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EVOLUTION OF SECURITIES AND INVESTMENT LAWS IN INDIA

Author: Sameer Afzal Ansari, III year of B.A.,LL.B. from Guru Gobind Singh Indraprastha University


It tis tessential tfor ta tcountry’s teconomy tthat tits tsecurities tmarket thave trobust thealth. tThe tmore twell tdeveloped ta tcountry’s tsecurities tmarket, tthe tbetter tare tthe tchances tof teconomic tgrowth tand tdevelopment.


Beginning of Securities market

The tearliest tstock texchange twas tset tup tin tAmsterdam tin t1602 tand tit twas tinvolved tin tbuying tand tselling tof tshares tfor tDutch tEast tIndia tCompany. tPrior tto tthis, tbrokers texisted tin tFrance tdealing twith tgovernment tsecurities. tIt tmust tbe tnoted tthat tthe tfirst treal tstock texchange tstarted tin tPhiladelphia tin tthe tUnited tStates tduring tthe tlate t18th tcentury. tLater, tthe tNew tYork tStock tExchange tbecame tpopular tand tWall tStreet tbecame tthe thotspot tof tbrokerage tactivities. tEarlier tstockbrokers twere tlargely tunorganised, tbut tlater tmost tof tthem tjoined thands tto tform tinstitutions tand torganisations. Security tTrading tin tIndia tgoes tback tto tthe t18th tcentury twhen tEast tIndia tCompany tbegan ttrading tin tloan tsecurities.


Derivatives tmarket thave tbeen tfunctioning tin tIndia tin tsome tform tor tthe tother tfor ta tlong ttime. tCorporate tshares twith tthe tstock tof tBank tand tCotton tpresses tstarted tbeing ttraded tin tthe t1830s tin tMumbai twith tBombay tCotton tTrade tAssociation tbeing tthe tfirst tto tstart tfuture ttrading tin t1875 tin tthe tarena tof tcommodities ttrading tand tby tthe tearly t1900s, tIndia thad tone tof tthe tworld’s tlargest tfutures tindustry. tGoing tback tto t1850s tthe troots tof tstock texchanges tin tIndia tsprouting twhen t22 tstockbrokers tbegan ttrading topposite tthe tTown tHall tof tBombay tunder ta tbanyan ttree. tThe ttree tis tstill tpresent tin tthe tarea tand tis tknown tas tHorniman tCircle.


This ttrading tcontinued ttill ta tshift tto tbanyan ttrees tat tthe tMeadows tStreet tJunction, twhich tis tnow tknown tas tMahatma tGandhi tRoad, ta tdecade tlater. tThe tshift twas tan tongoing tone tand tnumber tof tbrokers tgradually tincreased tfinally tsettling tin t1874 tat twhattis tknown tas tDalal tStreet. tThe tgroup tof t318 tpeople tcame ttogether tto tform t“Native tShares tand tStock tBrokers tAssociation” tand tthe tmembership tfee twas tRe t1. tThis tassociation tis tnow tknown tas tBombay tStock tExchange t(BSE) tand tin t1965 tit twas tgiven tpermanent trecognition tby tthe tGovernment tof tIndia tunder tthe tSecurities tContracts t(Regulation) tAct t(SCRA), t1956. tBSE tis talso tthe toldest tstock texchange tin tAsia tand tit tis tbeen t144 tyears tsince tit thas tbeen tformed. tFollowing tits tformation, tAhmedabad tstock texchange tcame tinto toperation tin t1894 ttrading tin tshares tof ttextile tmills. tAnother tdevelopment tin tthe thistory tof tstock texchanges tbegan twith tthe tCalcutta tstock texchange topening tup tin t1908 tand tbegan ttrading tshares tof tplantations tand tjute tmills. tIt twas tfollowed tby tMadras tStock tExchange tstarting tin t1920.


Post-independence Era and Reforms in the market

There twere ta tseries tof treforms tin tthe tstock tmarket tbetween t1993 tand t1996 twhich tfurther tlead tto tthe tdevelopment tof texchange-traded tequity tderivatives tmarkets tin tIndia.


There twas ta tcertain telement tof tthe ttrading tsystem tcalled t“Badla” tinvolving tsome telements tof tforwards ttrading twhich thad tbeen tin texistence tfor tdecades. tThis tpractice tled tto tthe tgrowth tof tundesirable tmarket tpractices tand tto tcheck tthis tdevelopment tit twas tprohibited toff tand ton ttill tit twas tbanned tin t2001. tIn tthe t1980s tstockbroking tservices twere trestricted tonly tto tthe twealthy tclass twho tcould tafford tthem. tWith tthe tspread tof tthe tInternet, tstockbroking tbecame taccessible.


In tthe t1990s tstock tmarket twitnessed ta tsteady tincrease tin tstock tmarket tcrises. tAn taspect tof tthese tcrises twas tmarket tmanipulation ton tthe tsecondary tmarket. tFollowing tare tthe tincidents twhich tprompted tthe tdevelopment tof tthe tstock tmarket:-

1. 1992: tHarshad tMehta t tThe tfirst t“stock tmarket tscam” twas tone twhich tinvolved tboth tthe tGOI tbond tand tequity tmarkets tin tIndia. tThereafter, tmanipulation twas tbased ton tinefficiencies tin tthe tsettlement tsystem tin tGOI tbond tmarket ttransactions. tInflation tcame tabout tin tthe tequity tmarkets tand tthetmarket tindex twent tup tby t143% tbetween tSeptember t1991 tand tApril t1992 tand tthe tamount tinvolved tin tthe tcrises twas tRs t54 tbillion.


2. 1994: tMS tShoes t tHere tthe tdominant tshareholder tof tthe tfirm, ttook tlarge tleveraged tpositions tthrough tbrokers tat tboth tDelhi tand tBombay tstock texchanges, tto tmanipulate tshare tprices tprior tto tthe trights tissue. tAfter tthe tshare tprices tcrashed, tbroker tdefaulted tand tBSE tshut tdown tfor tthree tdays tin ta tconsequence.


3. 1995: tSesa tGoa t tAnother tepisode tof tmarket tcrises tfor tthe tBSE, twas tthe tcase tof tprice tmanipulation tof tthe tshares tof tSesa tGoa. tThis twas tperpetrated tby ttwo tbrokers, twho tlater tfailed ton ttheir tmargin tpayments ton tleveraged tpositions tin tthe tshares tand tthe texposure twas taround t4.5 tmillion.


4. 1995: tBad tdeliveries tof tphysical tcertificates: tWhen tanonymous ttrading tand tthe tnationwide tsettlement tbecame tthe tnorm tby tthe tend tof t1995, tthere twas tan tincreased tincidence tof tfraudulent tshares tbeing tdelivered tinto tthe tmarket. tIt thas tbeen tthe texpected tcost tof tencountering tfake tcertificates tin tequity tsettlement tin tIndia tat tthe ttime twas tas thigh tas t1%.


5. 1997: tCRB. tC.R. tBhansali tcreated ta tgroup tof tcompanies, tcalled tthe tCRB tgroup, twhich twas ta tconglomerate tof tfinance tand tnon-finance tcompanies. tMarket tmanipulation twas tan timportant tfocus tof tgroup tactivities. tThe tnon-finance tcompanies trouted tfunds tto tfinance tcompanies tfor tprice tmanipulations. tThe tnon-finance tcompanies twere ttasked twith tsourcing tfunds tfrom texternal tsources, tusing tmanipulated tperformance tnumbers. tThe tCRB tepisode twas tparticularly timportant tin tthe tway tit texposed textreme tfailures tof tsupervision ton tpart tof tRBI tand tSEBI. tThe tamount tinvolved tin tthe tepisode twas tRs t7 tbillion.


6. 1998: tBPL, tVideocon tand tSterlite t tThis tis tan tepisode tof tmarket tmanipulation tinvolving tthe tbroker tthat tengineered tthe tstock tmarket tbubble tof t1992, tHarshad tMehta. tHe tseems tto thave tworked ton tmanipulating tthe tshare tprices tof tthese tthree tcompanies, tin tcollusion.


7. 2001: tKetan tParekh. tThis twas ttriggered tby ta tfall tin tthe tprices tof tIT tstocks tglobally. tKetan tParekh twas tseen tto tbe ta tleader tof tthe tepisode, twithtleveraged tpositions tonset tof tstocks tcalled tthe t“K10 tstocks”. tThere tare tallegations tof tfraud tin tthis tcrisis twith trespect tto tan tillegal t“Badla” tmarket tat tthe tCalcutta tStock tExchange tand tbanking tfraud.


The tabove tinstances thave thad ta tdisruptive teffect ton tthe tmarket tthat tis(i) tpricing tefficiency t(ii) tintermediation tbetween thouseholds tinvesting tin tshares tand tfirms tfinancing tprojects tby tissuing tshares twhich twere tresolved tby treform tmeasures tby tthe tgovernment.


In tthe tpost-independence tera, tthe tBSE tdominated tthe tvolume tof ttrading. tHowever, tthe tlow tlevel tof ttransparency tand tundependable tclearing tand tsettlement tsystems, tapart tfrom tother tmacro tfactors, tincreased tthe tneed tfor ta tfinancial tmarket tregulator, tand tthe tSEBI twas tborn tin t1988 tas ta tnon-statutory tbody. tLater tit twas tmade ta tstatutory tbody tin t1992.


Thereafter, tin t1952 tcash tsettlement tand toptions ttrading twere tprohibited tby tthe tgovernment tand tderivatives ttrading tshifted tto tinformal tforwards tmarket. tAt tpresent, tthe tgovernment tallows tfor tmarkets tbased tpricing tmechanism tand tshows tless tscepticism ttowards tderivatives ttrading. tThe tprohibition ton tfutures ttrading tof tmany tcommodities twas tlifted tstarting tin tthe tearly t2000s tand tnational telectronic texchanges twere tcreated. tIn tthe t1980s tstockbroking tservices twere tused tonly tby ta twealthy tclass twho tcould tafford tthem. tWith tthe trise tof tthe tInternet, tstockbroking tservices tbecame taccessible tto teven tthe tcommon tman. tMajor torganisations tbecame tinvolved tin tstockbroking tactivities. t


Although tin tthe twake tof tHarshad tMehta tscam tin t1992, tthere twas ta tpressing tneed tfor tanother tstock texchange tlarge tenough tto tcompete twith tBSE tand tbring ttransparency tto tthe tstock tmarket. tIt tleads tto tthe tdevelopment tof tthe tNational tStock tExchange t(NSE). tIt twas tincorporated tin t1992, tbecame trecognised tas ta tstock texchange tin t1993, tand ttrading tbegan ton tit tin t1994. tIt twas tthe tfirst tstock texchange ton twhich ttrading twas tconducted telectronically. tIn tresponse tto tthis tcompetition, tBSE talso tintroduced tan telectronic ttrading tsystem tknown tas tBSE tOnline tTrading t(BOLT) tin t1995.


Thereafter, tBSE tlaunched tits town tsensitivity tindex, tthe tSensex, tknown tat tpresent tas tthe tS&P tBSE tSensex, tin t1986 twith t1978-79 tas tthe tbase tyear. tThis tis tan tindex tof t30 tcompanies tand tis ta tbenchmark tstock tindex, tmeasuring tthe toverall tperformance tof tthe texchange. tEquity tderivatives twere tintroduced tby tthe texchange tin t2000. tIndex toptions tlaunched tin tJune t2001, tstock toptions tin tJuly t2001, tand tstock tfutures tin tNovember t2001. tIndia’s tfirst tfree-float tindex, tBSE tTeck, twas tlaunched tin tJuly t2001.


Its tcompetitor, tNSE tlaunched tits tbenchmark texchange, tthe tCNX tNifty, tnow tknown tas tNifty t50, tin t1996. tIt tcomprises tof t50 tstocks tand tfunctions tas ta tperformance tmeasure tof tthe texchange. tIn tterms tof telectronic tscreen-based ttrading tand tderivatives, tit thas tleft tbehind tits tcompetitor tBSE tby tintroducing tfirst tof tits tkind tproducts tand tservices.


Stock texchanges tat tpresent

After tincorporation tof tBSE tand tNSE, t23 tstock texchanges twere tadded tnot tincluding tthe tBSE. tAt tpresent, tthere tare t23 tapproved tstock texchanges tin tIndia tout tof twhich t6 tare tfunctional:-

t

1. tBSE tLtd

2. tCalcutta tStock tExchange

3. tIndia tInternational tExchange t(India tINX)

4. tMetropolitan tStock tExchange

5. tNSE t

6. tNSE tIFSC tLtd

t

Thus, tfrom tthe ttimes twhen tbuyers tand tsellers thad tto tassemble tat tstock texchanges tfor ttrading ttill tthe tpresent ttimes twhen tthe tdawn tof tIT thas tmade tthe toperations tat tstock texchanges telectronic thence tmaking tstock tmarkets tpaperless. tTrading tfacilities tcan tbe taccessed tfrom thome tor toffice ton tphone tor tInternet. tTherefore, twith tnew tproducts tand tservices, trampant tgrowth tin tstock ttrading tcan tbe tforeseen.