Major Financial Crisis of Past Two and Half Decade: a Conceptual Study

International Journal of Disaster Recovery and Business Continuity Vol.11, No. 2, (2020), pp.1568–1572

Major Financial Crisis of Past Two and Half Decade: A Conceptual Study

Anuradha Samal1 and A K Das Mohapatra2

1Assistant Professor, Department of Business Administration, Sambalpur University, Odisha- India. [email protected]

2Professor, Department of Business Administration, Sambalpur University, Odisha- India. [email protected] & [email protected]

Abstract

This paper analyses is regarding the conceptual understanding of the major financial crisis in the Indian Stock Market during the past 24 years since 1995. A critical Incident Analysis has been done by dividing the entire data into three major events namely; Asian Financial Crisis, Sub Prime Mortgage Crisis and Chinese Stock Market Turbulence which has affected the Indian stock market to the maximum extent in the past two and half decade. Keywords: Asian Financial Crisis, Sub Prime Mortgage Crisis and Chinese Stock Market Turbulence

Introduction

Indian Stock Market

In Indian Stock market shares of pubic listed companies are traded. The origin of the Indian stock market began in 1875 where long period securities in the form of negotiable instruments were introduced. Sooner the clause of limited liability was introduced in the mid of 19 century, when Companies Act 1950 was established with the main objective to create interest among the public to invest in securities.

Sooner, with the development of “native share and stockbrokers” at Bombay in 1875, that is presently the Bombay Stock Exchange, the formation of exchanges in Ahmedabad (1894), Calcutta (1908), and Madras (1937) took place. Securities Contracts (Regulation) Act, 1956 was introduced which mandated the stock exchanges to avail government recognition. As of January 2005 there were 23 stock exchanges in India. They are situated at, Kanpur, Delhi, Guwahati, Ahmedabad, Calcutta, Chennai (Madras Stock Exchange), Cochin, Coimbatore, Bangalore, Ludhiana, Mangalore, Baroda, Bhubaneshwar, Hyderabad, Indore, Jaipur, Mumbai (Bombay Stock Exchange), Mumbai (National Stock Exchange or NSE), Mumbai (OTC Exchange of India), Mumbai (Interconnected Stock Exchange of India), Patna, Pune, and Rajkot.)

The most significant advancement in Indian stock exchange was with the foundation of the National Stock Exchange (NSE) in 1994. In a very short period, it rose as the biggest stock exchange in the nation competing at par with the Bombay Stock Exchange (BSE) the oldest stock exchange of India.

National Stock Exchange (NSE)

Introduced in 1994, NSE was built up in Mumbai (India) with a goal to give across nation trading offices with proper facilities for the trading of varied securities and facilitate equivalent trading access to investors across the nation.

NSE has settled on a request-driven framework. At the point when a request is set by an exchanging part, the Computer consequently creates a special request and the party can take a print of request affirmation slip containing that number.

The NSE is a countrywide computerized stock exchange. The NSE is classified into 2 different segments: Wholesale Debit Market segment and the Capital Market segment whose explanation is given below.

Table 1: Wholesale Debit Market segment Vs. the Capital Market segment

Basis Wholesale Debit Market segment Capital Market segment Market It is a market for high-value transactions in It is a market for convertible debentures, government related securities like equities, and retail trade in non- commercial papers, public sector undertaking convertible debentures bonds other government debt instruments etc.

Trading The trading members are linked to the central The trading members are connected computer in Mumbai through a Very Small through dedicated high speed lines to the Aperture Terminals (VSATS) which is central computer at connected through satellite Mumbai.

Bombay Stock Exchange

BSE is one of mainly recognized and sorted out stock exchanges in the world with a long, vivid, and colorful history. In the 1850s, exchanging was limited to dozen brokers under the banyan tree opposite to the Town hall in Bombay. The area of trading shifted many places as the number of brokers kept on rising. The gatherings inevitably moved to Dalal Street in 1874 and 1875 which officially became an authorized organization named “The naive share and stockbrokers association”. In 1895, the association purchased a premise in Dalal Street and it was launched in 1899. Subsequently, Stock exchanged at Bombay was united and consolidated. BSE got acknowledgment in May 1927 under the Bombay securities contracts control act, 1925. The Indian constitution appeared on 26th Jan, 1950. The Constitution put stock exchanges and the forward markets under the restricted authority of the Government of India. In 1956, BSE turned out to be the 1ststock exchange to be acknowledged by the Government of Indian under securities contracts (regulation) act.

BSE changed from open clamour or outcry framework to screen-based framework in1995. It accelerated its computerization program keeping in mind the threat of competition from NSE. Brokers play a significant role in BSE, A broker is a specialist who trades for his own account and thus offers a two- way quote or a bid-ask quote. Bid quote reflects the cost at which the broker is ready to purchase and ask a quote speaks to the cost at which the broker is ready to sell. Prospective Investors need to transact by means of a broker/agent. BSE presently works on a “request-driven” structure and “quote-driven” structure. 1569 ISSN: 2005-4289 IJDRBC Copyright ⓒ2020 SERSC International Journal of Disaster Recovery and Business Continuity Vol.11, No. 2, (2020), pp.1568–1572

BSE 500 INDEX

BSE 500 which is also called SandP Bombay Stock Exchange 500 is a free-float market weighted index of BSE. It is intended to be a broad image of the Indian market. The best 500 organizations recorded at BSE Ltd cover all the significant industries in the Indian economy.

Graph: 1 Sensex performance for past 25years

Worldwide Financial Crisis

Major global financial emergencies in the past two and half decades were the Asian Financial Crisis, Sub Prime Mortgage Crisis and Chinese Stock market Turbulence whose explanations are given below:

Asian Financial Crisis

It was one of major worldwide financial crisis which has influenced the Asian economy and affected the world economy during 1997-98. It started in Thailand when Bangkok (Thai baht) stopped to keep up the financial relationship with US (U.S. dollar), which lead to a series of currency devaluation, like Indonesian (rupiah) was devalued somewhere about 80%, Thai (baht) by 50%, South Korean(won) around 50 percent and Malaysian ringgit by 45% and it has also affected to Russian and Brazilian currency too. Altogether there was dropping in capital inflows of more than $100 billion in 1styear of crisis overall in the world.

The reason behind the crisis was the failure of governance, which can be: international, national, and domestic. IMF was additionally criticized for general global administration plans focussing "one size fits all" approach of governance. Even APEC the Asia-Pacific Economic Cooperation and ASEAN and the Association of Southeast Asian Nations were also criticized as well.

Sub Prime Mortgage Crisis

Sub Prime Mortgage Crisis otherwise named as the Great Recession which began in December of 2007 in the US had a significant negative impact on the world economy. The World Economy declined by 1.1 percent during the time of 2008 to 2009 with a staggering drop of 3.4 percent on an average in the GDP (Gross Domestic Product) of most of the developed nations. But even during the downturn, the Indian economy managed out with a 5.35 percent growth in GDP in 2009.

The crisis has its underlying roots in the US house bubble which saturated in 2006, when numerous banks offered loans at low rates along with very basic fulfilment criteria to the borrowers who were qualified as well as not qualified to reimburse them. Starting in mid-2007, these sub-prime moneylenders began to collapse, after their borrowers failed to meet their instalment commitment. This circumstance gave rise to "Credit Crunch" (characterized as "a serious deficiency of cash or credit"), caused due to the absence of trust of significant banks who ceased to distribute funds among each another and when credit crunch occurred, banks and financial institutions found it even more difficult or impossible to obtain any more cash, which drove them to job cuts, stop investments and eventually defaulting on their own obligation.

Chinese Stock Market Turbulence

The Shanghai Stock Exchange (SSE) is situated in China in the city of Shanghai. It is one of the few stock exchanges operating without restraint in the People’s Republic of China, another s Shenzhen Stock Exchange. The SSE is the world's fourth-biggest financial stock exchange by market capitalization at US$4.0 trillion as of Nov 2018 SSE is restricted for foreign investors and often regulated and influenced by choices of the government.

The Chinese stock market turbulence started with the stock market bubble which popped on 12 June 2015 and end toward the starting of February 2016. Nearly 33% of A-grade shares on SSE was lost within1 month of time. Significant repercussions occur afterward around 27 July and 24 August which was referred as "Dark Monday". From 8 to 9 July 2015, the Shanghai stock market degraded by 30% as 1400 organizations, which is more than 50 % of the listed firms filed a trading close down to stop additional losses. Despite the efforts of the government the stock market continued to fall and on 24th August it recorded the largest dip of 8.48% in a single day which was recorded highest since 2007 in SSE.

Indian economy was also affected by this market crash. Indian stock market has recorded an all-time major single-day fall of 1624 points in Sensex on August 24, 2015, and the year 2015 and 16 were considered as the market crash period. The reasons behind the crash were the reduced the confidence of investors and sooner there was a rapid selling of stocks.

Conclusion

Indian economy began to slow down in the crisis period but as compared to the adverse effect of the crisis on the world economy. In all the three crisis, namely, Asian financial crisis, Sub-prime mortgage crisis, and Chinese stock market turbulence, Indian economy was less affected due to centralised management and regulated monetary policy.

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