Why does India have more than one Stock Exchange?
Before you can understand this, you need to know what a stock exchange is for in general. People often think that a stock exchange is a government agency that works for the good of everyone. So, it makes sense to ask, “How can there be more than one?” The private sector owns the stock exchange.
For a basic understanding of the stock exchange, we can think of it as one of our local agreed-upon market places, where buyers can find local sellers and vice versa. In the same way, a stock exchange gives investors a place to meet companies and other investors. In the end, stock exchanges also make money because they charge fees for their services.
The Bombay Stock Exchange (BSE) was also set up for the same reason. It was started by Premchand Roychand, who was India’s first “Big Bull.” He was also known as the Cotton King or the Bullion King. Roychand was one of the most powerful businessmen of the 1800s. He made a lot of money through stockbroking.
In 1855, 22 stockbrokers would meet under a banyan tree in front of Mumbai’s town hall. This is where the story of BSE begins. They would do this just to buy and sell their stocks and bonds. The BSE is the oldest exchange in Asia because of this. This should help you understand why they were made in the first place. In the same way, other regional exchanges were set up in different parts of the country.
“The Native Share and Stock Brokers Association” was the name of the group. As the number of brokers increased, they moved to different places. In the end, in 1874, they moved to Dalal Street. The BSE got worse, and the government finally took notice of it in 1957. The BSE was the only National exchange, though.
Why was it important to have a New Stock Exchange?
Why did we need another exchange when we already have a good one in BSE?
The answer can be seen in any market where one company has been in charge for too long. Imagine if the world only had one bank. At some point, they would start charging their customers very high prices. Even the customers wouldn’t have any other choice.
On top of that, since the only bank would know that it is the only player, its services would only get worse and never keep up with changes in technology.
Dr. Ramachandra H. Patil was a very important part of putting together the NSE. He said that the Indian stock market in the early 1990s was like the Stone Age.
On top of that, a group of powerful and influential brokers ran the BSE. One could even say that the country’s largest stock exchange, or bourse, was run by a powerful group of brokers. There were a lot of bad deliveries, fake certificates, and price manipulations on the exchanges. This was done to help powerful people and hurt small investors. On top of all this, joining the brokerage community was hard for a number of reasons.
To become a broker, you would have to be related to other brokers (as a nephew, son, etc.). Or, you could pay a membership fee that was up to Rs. 1 crore back in the 1990s on the BSE. In the 1980s, millions of people across the country started investing in the stock market. But these small investors had to deal with the following crises in the 1990s.
What Gave the Government a Push?
Harshad Mehta Scam. This was the first scam on the Indian stock market. Banks and both the stock and bond markets were involved. It was said that the fraud cost 4000 crores. There were also a few other crises on the exchange that were caused by brokers, such as M.S. Shoes in 1994, when the share prices were manipulated and the BSE had to be shut down for three days.
During 1994 and 1995, shares of Sesa Goa, Rupangi Impex, and Magan Industries Ltd were also manipulated. The Harshad Mehta Scam, on the other hand, was just too big to ignore. The government finally started to look into this problem and asked several groups, such as the IDBI, to help set up a stock exchange.
But why did it take so long for the government to act?
Seth Shantaram Mangesh Kulkarni said in a lecture he gave in Mumbai, which was written up in the Economic and Political Weekly, that the Indian market was one of the worst because it was almost at the bottom of the league. Kulkarni also helped set up the NSE and was its managing director and chief executive officer (CEO) for the first seven years.
He said, “As we are all used to India being at the bottom of the list for so many other measures of development, such as per capita income, nutritional standards, health facilities for its citizens, literacy levels, etc., we didn’t seem too worried that the capital market was also at the bottom of the list.”
It did make sense that a government that was still dealing with a lot of problems in the country would even think about the stock market, which only affected a small number of people. We’ve also made progress in other ways, which is good. And 1992 was the last push the government needed to do something about the stock market.
People who are against a new exchange
As was already said, the government helped a number of organisations set up a modern stock exchange. Kulkarni says, however, that this move ran into a lot of trouble. This move was opposed right away by the powerful broker community, who saw it as a violation of their basic right to run a stock exchange. This action went against their right “to run their businesses as they saw fit, even if that wasn’t always in the best interest of the markets and investors.” Unfortunately for the NSE, this idea would be easy to sell to regular people because every exchange in the world has always been owned and run by brokers. Several important officials were not happy about the idea of setting up another exchange. How could a new institution take on the BSE, which has been around for over a hundred years, and its brokers at the same time? Other exchanges all over India were also against this move.
How did the NSE get where it is now?
When the NSE was set up and made official in 1993, the brokers’ views changed. They started to worry about how the NSE could hurt their business. Unlike the BSE, where trading took place on the floor on Dalal Street, investors could now trade from anywhere in the country using real-time trading facilities. When the NSE first started using computerised trading, the brokers were sceptical. People thought that the idea would never catch on in India because not many people there knew how to use computers. They were, however, wrong!
Also, the NSE started to point out other problems with the BSE. They got rid of the things that made it hard to become a broker. There wasn’t a 1 crore fee to get in. Now, people who were interested only had to keep a deposit that didn’t earn interest. The settlement process was also important to the NSE. The cycle of trading on the BSE would take 15 days to settle. This was cut down to a week by the NSE. The management also helped set up the National Securities and Depositories and the Clearing Corporation of India.
Kulkarni says that at first, the amount of money traded was often less than Rs. 10 crore a day. But this was just because their new members were trying out how things worked. Once they saw that the settlements were done on time, they began to trust each other. Within a year, the NSE was the first exchange to make more money than the BSE, which was already set up in its own country. This made other exchanges have to keep up with the times and put investor needs first. The only way for them to stay alive was to do this.
One of the most efficient markets in the world today is the Indian market. Due to the fact that there are two national exchanges.
Some Final Thoughts
In this article, we tried to explain why India has both the BSE and the NSE. This should not only explain why we have more than one stock exchange, but also why we needed them. Over time, it was important for the exchanges to also make it harder for scammers to take advantage of people, since this would make people less likely to trust them. By getting stronger, the NSE forced others to do business in a clean way, which in turn made the authorities stronger.
What do you think of the government’s plan to compete with the BSE and the powerful brokers by indirectly setting up another exchange? What do you think the markets would have been like if the NSE had never been made? If you traded in the early 1990s, please tell us about it below.
