Reforms at Bombay Stock Exchange, Asia’s Oldest Stock Exchange

– The Competitive Strategies

A Case Study Analysis

CONTENTS• Introduction• Formation of the Bombay

Stock Exchange• Scandals on the BSE• Reforms at BSE and Post –

reform• Challenges faced by BSE• Conclusion

INTRODUCTION

Background• The functions of the stock

exchange are threefold• BSE criticisms • BSE reforms over the

course of the years• BSE a corporate entity in

2005

• Provides a market place for purchase and sale of securities

• Provides linkage between savings and investment

• Plays the role of a barometer

Growth of Capital Markets in India• Origins of trading- East India company• Post independence- Capital issues control act • Only nationalized companies allowed to raise

capital• The securities contract regulation ACT 1956• Only stock exchanges recognized by the government of

India permitted to function• Foreign exchange regulations ACT 1973

Evolution of Stock Exchanges in India

Stock exchange Year of incorporationBombay stock exchange 1894

Calcutta stock exchange 1908

Madras stock exchange 1920

Bengal share and stock exchange Ltd. 1937

Indian stock exchange Ltd. 1938

Uttar Pradesh stock exchange 1940

Nagpur stock exchange 1940

Hyderabad stock exchange Ltd. 1944

Bangalore stock exchange 1963

National stock exchange 1992

FORMATION OF THE BOMBAY STOCK EXCHANGE

Historically Speaking• Started in 1850 in front of Town-Hall in Bombay currently known as

Horniman circle• Formed in 1875 as Bombay Stock Exchange • In 1986 launched its first stock index named ‘SENSEX’ with base

year 1978-79• Non-profit association & evolved as the premier stock exchange • Oldest stock exchange of Asia• Accounts for 75% of listed capital & 75% of shares in terms of

market capitalization• Its turnover is 1/3rd of the total turnover in securities in India

Membership at the BSE• Transactions are carried by TM on behalf of their

clients• Financial soundness, track record, experience,

infrastructure and manpower• TM must be registered and pay fee to BSE &

Regulatory Authority• TM’s play a role of brokers, sub-brokers, floor-

brokers, agents, jobbers, dealers, Badla financiers, dealer in G-Sec and underwriters

Structure of BSE• BSE has– A Board of 9 directors– Executive Director– 3 Gov Nominees – A RBI Nominee– 5 Public representatives

• Executive Director is responsible for day-2-day functioning and administration of Stock Exchange

Trading & Settlement• Outcry System• Interaction based trading & settlement– If paid-up value= INR 10 & or 100 Sh. Trading lot is 50

or 100 Sh.– Paid-up value > 100 INR, market lot of 10 Sh.

• Settlement period 14 days or more• Permission from board or president in special

cases• Physical settlement by TM at the clearing house

SCANDALS ON THE BSE

Securities Scams1991-92• Harshad Mehta and Hiten

Dalal• Ready Forward Deals• Banking Receipts• Manipulation• SEBI Act on April 4th 1992• NSE Established in November

1992• Badla discontinued in 1993

1994-95• Collusion of brokers and

top-management for the purpose of price rigging– M. S. Shoes Ltd.– Rupangi Impex Ltd.– Magan Industries Ltd.

• Fraudulent Shares– Sesa Goa Ltd.

Securities Scams1997• C. R. Bhansali Group

– Fraudulent Accounting Practices

– NBFC

1994-95• Harshad Mehta

– Collusion with top-management for the purpose of price rigging

– BPL, Videocon, Sterlite– Involvement of BSE Officials– Lifetime Ban

• T + 5 System, Rolling Settlement System

• BLESS

REFORMS AT BSE AND POST -REFORM

Reforms Undertaken in BSE• January 2000: rolling settlement system (T+5

system)– Started with 10 scrips– Later 153 were brought under

• January 2001: BLESS was introduced• July 2001: badla was wholly replaced by rolling

settlement system• January 2002: all the shares in BSE were brought

under this scheme

The Ketan Parekh ScamStock Brokers of

Kolkata Stock Exchange

Stock Market Activities

Ketan Parekh

Bank of IndiaMMCB

Money borrowed is diverted to fund the co-brokers at Kolkata Stock Exchange for price manipulation Discounted the pay orders

presented by KP and the pay orders worth INR 137

cr bounced

Got the pay orders discounted with Bank of India

Took pay orders from MMCB

without paying money

Diverted the amount of pay orders from Bank of India to rig the share prices of K-10 scrips

BSE Post Reforms• Badla and BLESS were banned• Short selling banned from March 2001 to July

2001• 20% circuit filter for stocks in rolling settlement• Index based filter (10%, 15%, 20%)• Introduction of margin trading in September

2001

CHALLENGES & COMPETITION

Challenges faced by BSE• Corporatization• To catch up with the development across the

world• To bring transparencies in transactions.• To bring technological and structural change• Demutualization

Rise of the NSE• NSE was started in April 1993 as a corporate

body.• In July 2005, became the largest exchange in

India.• Trades over 1500 equity, 800 debt instrument

with a corporate membership of 980.• Companies are selected on the basis of record,

the profitability, paid-up capital, market capitalization and dividend payment.

NSE better than BSE?• Superior technology.• More transparent market place.• NSE is a corporate body • Promotes the growth of human capital.• Innovative approach of trading• Regular inspection and investigation.• Proper risk management systems (PRISM and SPAN).• The telecommunication network is subjected to

periodic checkup.

CONCLUSION

Future Outlook• Use of technology– Outcry method replaced by screen based trading– Web based trading facilities (BSE WebX)

• Issues– Lack of transparency– Price manipulations– Insider trading– Circular trading– Mismanagement and immature corporate governance– Investor confidence

Corporate Governance• Corporate Governance addresses:– Ethical issues– Efficiency issues– Accountability issues

• Corporate Governance vs. Corporate Management

• Indian model of Corporate Governance

Implications• Economic• Business• Individuals