading wherein most big brokers would send their assistants to buy and sell shares based on prices negotiated with the use of hand signals.

These trades would then be jotted down in sauda-pads, color-coded pink or blue to indicate the status of each broker. Now at the end of the day, all the sauda-pads were accumulated from all the brokers and a final bhav copy was produced from the details of these pads.

Now it is important to note that all these brokers were very influential in the workings of these exchanges who had a lot of power and could even annul an unprofitable trade by making a simple call to a governing board member not to mention the commonplace issue of payment defaults or insider tips wherein an influential broker could get important tips from inside the company by getting their relatives a job in the company they were going to trade in.

Technological Enhancement

Most of these issues saw a massive outcry from most brokers who saw this as manipulation of the market.

As a result, there was a gradual shift from the ring trading system to a more sophisticated screen trading system which had already been adopted by Wall Street at the time.

These technological advancements led to high volumes of trades being executed every day which was mostly dominated by BSE. However, BSE had a low level of transparency and poor clearing and settlement systems which caused an increase in a number of fraudulent cases at that time on Dalal Street. Hence, in 1988 this gave rise to SEBI as a financial regulator.

Stock Market Scams

During this period there were big scams which took place in the stock market most notably the Harshad Mehta scam of the early nineties, Ketan Parikh’s scam in 1999-2000, IPO rigging scandal in 2010 and NSEL’s commodity trading fraud in 2010.

Now let’s have a closer look at a couple of these scams which played a major role in shaping the future of the Indian stock market today:

Harshad Mehta Scam

Harshad Mehta exploited the loopholes in inter-bank transactions by using bank receipts (BRs) to fund his ultra-risky market operations.

Ketan Parikh Scam

Ketan Parekh used cleverly spun stories about the Y2K bug, to bid up tech stock prices to stratospheric levels in cahoots with promoters.

Read more about stock market Scams here

National Stock Exchange

All these scams raised alarms and soon there was a pressing need for a new Stock Exchange which was large enough to compete with BSE and bring more transparency to the stock market. 

This gave birth to the National Stock Exchange (NSE). It was incorporated in 1992, become recognized as a stock exchange in 1993, and trading began on it in 1994.

It was the first stock exchange on which trading took place electronically. In response to this competition, BSE also introduced an electronic trading system known as BSE On-line Trading (BOLT) in 1995.

The BSE launched its sensitivity index, the Sensex, now known as the S&P BSE Sensex, in 1986 with 1978–79 as the base year. This is an index of 30 companies and is a benchmark stock index, measuring the overall performance of the exchange. The index reached the level of 1,000 in July 1990, 2,000 in January 1992, 4,000 in March 1992, 5,000 in October 1999, and 6,000 in February 2000.

The exchange introduced equity derivatives in 2000. Index options were launched in June 2001, stock options in July 2001, and stock futures in November 2001. India’s first free-float index, BSE Teck, was launched in July 2001.

Its competitor, NSE, launched its benchmark exchange, the CNX Nifty, now known as Nifty 50, in 1996. It comprises of 50 stocks and functions as the performance measure of the exchange. In terms of electronic screen-based trading and derivatives, it beat BSE by launching first of its kind products and services.

Current Stock Exchange Scenario

NSE and BSE are major stock exchanges in India but it is important to note that they are not the only ones. After India’s independence 23 stock exchanges were added but now only 7 remain and the rest have exited and are listed as defunct exchanges by SEBI. Here is a list of active Stock Exchanges in India:

  • Bombay Stock Exchange (BSE) in Mumbai, one of the two principal large stock exchanges of India
  • National Stock Exchange of India (NSE) in Mumbai, one of the two principal large stock exchanges of India
  • NSE International Exchange
  • Calcutta Stock Exchange in Kolkata, a smaller stock exchange
  • Magadh Stock Exchange
  • India International Exchange (INX)
  • Metropolitan Stock Exchange of India

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Although we have still had some scandals in the stock market however the earlier scams at the start and end of the nineties have ensured an increased level of transparency and scrutiny and any kind of manipulation is investigated and dealt with strictly by SEBI.

Also nowadays it is much easier to trade in the market as it has become more convenient due to the online trading boom which has been led by most of the major brokers dominating the Indian stock market since the turn of the century.

Nowadays there is slightly less risk of stocks being manipulated by the brokers and hence it has become a much level playing field for investors looking to enter markets at a young age although the risks of investing in the stock markets still prevail.

Cover photo of Bulls, Bears and Other Beasts – A Story of the Indian Stock Market by Santosh Nair

If you are really keen on learning about the history of the Indian Stock markets then one of the best books that illustrate its functioning in the early times is Bulls, Bears and Other Beasts – A Story of the Indian Stock Market. Written by Santosh Nair this book provides a ringside view of the Indian stock markets in its infancy and has done a tremendous job in filling the void for depicting the story of the Indian stock market over the last three decades.

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