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Stock Markets
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Stock Markets
Background and Overview
Being one of the major corner stones in a modern economy, the evolution of a stock market is generally seen as an important feature of developing economies. India has a long history of stock exchanges, Bombay Stock Exchange opened up as early as 1875. Since then, the growth in number of stock markets has been quite impressive and today India has no less than 23 stock exchanges nationwide. The two major ones are Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). These markets together make up more than 90 % of the total trading volume at stock markets in India. Still, even though the number of stock exchanges is large, until 1990 the market activities have been low key. It was not until 1991, when several deregulations and liberalizations were put in practice, that the turnover rates and market capitalization figures started growing. These included among other things a deregulation of interest rates on capital market debt instruments. In contrast to the 80's, when debt predominated in resources mobilized from the primary market, during the 90's, equities and convertible debt have come to dominate primary issuance.
In 1980, 2256 companies were listed at a market capitalization of less than 1 billion rupees. Today, more than 9000 companies are listed and
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the market capitalization has grown to 97 billion rupees. Out of these more than 9000 companies about 5000 are listed on the Bombay Stock Exchange making it the dominant scene of action. Today, the market capitalization is at the equivalent of 40 % of GDP as opposed to 5 % of GDP in 1980. The total market capitalization in 1998 was little bit more than 400 billion rupees. This could be compared with the best performing stock market in Europe last year, the Stockholm Stock Exchange of Sweden where the market capitalization rate is at the equivalent of roughly 250 % of GDP.
One of the characteristics of the Indian stock market is that there are more than 40 million shareholders as compared to 50 million share holders in the US (even though the population of the US is arguably a lot smaller, about 25 % of the one of India in fact), making it the second largest stock market of the world when it comes to number of share holders. Interest rates are kept up, and if that is not the case the interest in the stock markets from households would most probably be even greater.
Also connected to the large number of shareholders is the fact that mutual funds play a relatively small role at the Indian stock markets as compared to other developing markets. In India, they only own 25 % of the stock market value, as compared to an average of 45 % for all developing countries as a group.
Access to markets
The primary market has historically been severely disturbed by the fact that the equity has not been allowed to be priced freely. Instead prices were set by the Controller of Capital Issues. Generally, prices were seen to be set far below fair market values. Also the regulated interest rates made equities seem less attractive to investors. During the deregulations of 1991 this was changed though. Equities are now allowed to be freely set and interest rates have been deregulated. Still, the former regulations make the market less skilled in valuing IPO's than would have been the case otherwise. Two years after the deregulation, 1993, raisings through primary markets were at 270 billion rupees, up from 55 billion rupees in 1988. Also, in terms of percentage of national savings, it was up from 6.3 % in 1988 to 16.2 % in 1993. Clearly, primary markets have been more effectively used since deregulations have taken place. The deregulations have helped Indian companies raising capital. Before these came into effect, many Indian companies relied on overseas capital markets or buying of bankrupted listed companies for their supply of capital. This has been possible for large companies, but hardly feasible for small entrepreneurial companies, a backbone in a developing economy. To further encourage small companies, so-called 'over-the-counter' markets have been set up.
Functioning of the markets
The main regulatory body is the Securities and Exchange Board of India (SEBI). Their objective has been set as to establish a transparent, efficient system of market regulation. Arguably they have had a tough job during the 90's since the Indian stock market has been widely acknowledged for its inefficiency and lack of transparency as well as lack of competence among intermediaries. Many investors have seen the Indian market more or less as a casino market with huge settlement risks. This has not been without reason, since there for example have been reports about lost share certificates due to careless clerks allowing them to blow out through open windows. Also, the technical infrastructure has historically been weak as monumented in 1994 when the settlement system crunched to halt. This though, is promising to change as the to major stock exchanges, BSE and NSE has as of 1995 already introduced screen-based trading systems raising the efficiency substantially.
Insider trading has been a big problem as well as brokers with capital shortages, violation of operating procedures and lack of self-enforcement of stock market rules. The SEBI has now been given greater authority to take measures against these malpractices.
There are interesting prospects for the future since the government has passed propositions allowing equity trading via the Internet on Indian stock exchanges and allowing foreign individuals and corporations to invest in Indian companies. There is to be a ceiling to this however, on 5 % of any single company.
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