Page 109 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes But, when the securities are bought with the sole object of selling them in future at higherprices
or these are sold now with the intention of buying at a lower price in future, are called speculation
transactions. The main objective of such transactions is to take advantage of price differential at
different times. The stock exchange also provides for settlement of such transactions even by
receiving or paying, as the case may be, just the difference in prices. For example, Rashmi
bought 200 shares of Moser Baer Ltd. at ` 210 per share and sold them at ` 235 per share. He does
not take and give delivery of the shares but settles the transactions by receiving the difference in
prices amounting to ` 5,000 minus brokerage. In another case, Mohit bought 200 shares of
Seshasayee Papers Ltd. at ` 87 per share and sold them at ` 69 per share. He settles these
transactions by simply paying the difference amounting to ` 3600 plus brokerage. However,
nowadays stock exchanges have a system of rolling settlement. Such facility is limited only to
transactions of purchase and sale made on the same day, as no carry forward is allowed.
Though speculation and investment are different in some respects, in practice it is difficult to say
who is a genuine investor and who is a pure speculator. Sometimes even a person who has
purchased the shares as a long-term investment may suddenly decide to sell to reap the benefit
if the price of the share goes up too high or do it to avoid heavy loss if the prices starts declining
steeply. But he cannot be called a speculator because his basic intention has been to invest. It is
only when a person's basic intention is to take advantage of a change in prices, and not to invest,
then the transaction may be termed as speculation. In strict technical terms, however, the transaction
is regarded as speculative only if it is settled by receiving or paying the difference in prices
without involving the delivery of securities. It is so because, in practice, it is quite difficult to
ascertain the intention. Some people regard speculation as nothing but gambling and consider
it as an evil. But it is not true because while speculation is based on foresight and hard calculation,
gambling is a kind of blind and reckless activity involving high degree of chance element. No
only that, speculation is a legal activity duly recognised as a prerequisite for the success of stock
exchange operations while gambling is regarded as an evil and a punishable activity. However,
reckless speculation may take the form of gambling and should be avoided.

6.3.4 Stock Exchanges in India

The first organised stock exchange in India was started in Mumbai known as Bombay Stock
Exchange (BSE). It was followed by Ahmedabad Stock Exchange in 1894 and Kolkata Stock
Exchange in 1908. The number of stock exchanges in India went up to 7 by 1939 and it increased
to 21 by 1945 on account of heavy speculation activity during Second World War. A number of
unorganised stock exchanges also functioned in the country without any formal setup and were
known as kerb market. The Securities Contracts (Regulation) Act was passed in 1956 for
recognition and regulation of Stock Exchanges in India. At present we have 23 stock exchanges
in the country. Of these, the most prominent stock exchange that came up is National Stock
Exchange (NSE). It is also based in Mumbai and was promoted by the leading financial institutions
in India. It was incorporated in 1992 and commenced operations in 1994. This stock exchange has
a corporate structure, fully automated screen-based trading and nation-wide coverage.

Another stock exchange that needs special mention is Over The Counter Exchange of India
(OTCEI). It was also promoted by the financial institutions like UTI, ICICI, IDBI, IFCI, LIC etc. in
September 1992 specially to cater to small and medium sized companies with equity capital of
more than ` 30 lakh and less than ` 25 crore. It helps entrepreneurs in raising finances for their
new projects in a cost effective manner. It provides for nationwide online ringless trading with
20 plus representative offices in all major cities of the country. On this stock exchange, securities
of those companies can be traded which are exclusively listed on OTCEI only. In addition,
certain shares and debentures listed with other stock exchanges in India and the units of UTI and
other mutual funds are also allowed to be traded on OTCEI as permitted securities. It has been
noticed that, of late, the turnover at this stock exchange has considerably reduced and steps have

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