essay on indian stock market

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The BSE and NSE

Trading and settlement, market indexes, market regulation.

• Investing in India's Markets

The Bottom Line

• International Markets

Indian Stock Market: Exchanges and Indexes

With its massive population and bustling economy, India is an engine of growth. On Jan. 22, 2024, its stock market capitalization surpassed Hong Kong’s for the first time. According to data compiled by Bloomberg, the value of shares listed on Indian exchanges reached $4.33 trillion, compared to $4.29 trillion for Hong Kong.

Key Takeaways

• India has two primary stock markets, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
• The BSE is India's oldest stock exchange.
• India's exchanges are regulated by the Securities Exchange Board of India (SEBI).
• The two prominent Indian market indexes are Sensex and Nifty.

Most of the trading in the Indian stock market takes place on its two stock exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE was established in 1875. The NSE was founded in 1992 and started trading in 1994. Both exchanges follow the same trading mechanism, trading hours, and settlement process.

As of Jan. 30, 2024, the BSE had 5,315 listed firms, whereas the rival NSE had 2,266 as of Dec. 31, 2023. Almost all the significant firms of India are listed on both exchanges. The BSE is the older stock market, and the NSE is the largest in volume.

Trading on both exchanges is through an open electronic limit order book where order matching is done by the trading computer. There are no market makers , and the entire process is order-driven by investors matched with the best limit orders. Buyers and sellers remain anonymous.

An order-driven market brings more transparency by displaying all buy and sell orders in the trading system . Institutional investors can use the direct market access (DMA) option, using trading terminals provided by brokers for placing orders directly into the stock market trading system.

Equity spot markets follow a T+1 rolling settlement , with any trade on Monday getting settled by Tuesday. All trading is conducted between 9:15 a.m. and 3:30 p.m., Indian Standard Time (+ 5.5 hours GMT), Monday through Friday. Delivery of shares must be made in dematerialized form. Each exchange has its own clearing house, which assumes all settlement risk by serving as a central counterparty.

The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest market index for equities; it includes shares of 30 firms listed on the BSE. It was created in 1986 and provides time series data from 1979 as the base year.

The Standard and Poor's CNX Nifty includes 50 shares listed on the NSE. It was created in 1996.

The development, regulation, and supervision of India's stock market rests with the Securities and Exchange Board of India (SEBI), formed in 1992 as an independent authority. Since then, SEBI has consistently tried to lay down market rules in line with the best market practices. It enjoys vast powers of imposing penalties on market participants in case of a breach.

Investing in India's Markets

India permitted outside investments in the 1990s. Foreign investments are classified into two categories: foreign direct investment (FDI) and foreign portfolio investment (FPI). All investments in which an investor takes part in the day-to-day management and operations of the company are treated as FDI, whereas investments in shares without any control over management and operations are treated as FPI.

To make portfolio investments in India, one must be a foreign institutional investor (FII) or one of the sub-accounts of one of the registered FIIs. Both registrations are granted by the market regulator, SEBI. Foreign institutional investors mainly consist of mutual funds, pension funds, endowments, sovereign wealth funds, insurance companies, banks, and asset management companies. FIIs can also invest in unlisted securities outside stock exchanges, subject to the approval of the price by the Reserve Bank of India .

India has the fifth-largest economy in the world by GDP, with a 2023 GDP of $3.7 trillion.

Restrictions and Investment Ceilings

The government of India prescribes the FDI limit, and different ceilings have been prescribed for different sectors. The maximum limit for portfolio investment in a particular listed firm is decided by the FDI limit prescribed for the sector to which the firm belongs. However, there are two additional restrictions on portfolio investment.

According to SEBI, an FII can invest up to 10% of the equity of any one company, subject to the 24% limit on overall investments. The 24% limit may be raised to 30% for individual companies that have received shareholder approval to do so. FIIs are allowed to invest 100% of their portfolios in debt securities.

Investments for Foreign Entities

Foreign entities and individuals can gain exposure to Indian stocks through institutional investors. Investments can be made through some of the offshore instruments, like participatory notes (PNs), depositary receipts, such as American depositary receipts (ADRs) and global depositary receipts (GDRs), exchange-traded funds (ETFs), and exchange-traded notes (ETNs).

Participatory notes representing underlying Indian stocks can be issued offshore by FIIs, only to regulated entities, but small investors can invest in American depositary receipts representing the underlying stocks of some of the well-known Indian firms, listed on the New York Stock Exchange and Nasdaq. ADRs are denominated in dollars and subject to the regulations of the U.S. Securities and Exchange Commission (SEC).

Retail investors can invest in ETFs and ETNs , based on Indian stocks. India-focused ETFs mostly make investments in indexes made up of Indian stocks. Most of the equities included in the index are listed on the NYSE and Nasdaq. Two ETFs based on Indian stocks include the iShares MSCI India ETF ( INDA ) and the Wisdom-Tree India Earnings Fund ( EPI ).

What Is the Main Stock Market in India?

The main stock market in India is the Bombay Stock Exchange (BSE) which has 5,315 listed firms.

What Is the Largest Company on the Indian Stock Market?

The largest company on the Bombay Stock Exchange (BSE) is Reliance Industries with a market cap of over $229 billion as of Jan. 30, 2024.

Can Americans Invest in the Indian Stock Market?

Yes, Americans can invest in the Indian stock market. There are a few ways of doing so, such as investing in exchange-traded funds (ETFs) or purchasing American depository receipts (ADRs) of the company.

Most of the trading in the Indian stock market takes place in the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). As of 2024, India ranked as the fourth largest market in the world. The two dominant Indian market indexes are Sensex and Nifty.

Bloomberg. " India Tops Hong Kong as World’s Fourth-Largest Stock Market ."

BSE. " History and Milestones ."

NSE. " History & Milestones ."

BSE. " All India Market Capitalization ."

NSE. " All Companies Based on Market Capitalisation ."

NSE. " Trading System ."

NSE. " Settlement Cycle ."

BSE. " Compulsory Rolling Settlement ."

BSE. " Session Timings ."

NSE. " Exchange Communications. Market Timings ."

Pib.gov.in. " BSE Sensex Is Now 25 ."

NSE. " Nifty50 ."

Securities and Exchange Board of India. " About SEBI ."

International Monetary Fund. " UNCTAD Press Release: FDI Flows to India Expanded in the 1990s ."

Securities and Exchange Board of India. " Foreign Institutional Investment ."

World Population Review. " Countries By GDP ."

Companiesmarketcap.com. " Reliance Industries ."

BSE. " Top 100 Companies by Market Capitalization ."

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Stocks Soar in India, Luring Investors at Home and Abroad

The second-most populous country is enjoying some of the world’s strongest stock market returns. Pro-growth policies and gnawing questions about China have helped.

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By Matt Phillips and Emily Schmall

Until the pandemic, India’s stock market was like another world that Dilip Kumar never had a reason to visit. But like so many other people around the world who were stuck at home, he began to see it as the place to be.

Mr. Kumar, a proposal administrator at an engineering company in New Delhi, set up a free stock trading account through Zerodha, India’s largest online brokerage firm, and plowed some of his savings into Indian Railways as well as a clothing retailer and a cinema chain.

“I invested in all the things I was using daily,” he said. Since then, he’s gotten “a big return in quick time” — more than doubling his money in a little over a year.

Plenty of others want in on the action.

India’s booming stock market is drawing both local novices and global investors to shares of the financial, industrial and technology companies that dominate its listings. The MSCI India index is up about 30 percent this year — nearly twice the return of the global index — while India’s benchmark 30-share S&P BSE Sensex is up roughly 25 percent. Both have notched a seemingly relentless string of record highs, soaring on factors including simple demographics, governmental and fiscal policy and geopolitical changes.

The enthusiasm is clear from the initial public offering this week for the parent company of the digital payments platform Paytm. The company hit its target of raising $2.5 billion — making the offering the biggest in the country’s history and valuing the company at more than $20 billion. The offering underscored the momentum of the financial and tech sectors in a country with a predominantly young population embracing digital start-ups.

At the same time, the government of Prime Minister Narendra Modi is trying to make India more self-reliant, a boon to domestic businesses offering everyday goods and services, while trying to bring more citizens — and their money — into the formal economy. And this spring, the Indian central bank embarked on a bond-buying program that’s a smaller version of the sort that has lifted stocks around the world.

Combine those factors and it’s a recipe for a retail investor boom: According to the Securities and Exchange Board of India, new securities-holding accounts have risen to an all-time high.

“There is pent-up demand among the upper middle class, who have been rushing to the market,” said Jiban Mukhopadhyay, a corporate economics professor emeritus at the S.P. Jain Institute of Management and Research.

Their confidence has been buoyed by the huge stakes that institutional investors overseas are taking in companies that have gone public this year. Abu Dhabi’s sovereign wealth fund, the Texas teachers’ pension fund and the University of Cambridge have invested a total of more than $1 billion in Paytm.

One reason: Foreign investors have lately soured on China, long the destination for those seeking high-flying returns, as growth there slows and a powerful central government cracks down on big tech companies.

“India really stands out this year, with China decelerating,” said Todd McClone, a portfolio manager at William Blair’s Emerging Markets Growth Fund. His fund sharply cut its allocation to China, moving much of that money into Indian stocks including the conglomerate Reliance Industries, the paint manufacturer Asian Paints and the specialty chemical company SRF.

“With accelerating growth, lots of good companies and all the demographics that stand behind it, I think it gave people a lot of confidence to come back to that market,” he said.

It remains to be seen how sustainable the rally will be. Emerging markets like India can often be at the mercy of decisions made by investors on the other side of the globe. Oil prices are surging, which is a particular challenge for India, a major importer.

Economists also point to an uneven recovery from the pandemic that has pushed many Indians back into poverty. The economy plunged 21 percent during India’s first lockdown, the small and midsize businesses that employ most of India’s work force continue to falter, and the government is spending billions of dollars to mop up banks’ growing number of bad loans.

But investors remain optimistic: Wall Street analysts expect Indian companies to increase their earnings more than 22 percent over the next 12 months — calculated in dollars — a faster pace of growth than benchmark indexes in either China or the United States.

“Stock prices follow earnings, and Indian corporates have the strongest fundamental momentum ,” said Brian Freiwald, an emerging-market portfolio manager at Putnam Investments in Boston.

Part of the reason for the Indian market’s rapid ascent can be traced to 2016 and a policy of demonetization. Meant to tamp down money laundering, the policy banned the most widely circulated currency notes and wiped out the savings of families and small businesses overnight. But it also bolstered companies like Paytm, a sector that benefited further as the pandemic disrupted face-to-face transactions.

Adding to the momentum are market-friendly measures delivered by Indian policymakers. In February, Mr. Modi’s government proposed a budget that called for more spending on health care and infrastructure. Then, two months later, the Reserve Bank of India began the same kind of quantitative easing programs that the Federal Reserve and other central banks instituted to support their domestic economies. Though it started its bond-buying program more than a year after the Fed’s began, India enjoyed a similar stock-market response: Shares took off.

For global investors, it was a stark contrast to what was happening in China, which had already enjoyed a rapid recovery from its pandemic shutdowns. Chinese policymakers began withdrawing some of their support for the economy early this year. Growth began to slow — it was down to just 4.9 percent in the third quarter — putting pressure on debt-laden firms that rely on continuously fast growth to pay their creditors. At the same time, the Chinese government, under the increasingly centralized power of President Xi Jinping, has begun to rein in some of the country’s most prominent tech companies.

It has been an unappealing backdrop for investors, and Chinese markets have posted some of the worst returns in the world this year.

“ India tends to do well when there’s an issue in China,” said Divya Mathur, an emerging-market portfolio manager at the money management firm Martin Currie in Edinburgh.

As rapid as the Indian market’s gains have been, they remain fragile, experts said.

Emerging markets like India can whipsaw as global investors who poured in money can pull it out quickly, particularly when central banks raise interest rates and attract investor capital. India was slammed by such a situation in 2013: When the Federal Reserve began to step back from low-interest rate policies after the 2008 financial crisis, investors pulled their money from India. Its currency, the rupee, plunged to a new low against the dollar and pushed the country to the brink of a financial crisis.

There are also fundamental demographic challenges ahead. The young people who have helped speed the country’s embrace of new technologies will put pressure on the government to keep up the rapid economic expansion. Over a quarter of India’s population — more than 360 million people — are under the age of 15, according to the World Bank.

“As this young population comes of age, can India provide enough job opportunities?” asked Ajay Krishnan, a portfolio manager who specializes in emerging markets at Wasatch Global Investors in Salt Lake City.

The pandemic also remains a threat: Roughly a quarter of India’s population is fully vaccinated, leaving it vulnerable to another surge in cases that could cause more economic damage and push more citizens into poverty.

Mr. Mukhopadhyay, the economics professor, said those dynamics are a sign that market returns aren’t an indicator of broader prosperity.

“The Indian stock market behaves like a pampered kid,” he said. “It has hardly any relationship with the movement of the economy.”

Sameer Yasir contributed reporting.

Matt Phillips covers financial markets. Before joining The New York Times in 2018, he was editor in chief at Vice Money and a founding staffer at Quartz, a business and economics website. He also spent seven years at The Wall Street Journal, where he covered stock and bond markets. More about Matt Phillips

Emily Schmall is a South Asia correspondent based in New Delhi. More about Emily Schmall

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Essay: Indian stock market

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The market in which shares of publicly held companies are issued and traded either through exchanges or over-the-counter markets, is known as the equity market or stock market. The stock market is one of the most important components of a free-market economy, as it provides companies with access to capital in exchange for giving investors a part of ownership in the company. The share market makes possible to its investors to grow their small initial sums of money into large ones, and to become wealthy without taking the risk of starting a business as their own or making the sacrifices that often accompany a high-paying career. A stock exchange is a place or organization for the trade of shares of listed companies. A stock exchange is a form of exchange which provides services for stock brokers and traders to buy or sell stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and dividends. Securities traded on a stock exchange include stock issued by listed companies, unit trusts, derivatives, pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it must be listed there. Usually, there is a central location at least for record keeping, but trade is increasingly less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of increased speed and reduced cost of transactions. Trade on an exchange is by members only. There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities. In recent years, various other trading venues, such as electronic communication networks, alternative trading systems and “dark pools” have taken much of the trading activity away from traditional stock exchanges. ORIGIN OF INDIAN STOCK MARKET BSE and NSE are the leading stock exchanges in India. Apart from these two stock exchanges there are another 22 stock exchanges are also trading shares in India. But BSE and NSE established themselves as leaders in stock exchanges. There are about 80 percent of equity volume are traded in these two exchanges. BOMBAY STOCK EXCHANGE(BSE) Bombay Stock Exchange is the oldest stock exchange in Asia. It is popularly known as BSE. It was established as ‘The Native Share and Stock Broker’s Association’ in 1875. . It is the world’s 5th most active in terms of number of transactions handled through its electronic trading system. There are over 6000 stocks are listed in BSE having the market capitalization around 968000 crores BSE is the 1st in India and second in the world to obtain an ISO 9001:2000 certifications. It is also the first exchange in the country and second in the world to receive Information Security Management System. BSE’s normal trading session are from 9:15am to 3:30pm on all days of week except Saturdays Sundays and holidays declared by the Exchange in advance. BSE automated its system in1995.

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Decoding Finance

Understanding the Indian Stock Market: A Beginner’s Guide

• May 5, 2023

Table of Contents

Introduction

The Indian stock market is a rapidly growing financial market that has attracted the attention of many investors looking to diversify their portfolios and make a profit. However, for beginners, investing in the stock market can be a difficult task. With a vast array of investment options, complex terminologies, and a constantly changing market, it can be challenging to navigate the Indian stock market.

That’s why this beginner’s guide has been created to provide an overview of the Indian stock market and the key concepts that every investor should understand. We’ll cover the basics of what the Indian stock market is, how it works, the types of investment options available, and the factors that affect the market. By the end of this guide, you’ll have a basic understanding of the Indian stock market and be better equipped to make informed investment decisions. So, let’s get started on understanding the Indian stock market: a beginner’s guide.

What is the Indian Stock Market?

The Indian stock market is a marketplace where publicly traded companies sell shares of their stock to investors. This market is regulated by the Securities and Exchange Board of India (SEBI) and operates with the goal of ensuring that the market functions efficiently and transparently while protecting investors from fraudulent activities.

There are two primary exchanges in Indian Stock Market: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). These exchanges provide a platform for companies to raise capital by selling shares and for investors to buy shares of these companies. The stock market works on the basis of supply and demand, where the price of a stock is determined by the forces of the market.

To participate in the Indian stock market, investors must open a demat account and a trading account with a registered stockbroker. The demat account holds the shares purchased by the investor, while the trading account allows the investor to buy and sell shares through the stockbroker.

The Indian stock market provides investors with a variety of investment options. Investors can choose to invest directly in individual stocks, where they purchase shares of a specific company listed on the stock exchange. Alternatively, they can opt for indirect investment through mutual funds or exchange-traded funds (ETFs), where a portfolio of stocks is managed by professional fund managers.

In summary, the Indian stock market provides a platform for companies to raise capital and for investors to buy and sell shares of these companies. With the help of a registered stockbroker and the availability of a variety of investment options, investors can participate in the Indian stock market and potentially earn a return on their investment.

How Does the Indian Stock Market Work?

The Indian stock market is a complex system that is influenced by a range of factors. In this section, we’ll take a closer look at how the Indian stock market works and the key factors that influence its performance.

The Indian stock market operates on the principle of supply and demand. When a company sells shares of its stock to the public, it does so with the aim of raising capital. Investors purchase these shares with the hope of earning a return on their investment, either through capital gains or dividends.

The price of a stock is determined by the rule of supply and demand. If there is high demand for a particular stock, the price will increase, and vice versa. The market price of a stock is constantly changing as investors buy and sell shares based on their expectations of the company’s performance and other market factors.

The performance of the Indian stock market is influenced by a range of factors, including economic indicators, corporate earnings, global events, and investor sentiment. Economic indicators such as GDP growth, inflation rates, and interest rates can have a significant impact on the market’s performance. Corporate earnings reports also play a crucial role in determining the market’s direction, as investors are constantly monitoring the financial performance of companies to make informed investment decisions.

Global events such as changes in trade policies, geopolitical tensions, and natural disasters can also have an impact on the Indian stock market. These events can cause fluctuations in the market as investors respond to new information and adjust their investment strategies accordingly.

Finally, investor sentiment can have a significant impact on the Indian stock market. If investors are optimistic about the market’s direction, they may be more willing to invest, which can drive up prices. Conversely, if investors are pessimistic, they may sell their shares, which can cause prices to decline.

In summary, the Indian stock market works on the principle of supply and demand, and its performance is influenced by a range of factors, including economic indicators, corporate earnings, global events, and investor sentiment. Understanding these factors is crucial for investors looking to make informed investment decisions in the Indian stock market.

Types of Investment in the Indian Stock Market

The Indian stock market provides investors with a range of investment options, each with its own level of risk and potential return. In this section, we’ll take a closer look at the different types of investment available in the Indian stock market.

Stocks : Stocks are the most basic form of investment in the Indian stock market. When an investor purchases a stock, they are buying a share of ownership in a company. The price of the stock is determined by the forces of supply and demand in the market, and investors can earn a return on their investment through capital gains or dividends.

Mutual Funds : Mutual funds are professionally managed basket of portfolios of stocks and bonds. Investors pool their money together and hire a professional fund manager to invest the money in a diversified portfolio of assets. Mutual funds provide investors with exposure to a range of stocks, making them a good option for investors looking to diversify their portfolio.

Exchange-Traded Funds (ETFs) : ETFs are similar to mutual funds but are traded on stock exchanges like individual stocks. ETFs are also managed by professional fund managers and provide investors with exposure to a range of stocks. However, unlike mutual funds, ETFs can be bought and sold throughout the trading day, making them a more flexible investment option.

Initial Public Offerings (IPOs) : An IPO is the first time a company’s stock is offered for sale to the public. Investors can purchase shares of the company during the IPO and potentially earn a return on their investment if the company’s stock price increases.

Futures and Options : Futures and options are derivative instruments that allow investors to speculate on the future direction of the market. Futures are contracts that obligate the buyer to purchase or sell an underlying asset at a specific price on a specific date, while options provide the buyer with the right, but not the obligation, to buy or sell an underlying asset at a specific price on a specific date.

In summary, the Indian stock market offers a range of investment options, including stocks, mutual funds, ETFs, IPOs, and futures and options. Each investment option has its own level of risk and potential return, and it’s important for investors to understand their investment objectives and risk tolerance before choosing an investment option.

Factors Affecting the Indian Stock Market

The Indian stock market is a dynamic and complex system that is influenced by a variety of factors. In this section, we’ll take a closer look at some of the key factors that can affect the performance of the Indian stock market.

Economic Indicators : Economic indicators such as GDP growth, inflation rates, and interest rates can have a significant impact on the Indian stock market. For example, a strong GDP growth rate can boost investor confidence and lead to increased investments in the stock market, while high inflation rates and interest rates can have a negative impact on the market by increasing the cost of borrowing and decreasing consumer spending.

Global Events : Global events such as changes in trade policies, geopolitical tensions, and natural disasters can also have an impact on the Indian stock market. These events can cause fluctuations in the market as investors respond to new information and adjust their investment strategies accordingly.

Corporate Earnings : Corporate earnings reports are an important factor that can affect the performance of the Indian stock market. If a company reports strong earnings, investors may be more willing to invest in the stock, leading to an increase in its price. Conversely, if a company reports weak earnings, investors may sell their shares, causing the stock price to decline.

Investor Sentiment : Investor sentiment is another important factor that can influence the Indian stock market. If investors are optimistic about the market’s direction, they may be more willing to invest, which can drive up prices. Conversely, if investors are pessimistic, they may sell their shares, which can cause prices to decline.

Government Policies : Government policies can also have an impact on the Indian stock market. For example, changes in tax policies, subsidies, and regulations can influence the performance of specific sectors and companies, which can in turn affect the overall performance of the stock market.

In summary, the Indian stock market is affected by a variety of factors, including economic indicators, global events, corporate earnings, investor sentiment, and government policies. Understanding these factors and their potential impact on the market is crucial for investors looking to make informed investment decisions in the Indian stock market.

In conclusion, the Indian stock market offers a range of investment opportunities for investors looking to grow their wealth over time. By understanding the basics of the stock market, including how it works, the different types of investments available, and the factors that can affect its performance, investors can make informed decisions and potentially earn a significant return on their investment.

However, investing in the stock market comes with risks, and it’s important for investors to do their own research and consult with financial experts before making any investment decisions. Investors should also consider their own investment objectives and risk tolerance before choosing an investment option. The Indian stock market has a rich history and has seen significant growth over the years. While there are ups and downs in the market, many investors have been able to achieve significant returns by investing in quality companies and making smart investment decisions.

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Essay on Stock Exchange

In this essay we will discuss about Stock Exchange in India. After reading this essay you will learn about: 1. Meaning of Stock Exchange 2. Features of Stock Exchange 3. Functions 4. History 5. Major Problems in Trading 6. Measures Suggested.

• Essay on the Measures Suggested for the Reform of the Stock Exchange

1. Essay on the Meaning of Stock Exchange :

Industrial securities market can be broadly divided into two parts, i.e., namely, primary markets or new issues market (NIM) and secondary markets or stock markets. Thus the primary market or NIM deals with new securities, i.e., with those securities which were not available earlier and are made available before the investing public for the first time.

On the other hand, the stock market is a potential market for those old securities which are already issued and also granted stock exchange quotation. Thus the stock exchanges usually provide a systematic regular and continuous market for both buying and selling of old securities.

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The main differences between NIM and stock exchanges are mostly related to:

(a) Types of securities dealt,

(b) Nature of financing and

(c) The organisation of the entity.

By the term stock exchange, we mean a market where stocks, shares and other kind of securities are bought and sold. In this market owners can dispose of their securities as per their likings. The present large scale production system favours formation of joint stock company or corporate form of organisation which is quite suitable for securing large amounts of capital from those people who possess surplus funds and are willing to take risk and invest them profitably as per their own convenience and temperament.

The buyer of stocks and securities can realise their invested capital by selling those stocks and shares to others ready to buy the same at the prevailing price in the stock exchanges. Thus the stock exchange or market is a designated place where shares, stocks and other securities arc bought and sold. Stock market or exchange is, therefore, an important institution for running the corporate type of firm in a smooth manner.

2. Essay on the Features of Stock Exchange :

It would be better to identify some of important features of stock exchange.

Following are some of these features:

(i) Voluntary Association:

Stock exchange can be termed as voluntary association where various individuals join together and thereby form a private or public limited company so as to initiate the activities of stock exchange.

(ii) Recognition and Registration:

The stock market must be recognised by the government under the Securities Contract (Regulation) Act, 1956. Moreover, the stock exchange may or may not be registered under the Act.

(iii) Membership:

Membership of stock exchange is open as per Rule 8 of the Securities Contract (Regulation) Act, 1956. The stock exchange has framed by-laws to settle disputes etc. which the members have to follow.

(iv) Conduct of Business:

The stock exchange does not involve itself in the business of buying and selling of securities rather it provides facilities for buying and selling of securities for its members.

(v) Management of Stock Exchange:

The management of stock exchange is entrusted to its governing body whose composition differs from one another. The body functions as per the constitutional provisions and by-laws of stock exchange.

3. Essay on the Functions of Stock Exchange in India:

The stock market or stock exchanges are usually discharging some important functions for the orderly and systematic growth of capital market.

The following are some of these important functions:

(i) Nexus between Savings and Investment:

Stock markets establish nexus between savings and investments of the community. The community savings are rightly mobilised and channelized by the stock exchanges of the country for its investment into those sectors and companies which the community at large feels secure especially on the basis of its past performance, good return, capital appreciation etc.

The preference of investors for a particular industry or for a particular individual unit is reflected in the share price, which again determine the mode of investment.

Stack exchanges render valuable services for the preliminary distribution of new issues of capital and also arrange offers for sale of existing securities, in a most systematic and orderly fashion. Members of stock exchange also help in floatation of new issues as brokers and underwriters throughout the country.

(ii) Market Place:

Another important function of stock markets or exchanges is to provide a market place for the purchase and sale of securities to the original subscriber and a huge number of buyers for attaining its free transferability. As the purchase and sale of securities are centralised in that market so the purchaser usually get a ready seller and the seller usually get a ready purchaser at a competitive price for making necessary transaction on their securities.

(iii) Continuous Price Formation:

Establishing a process of continuous price formation is another important function of stock exchanges or markets. As a large number of buyers and sellers are operating in such market, the collective judgement of such a large number of people brings changes in the level of prices of securities in small graduations in an unending process.

Accordingly, stock markets can act as a barometer of the state of health of the economy of a nation through its continuous price formation which helps an investor to take a right decision at appropriate time.

(iv) Market Making:

The stock markets establish a system of market makers at par with all leading stock exchanges of the world. In this system, the market makers usually take the responsibility of making of market of specific shares, i.e., for buying and selling a specific share at definite prices.

This system also protects the investors from its exploitation by the stock brokers and ensure transaction of shares at best possible market rates and also ensure prompt execution of transaction and liquidity. Thus this system offers protection to investors and also liquidity to all shares.

(v) Uniform System of Settlement:

Another important function of stock exchanges is to unify all stock exchanges on a national basis for introducing a uniform system of one-week settlement. This system reduces the risk of price movements in share and also checks the tendency towards over-speculation and over concentration of trading activity in a few shares.

(vi) Management Information System:

The stock markets usually introduce a well designated management information system (MIS) so as to feed the stock exchanges with sufficient information relating to trading volume and prices, trading concentration in certain securities, speculation etc. Such information are very much helpful for the authorities to restrict and regulate the stock market properly.

(vii) Evaluation of Securities:

The stock markets usually provide a correct mechanism through which price of various securities offered by different business undertakings are determined through proper evaluation of its present future income yielding capacity.

(viii) Protecting investor’s interest:

It is mandatory for all stock exchange to frame rules, regulations and bye-laws for ensuring reasonable degree of security and safety to the investors to make all transactions fair and secure.

(ix) Capital formation:

Stock exchanges provides the services to the investors by collecting their savings and by channelizing these savings into investment in securities of various business firms and companies and thereby paves the path for capital formation and also for proper investment of capital.

4. Essay on the History of Stock Exchanges in India: Nature of Transaction and Speculation :

The history of stock exchange in India can be traced back at Bombay where the first organised stock exchange in India started to work and when the Native Share Stock Brokers’ Association, popularly known as Bombay Stock Exchange was formed to serve its purpose by the brokers of Bombay.

After that the Ahmedabad Stock Exchange was started in 1894 in order to facilitate the dealings of shares of textile mills established there. Again, in 1908, the Calcutta Stock Exchange was started to arrange a ready market for shares of jute mills and plantation industries.

There was spurt in speculative activity in India during the Second World War and thereby the number of stock exchanges has increased from 7 in 1939 to 21 in 1945. Over and above these organised exchanges, some unorganised exchanges, known as Kerb markets, were also functioning in the country as per usages and conventions.

As per the Securities Contract (Regulation) Act of 1956, the Government of India has recognised 15 stock exchanges. Among all these stock exchanges, Bombay Stock Exchange is the premier exchange in the country, which transacts nearly 70 per cent of total transactions made in all the stock exchanges of the country.

Thus stock exchanges provide an organised market for transactions in shares and other securities. There are 22 stock exchanges in the country, out of which 20 SEs are regional ones with allocated areas. Two other SEs set up in the post-reform era, viz., National Stock Exchange (NSE) and the Over the Counter Exchange of India (OTCEI) are mandated to have nationwide trading.

The NSE and OTCEI have adopted screen based trading system (SBTS). The NSE and OTCEI have started nationwide SBTS, which provided completely transparent trading mechanism. This has been followed by regional stock exchanges. As on 31st March 1997, 9,890 companies were listed in stock exchanges.

The NSDL was set up in October 1996 under the Depository Act, 1996 with the objective of ensuring free transferability of securities with speed, accuracy and security. This Act has made the securities of public limited companies freely transferable and also provides for maintenance of ownership records in the book entry form. Thus the stock exchanges of India has been progressing at a satisfactory rate with the support of the Government and are also meeting the requirements of public limited companies in its security related affairs.

Nature of Transaction:

The nature of transaction in all stock exchanges is not similar as it is guided by procedures adopted and the settlement of transactions done in various stock exchanges.

However, in an Indian stock exchange, any typical investment business transaction has to pass through the following four stages:

(i) Placing an order through a member broker with a broker in the form of either “fixed order” (order executed at the price indicated by the client) or “Limit Order” (fixing limits of price by the clients beyond which broker cannot go) in a very precise, clear and unambiguously either orally or by phone and to be confirmed immediately in writing.

(ii) Executing of the order by the broker through bargain and listing the bargain in the official daily list of stock exchange.

(iii) Reporting the deal to the client by the broker after the deal is transacted and recorded in the books of the brokers by sending a contract note, giving details of the security purchased or sold and the price, the broker’s commission, date of settlement etc.

(iv) Settling transactions either through ready delivery transaction method (where payment has to be made immediately on the transfer of securities or within a period of one to seven days) or through clearing house or by hand delivery i.e., cash or through forward delivery transaction method (where settlement is done on a fixed day, i.e., either fortnightly or weekly) and the forward contracts are cleared through clearing house.

Speculation and Stock Exchange :

The idea of speculation in a stock exchange indicates purchase and sale of a security or share at a particular point of time with the sole object of making windfall profit by its sale or purchase at another point of lime. In India, stock exchanges are very much subjected to speculation. In stock market, two types of transactions are held normally, viz., investment transactions and speculative transactions.

By investment transaction, we mean purchase or sale of securities which are done with the long term prospect relating to their yield and price. But in a speculative transaction actual buying or selling of securities are not done normally and thereby the delivery of securities or the payment made as per ruling price are also very rare; rather only the difference in prices between buying and selling are paid.

Now-a-days, there are predominance of speculative transactions over the investment transactions in the stock exchanges in India as the former requires smaller amount of money and the latter requires larger volume of money for making full payment against purchase of securities.

5. Essay on the Major Problems in Trading in Indian Stock Exchange:

Indian stock exchanges are subjected to certain serious problems or defects. These are:

(i) Lack of Integration:

In India, there are a number of stock exchanges which are scattered throughout the country. But there is lack of proper integration among these stock exchanges. Although Bombay Stock Exchange (BSE) dominates over all the stock exchanges as it conducts more than 70 per cent of the total transactions of all exchanges but due to lack of proper integration between the stock exchanges, the prices of shares and stocks vary considerably between different markets at the same point of time.

(ii) Weak Management of SE:

Indian stock exchanges are suffering from weak and deficient management and also certain flaws in their structure. The stock exchange is usually managed by the member-brokers for their own benefits. The Governing Body of a stock exchange is not having any concern or willingness for introducing any reforms in trading.

It does not give much care to investor’s complaints. The Executive Director (ED) of a stock exchange has also failed to perform its regulatory functions freely as it is very much responsible to Governing Body.

(iii) Arbitrary Classification of Specified and Non specified Shares:

In India, most of the major stock exchanges have been following an arbitrary practice of classifying listed shares into “specified” group and “unspecified” group. Specified shares are getting certain special facilities such as settlement period, carry forward and clearing which promotes speculation.

This type of categorization favours granting of artificial encouragement to a few large companies which has economic justification in it.

(iv) Discriminatory Margins:

Indian stock exchanges (SEs) are levying margins on all speculative transactions which are highly discriminatory in character, as the margins are varying extensively from share to share and also from day to day, ranging between 0 to 40 per cent.

Again, the system of imposition of margins has also failed to control excessive speculation in stock exchanges. Moreover, the margin system has also failed to provide reasonable guarantee to the financial integrity of the market.

(v) Adoption of the Settlement System and Carry Forward System (Badla):

In India, various stock exchanges are adopting different settlement system which is responsible for high price fluctuations and high risk exposure. This leads to over-speculation in the market. Moreover, the carry forward system in India is introduced with the objective to promote speculation in a specified group of shares and also to promote spurious kind of share trading. In a carry forward system it is possible to postpone forward premium or charge, popularly known as “Badla” in India.

The “badla” is a free market rate which may now be as high as 36 per cent. In India, the badla financing is becoming very much attractive and as per Dr. L.C. Gupta’s estimates, about Rs 300 to 400 crore may be involved in such type of badla financing. The carry forward system along with badla financing is highly beneficial to the stock brokers as it adds to their income both directly or indirectly.

But at the same time, this system promotes speculation and in certain cases over speculation in certain market. Thus, on an average, the carry forward system is unjustifiable and unhealthy which ultimately leads to spurious speculation and this goes against the interest of the speculators.

(vi) Ignoring Investors’ Interest:

Indian stock exchanges are so designed that it provides much benefit to the brokers and ignores the genuine interests of the investors. The confidence of the investors on such market is very weak as the brokers are always cheating the investors on price of shares and they are also not getting a fair deal in their transactions of shares. Complain from the investors remain uncared and unattended. 

6. Essay on the Measures Suggested for the Reform of the Stock Exchange:

Following are some of the important measures suggested by Dr. L.C. Gupta for making necessary changes in the current trade practices in Indian stock exchanges in his “Export study of Trading in shares in stock Exchanges”:

(i) Uniform System of One-Week Settlement:

In order to unify all stock exchanges in India on a national basis, all the SE should introduce a uniform system of one-week settlement. This uniform system will reduce the risk missing out of price movements in shares and also check the strong tendency towards over speculation and over-concentration of trading activity in a few shares.

The uniform system will remove the complaint of long delay on the part of investors and also reduce the cost and delay. This system will also pave the way for easier inter-market transactions.

(ii) Market Making:

The system market makers should be introduced in stock exchanges in India at par with the all leading stock exchanges of London and New York. In this system the market makers usually take the responsibility of market making for specific shares, i.e., for buying and selling a specific share at definite prices.

Being an integral part of trading mechanism and all other arrangements, he protects the investors from its exploitation by the stock brokers and ensures the transactions of shares at best possible market rates and also ensure prompt execution of transactions and liquidity. This system will provide protection to investors and also liquidity to all shares.

(iii) Margin Trading and Marking to the Market System:

As the margin trading system adopted by Indian SEs is defective and has failed to prevent the problem of default and over-speculation, Dr. Gupta suggested two alternatives against this system. The first one suggests to adopt the margin trading system of USA in which commercial banks provide financial support to the extent of 50 per cent to the buyer in the stock market trading after necessary pledging of shares with a bank. But this system may not be acceptable to the Government at present as the country has experienced a huge problem of securities scam in the recent past.

The second alternative i.e., the marking to the market system on a daily basis is a complete system to check bankruptcy and will provide guarantee towards financial integrity of the market at all times. In this system, if there is any change in price of stocks at the close of trading, one side will get a debit for a loss and the other side will get a credit for a gain. If there is a continuous debit to a member’s account regularly then it will reflect a negative balance in its account at a point of time.

Once such negative balance, is reflected, then and there the member is stopped from making any further business. In the existing system, even a bankrupt member may continue to trade in securities. But to introduce this marking to the market system, it requires total computerisation of trade data.

(iv) Abolishing the System of Carry Forward:

The present practice of the system of carry forward adopted by the Indian SEs has led to over-speculation in the stock market. With the abolition of this system, the stock exchanges will be free from many problems.

(v) Formation of Governing Body (GB) and Management of Stock Exchange:

The formation of GB should be done in a rational way. The Executive Director of a Stock Exchange must either be appointed by the Government or by SEBI as per the advice from the panel of independent experts, so that he can have indepen­dent control over stock brokers.

The composition of GB of stock exchanges should also be changed between the broker-directors and non-broker directors in ratio of 50: 50 to make it more objective, direct and strong.

(vi) Introducing Management Information System:

The stock exchanges in the country should introduce a well designed management information system (MIS) so as to feed the SEs with sufficient information relating to trading volume and prices, trading concentration in certain securities, trading concentration by some SE members, speculation etc. Such information will also help the authorities to restrict and regulate the stock markets properly.

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Home — Essay Samples — Sociology — Globalization — Impact of FDI and FII on Indian Stock Market

Impact of Fdi and Fii on Indian Stock Market

• Categories: Globalization Indian Economy Stock Market

About this sample

Words: 2200 |

11 min read

Published: May 19, 2020

Words: 2200 | Pages: 5 | 11 min read

Table of contents

Foreign direct investment, why is fdi better than fii, need for fdi in india, need for fii in india, current scenario of fdi in india.

• Market potential and accessibility
• Political stability
• Market infrastructure
• Easy currency conversion.
• Developing economy
• Low salaried employees
• Low wage workers
• Abundant human resources
• Big private economy India is looking forward to a high growth rate of almost 16% – double that of the current 8%.

Investments

• Flipkart, India's largest e-commerce marketplace has raised US$ 1 billion in a funding round led by Chinese internet giant, Tencent and Microsoft.
• Paytm’s e-commerce unit raised US$ 200 million in a funding round led by Chinese e-commerce giant, Alibaba and existing investor, SAIF Partners.
• Caisse de Dépôt et Placement du Québec (CDPQ), Canada’s second largest pension fund, plans to invest around US$ 155 million to acquire a minority stake in TVS Logistics Services Limited, a privately held subsidiary of the TVS Group.
• International Finance Corp (IFC), along with IFC Global Infrastructure Fund, the PE fund of IFC Asset Management Company, has announced investment of US$ 125 million equity in Hero Future Energies.
• The World Bank Group has committed to provide US$ 1 billion for India’s solar energy projects and plans to work with other multilateral development banks and financial institutions to develop financing instruments to support future solar energy development in the country.
• Goldman Sachs' PE fund plans to invest US$ 200-250 million in Essel Highways, the road infrastructure arm of Essel Group, which could make it one of the biggest PE transactions in the sector.
• ReNew Power Ventures Pvt Ltd, a renewable energy producer, has signed a debt financing agreement of US$ 250 million with Overseas Private Investment Corporation (OPIC), the US government's development finance institution, which will be used to construct up to 400 megawatts (MW) of new solar power projects in India across multiple states.
• Godrej Fund Management (GFM), the real estate fund management arm of Godrej Properties, has raised US$ 275 million from Netherlands-based APG Asset Management NV, which will be used to invest in residential projects in India.
• Global investment banking major Goldman Sachs has invested Rs 441 crore (US$ 65.37 million) to acquire an equity stake in Gurgaon-based hotel development and investment start-up SAMHI Hotels which will help fund SAMHI's expansion plans.
• Singapore-based investment firm, Temasek Holding, has acquired 73 per cent stake in Hyderabad-based Care Hospitals, India's fifth largest private healthcare network, for Rs 1,800 crore (US$ 266.83 million).

Government Initiatives

• The Government of India plans to work on increasing India’s weight in the MSCI Emerging Markets Index, in order to boost foreign portfolio investors (FPIs) inflow into the economy.
• The Government of India and The World Bank have signed a US$ 650 million loan agreement for the Eastern Dedicated Freight Corridor-III (EDFC-III) project, which is expected to enhance railway transport capacity, service quality and freight carriage on the Ludhiana-Khurja section of the EDFC, along with developing institutional capacity of Dedicated Freight Corridor Corporation of India Ltd (DFCCIL).
• The RBI has allowed start-ups to borrow up to US$ 3 million per financial year through external commercial borrowings (ECBs).
• The Securities and Exchange Board of India (SEBI) has relaxed norms for registered FPIs in India, allowing them to operate through the International Financial Services Centre (IFSC) without any additional documentation or prior approval process.
• The Maritime India Summit 2016, which was held in Mumbai between 14th-16th April, has attracted investments worth Rs 82,905 crores (US$ 12.29 billion) across 141 memoranda of understanding (MOU) and business agreements, which were signed by various players in the maritime sector.
• The government of India has accepted the recommendation of A.P. Shah Committee to not impose Minimum Alternate Tax (MAT) on overseas portfolio investors retrospectively for the years prior to April 01, 2015, thereby providing significant relief to FPIs.
• SEBI has allowed FPIs to invest in units of Real Estate Investment Trusts (REITs), infrastructure investment trusts (InvITs), category III Alternative Investment Funds (AIFs), and also permitted them to acquire corporate bonds under default.
• The RBI has also allowed a number of foreign investors to invest, on repatriation basis, in non-convertible/redeemable preference shares or debentures issued by Indian companies listed on established stock exchanges in India. The investment should be within the overall limit of US$ 51 billion allocated for corporate debt. Long-term investors registered with SEBI will also be deemed as eligible investors.
• The People’s Bank of China (PBoC) has invested US$ 500 million in Indian bonds for the first time since the Indian government eased restrictions on foreign investors. Road Ahead India is being viewed as a potential opportunity by investors, with the economy having the capacity to grow tremendously. Buoyed by strong support from the government, FII investments have been strong and are expected to continue to improve going forward.
• Mr Mark Machin, Chief Executive Officer, Canada Pension Plan Investment Board (CPPIB), has expressed confidence in the Indian equity market and stated that the country is one of the best investment destination based on its demographic growth, increased productivity, and long-term economic growth potential.
• "The FII participation has been very consistent as far as India is concerned and we see the trend continuing. We have been overweight India in the context of Asia and emerging markets since November 2013 and that stance very much continues," said Mr Bharat Iyer, MD, Global Research, JP Morgan India.
• Impact investments in India are expected to grow at a compound annual growth rate (CAGR) of 20-24 per cent to touch US$ 6-8 billion by 2025, from US$ 1 billion in 2015, according to McKinsey & Co.
• A PricewaterhouseCoopers India report based on a survey of 40 PE firm partners has projected that the country has the potential to get PE funding of US$ 40 billion by 2025. Future PE investments would be driven by India’s consumption story, realistic valuations, competitive businesses, growing private entrepreneurship, among other factors, as per the report.

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