Page 64 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 5: Securities and Exchange Board of India

capital market. Company law as well as capital market rules and regulations gave them a Notes
sizable captive business from companies located in their areas. A company going public had to
have its shares listed in the regional stock exchange nearest to its place of incorporation and
only optionally with the BSE. In case of oversubscription, it was the regional exchange that
approved the allotment pattern. Companies having a large market capitalisation as well as a
wide branch network chose to have their shares listed in many regional stock exchanges as well
as in the BSE. A major reason for the survival of regional stock exchanges was seen in the slow
pace of technological progress. Well into the 1990s, Indian stock exchanges in general were
laggards in adopting communication technology that was transforming bourses in the U.S. and
Europe. Regional exchanges could still conduct trade in isolation from one another and from the
BSE. This had several undesirable consequences: illiquidity of stocks, possibilities of manipulation,
and arbitrage were some of them.
A vastly expanded reach was one of the major benefits the new technology conferred on the
stock exchanges. Significantly improved trading and settlement practices resulted. These
advantages were dramatically demonstrated by the advent of the NSE; it came into being in
November 1994 with a specific mandate to develop a better model than the existing exchanges.
Adopting the state of the art in technology and stock exchange management skills — the NSE is
the only exchange run wholly by professionals — the new exchange soon acquired pre-eminence.
Investors in many centres, outside the metros and even in semi urban areas, could trade on the
all-India exchange. Very soon the BSE followed suit with its own "BOLT" system. The
marginalisation of the regional stock exchanges became complete. Many large corporates, not
perceiving any benefit in sticking to a regional exchange, opted out. This process was facilitated
by the changed rules. Simultaneously, as part of stock market reform in India, exchanges were
required to professionalise their management and change their organisational structure from a
"mutual" basis — essentially a club type format with stock brokers as the only members — to a
"demutual" basis, a corporate form. That move has gathered momentum with the Government
amending the relevant legislation.

Will the regional exchanges adapt to the requirements of technology and organisational
restructuring and remain viable entities? Until recently many experts felt the regional exchanges
would go the way of many smaller exchanges in the developed world. However, the advent of
Indonext opens up many possibilities for survival by coming together and trading through a
new platform specially designed for the stocks of small and medium companies. As a rule such
stocks do not have liquidity. The hope is that the new platform will pool the resources of its 18
members and overcome the deficiencies of trading in illiquid stocks and small exchanges. There
have been some tall claims of Indonext paving the way for a strong all-India exchange that
would eventually be up in competition with the BSE and the NSE. A more realistic view is that
the new platform will give regional exchanges a lease of life.

Task Find out what is BSEIndonext and discuss its utility for RSEs.

5.4 BSE Derivative Trading

The path for derivatives trading was cleared in India with the introduction of Securities Laws
(Amendment) Bill in Parliament in 1998. Yet the introduction of derivatives was delayed for as
the infrastructure for it had to be set up. Derivatives trading required a computer-based trading
system, a depository and a clearing house facility. In addition, problems such as low market
capitalization of the Indian stock markets, the small number of institutional players and the
absence of a regulatory framework caused further delays.

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