Indian stock market
In order to appreciate the emerging role of stock exchanges in India it is apt to start with the historical perspective and a comparative picture with other stock exchanges in the world. The stock exchange is an association of member brokers for the purpose of facilitating and regulating trading in securities. It is thus, a self regulating organization, be it a company or association. As the securities trading developed in India since 1875, it was a private enterprise of an unregulated nature. The first attempt at regulation was by Securities Contracts Control Act of Bombay 1925, passed by the erstwhile Bombay Presidency. There was resistance from the stock exchanges for government control even at that time. These exchanges had a mushroom growth during the war time of forties as private clubs. There were as many as 21 exchanges in 1945. At that time securities trading were a state subject but with the adoption of Indian Constitution in 1951, it became a Central subject. It took nearly six years after that to pass the necessary central legislation in 1956 in the form of Securities Contracts (Regulations) Act.
In the socialistic patter of society adopted by the government for planned development of the economy in 1951, the role of stock exchange received no significant attention and they were left with the minimum government regulation under the above Act and the rules made there under. The traditional emphasis was on self regulation by the stock exchanges themselves with the result that the government had rarely used the full range of powers bestowed on them except for one or two occasions in war time. So the history of the growth of stock market movement in India was characterized by three main features.
1. Resistance to government control and regulation.
2. Growth of stock exchanges as private associations with a modicum of government interference.
3. Emphasis on self regulation and semi-autonomous nature of these private organizations. The government and broking community worked in close coordination and occasions resulting in friction few and far between. The volume of trade and funds raised from the capital market were small and the investor interest was at ebb.
Latest Phase in Stock Markets: It was only since 1985 with the entry of banks and their subsidiaries into the stock and capital marks, facilitated by the passage of the Banking Laws Amendment Act 1983 that the idea of better services in these markets arose. The Seventh Five Year Plan 1985-90 contained the first elements of a new economic policy leading to the opening up of the economy, industrial liberalization and a growing role for the private sector. These changes necessitated greater attention to the growth of capital market and protection of investors as public interest in these markets began to grow.
Existing Regulation:
Indian stock market activity is regulated by a variety of laws as diverse as Companies Act of 1956, Indian Contracts Act, Stamp Act, Negotiable Instruments Act and Securities Contract (Regulation) Act etc. The first requirement of well knit reforms is to have a consolidated law incorporating all the provisions to regulate investment activity as financial Services Act of 1986 in United Kingdom. Management Perspectives: The government formed The Securities and Exchange Board of India Act in 1992. The SEBI is the statutory body that controls and regulates the functioning of stock exchanges, brokers, intermediaries, and portfolio managers investment advisors and obliges several rigid measures to protect the interest of investors. The era of management by lapses, mismanagement has ostensibly ended and a new concept of management by rules has started. Various Departments have been formed which perform the functions of listing, regulation of trading, provision of settlement and clearance etc basically keeping the services to be rendered to the members and the public in mind. The decisions are sometimes taken by the committees appointed by the governing board for specific purposes. The Operations Department observe that daily trading takes place, collect quotation and make them available to members and public by the evening of every day. The Computer Department collects and compiles the corporate data quotations of scripts and turnover of trade, member-wise and script-wise for better investment decision making. The EDP work of building up the information base on companies for members and investors to make their investment decisions.
Future Role of Exchanges:
The future role of stock exchanges will be radically difference from the present, as their developmental role will be increasing much faster than their regulatory role. Not only the stock exchanges but all the players in the market namely companies, brokers, intermediaries and public would have to play a greater role in the functioning of stock market. Along with increasing self regulation and a stricter enforcement of a code of conduct on the members, the stock exchanges will have to emerge as public service institutions catering to increasing demands of investors in the country. Listed companies have also a role in this process to collaborate and extend all help for more efficient functioning of exchange. To improve the quality and efficiency of service, trained and professional category of intermediaries and brokers is also necessary. Education, training and research would be the hall mark of future stock brokers and other intermediaries.
Communication Technology:
Efficient marks require the flow of quick and correct information, an efficient communication system, a system of fair and just practices and procedures accompanied by a strict enforcement of a code of conduct on all. A national market system, if it is to be developed, would vitally depend on the efficient satellite telecommunication system in India and a proper linkage of all stock exchanges.
Information Technology:
Investment to increase the level of explicit coordination with outside agents have generally resulted in increased risk to the firm; firms have traditionally avoided this increased risk by becoming vertically integrated or by under investing in coordination. Information Technology has the ability to lower coordination cost without increasing the associated transactions risk, leading to more outsourcing and less vertically integrated firms. Lower association specificity of Information Technology investments and a better monitoring capability mean that firms can more safely spend in information technology for inter firm coordination than in customary investments for open coordination such as co-located facilities or specialized human resources; firms are therefore more likely to coordinate with suppliers without requiring ownership to reduce their risk. This enables them to benefit from production economies of large specialized suppliers. Moreover, rapid reduction in the cost of information technology and reduction in the transactions risk of explicit coordination makes possible substantially more use of explicit coordination with suppliers.
Conclusion:
Although the present stock market scenario appears dismal, it was due to the transitional phase, it was going through. The policy reforms were adhoc and unplanned, but the trend appears irreversible. The growing strong investor base, entry of middle class as investors and public awareness of the stock and capital markets have made it imperative for the reforms to continue. The offshoot of the economic and financial reforms is the greater responsibility thrust on the companies to improve their competitive efficiency and productivity. The greater role given to the private sector and increasing dependence on the capital market for both private and public sectors would force the companies to prove their ability through performance and stock exchanges to be better windows and transparent media of measuring the corporate and industrial performance. The regulatory framework of Securities and Exchange Board of India is increasing and spreading its tentacles in quantitative terms instead of confining to qualitative aspects, as in foreign markets. The ultimate objective of all regulations is maintenance of standards and quality and if that is to be achieved, deregulation can succeed and all the moves of the government and stock exchanges should be in that direction.
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