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Indian Economic Policy

Notes 1908 to provide a market for shares of plantations and jute mills. The Second World War saw great
speculative activity in the country and the number of stock exchanges rose from 7 in 1939 to 21 in
1945. Besides these organised exchanges, there were a number of unorganised and unrecognised
exchanges known as kerb markets which functioned under a set of usages and conventions and did
not have any set of rules which could be enforced in courts of law. There were also illegal “Dabba’
markets in which stocks and shares were also bought and sold.
Under the Securities Contract (Regulation) Act of 1956, the Government of India has so far recognised
23 stock exchanges. Bombay is the premier exchange in the country. With the setting up of National
Stock Exchange, all regional stock exchanges have lost relevance.
How Business is Transacted in a Stock Exchange

A typical investment transaction will consist of four stages :
(a) Placing an order with a broker : A client places his order with a stock broker who alone is
entitled to transact business in a stock exchange either to buy or to sell the shares of a company
at fixed prices or at best market prices.
(b) Execution of the order : The broker or his authorised clerk will execute the order and the same
will appear in the Stock Exchange Daily Official List which Will include the number and price
of shares which exchanged hands.
(c) Reporting the deal to the client : As soon as the deal is transacted, the broker sends a contract
note to the client giving details of the security bought or sold, the price, the broker’s commission,
etc.
(d) Settlement of transactions : There are two methods of settlement of transactions . In the case of
ready delivery (or cash) transactions, payment has to be made immediately on the transfer of
the securities or within a period of one to seven days. In the case of forward delivery contracts,
the settlement is made on a fixed day--it is generally fortnightly, though in some stock exchanges
like Chennai, it is weekly. In the case of forward delivery, there is a system of carry-over i.e.
post-ponement of delivery or payment involving a payment by one to another). This system of
carry-over provides great scope for speculation in the forward market.

Speculation and Stock Exchange
A high degree of speculation is associated with stock exchanges in India. There are two types of
transactions in a stock exchange, viz., investment transactions and speculative transactions. Investment
transactions refer to purchase or sale of securities undertaken with the long-term prospect relating to
their yield and price. An investment transaction normally involves the actual delivery of the security
and the payment of its full price. Actually, no stock exchange can-operate purely on the basis of
investment buying and selling alone, since pure investors cannot provide the requisite volume of
business or continuity of business which alone will ensure correct valuation of the shares according
to their real worth. Investment transactions are, therefore, supplemented by speculative transactions.
In a speculative transaction--buying or selling--the delivery of securities or the payment of full price
are rare; instead, only the differences in prices are paid or received. The predominance of speculative
transactions over investment transactions in a stock exchange is due to the fact that the latter involve
a larger volume of money (as securities bought have to be paid in full) while speculative transactions
are possible with smaller amounts of money (as delivery of securities and payment of full price are
rare).
Speculative transactions too are of different types depending upon whether a transaction is settled in
spot, ready and forward markets. A spot transaction implies that delivery of and payment for securities
will take place on the same day. A ready delivery transaction (also known as cash transaction) is one
which is completed in a short period of time, i.e. the delivery of and payment for securities will be
completed within a specified period of one to seven days. A forward transaction implies that the
delivery of and payment for securities will be made on certain fixed settlement days, coming once in
15 or 30 days. Of these three different types of transactions in the stock exchange, the forward
transactions provide the greatest scope for speculation.

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