CHAPTER 2 fflSTORY OF THE INDIAN CAPITAL MARKET Early Beginning Amassing Wealth Under Premchand Roychand Leadership Formation Of The Stock Exchange, Bombay Formation Of Other Regional Exchanges Swadeshi Movement Era Of Post-Independence Era Of Post FERA Amendments EraOf Liberahsation Of The Economy The Stock Market Today CHAPTER 2 HISTORY OF THE INDIAN CAPITAL MARKET EARLY BEGINNING The history' of the Stock Market in India days back to 1800 A.D. The origin of the Stock Market goes back to the time when securities representing business properties or pubhc debts and / or business debts were first issued and made transferable from one person to another. The East hidia Co. Ltd. was the dominant Institution in those days and business by and large was done in its loan securities only towards the close of 18th century. However, the earliest records of securit>' transactions in India were very meager. By 1830's there was regular increase in volume of business in loans and also in corporate stocks and shares. At that time the city of Bombay was the only place where business was done in the shares prominently of Banks like the Commercial Bank, the Chartered Bank, The Oriental Bank, The Chartered Mercantile Bank and The Old Bank of Bombay. The prominent shares other than Banks were those of Cotton Presses. In Calcutta in or around 1836 the quotations of loans of East India Company and shares of Bank of Bengal at heavy premium were seen. There were buyers of bank shares at Rs.SOOO premium and sellers at a premium of Rs.7500 per share. This business in Bombay as well as Calcutta upto 1850 was done by a few 28 handful brokers recognized by Banks and Merchants. In 1850 the Companies Act with limited liability was introduced and enacted. The era of modem joint stock enterprises in India had commenced since then. AMASSING WEALTH UNDER PREMCHAND ROYCHAND LEADERSHIP The history of Premchand Roychand & Sons is the early history of brokers and their rise to power in Bombay. From 1850 to 1865 witnessed a rapid development of commercial enterprises with the introduction of Railways and Telegraph services. At this time there was increasing demand for the exports from India to Europe was witnessed. Along with the brokerage business prospering there was the growth of Hundi business also. The legendary Mr.Premchand Roychand was undoubtedly the leader of brokers' community as he was the first broker who could speak and write English at that time. In view of this there was no wonder why within a few years from 1850, Mr.Premchand monopolized the broking business in shares, stocks, bullion and foreign Exchange besides all the best gilt- edged security of those days. The display of the brilliance in financial strategies crowned Mr.Premchand as the Napolean of finance. Mr.Premchand floated banks and financial institutions, land and sea reclamations' companies and companies of diverse kinds were promoted through his goodwill and wealth. Thus Mr.Premchand was the maker of The Stock Exchange history. 29 The American Civil War broke out during 1860-61 rendering the stoppage of supply of cotton to Europe. This so-called famine resulted into large demand on India and the Bombay Presidency witnessed large business in the cotton. The progressing civil war witnessed the rise in the cotton prices, the payment of which was made in the form of gold and silver pouring from U.K. The expanding exports resulted into amassing the wealth by Bombay resulted into formation of many new companies their market premiums between 1863-65 as stated below : TABLE No. 9 NEW COMPANY FLOTATICXVS, 1863-65 (Rs.i ncrore) No. Kind of Company Paid-up Capital Market Premia 25 Banks 13.64 10.94 69 Financial Associations 6.22 4.42 7 Land Reclamation Cos. 8.34 17.56 30* Miscellaneous Cos. 1.56 5.00 131 29.76 37.92 * Approximate (Source : The BSE Official Directory "History of the Stock Market In India ") In the immediate future the shares of Asiatic Banking Corporation, Old Bank of Bombay and the Backbay Reclamation, Mazgaon land. Port Canning, Elphinstone Land and various other companies shares were issued and were quoting at a heavy premium. Anybody and everybody 30 irrespective of caste and creed were deeply busy with the allotments of shares, buying gold and silver. It was like a madness which was indescribable. There was nothing that was floated whose shares did not command premium at very high level. The Back Bay Reclamation share with paid-up value of Rs.5000 was at a premium of Rs.50000 while the share of Port Canning with paid-up value of Rs.lOOO was at Rs. 11000 premium. The Mazgaon Land share was at a premium of Rs.9000, and the share of Elphinstone Land was at more than 500 percent premium. Some of the Banks' and Financial Associations' shares were commanding handsome premiums. Bank of Bombay share with Rs.500 paid up value was quoting at Rs.2850 as the highest price. People only realized when the end of American Civil War came and all were rushing to sell their securities, shares; only to find that they had accumulated non-saleable mass of papers. The fatal day was 1st July, 1865 when hundreds of time bargains matured which no one was in a position to fulfill. One time The Bank of Bombay share quoting at Rs.2850 could only be sold at just Rs.87. Similarly, the Back-Bay Reclamation share which was sold at Rs.5000 premium could be sold only at Rs.l750. Likewise all shares were sold at very low prices. A large number of Companies failed and there were a few solvent companies left. A special legislation. Act XXVIII of 1865 had to be enacted quickly to deal with the mass failures and such liquidations went on till 1872 or so. Though the depression was 31 long and severe, the share mania resulted into expansion of liquid capital and establishment of regular market in securities. All this resulted into helping Bombay to make itself the main center of money and capital market. This brought recognition to Bombay as the Financial capital of India. Along with the development of the market activity there were legislations coming up to regulate the healthy growth of the market. In around 1860, the number of brokers was about 60 and during the American Civil War time and resultant development of the economy showed an increase in the number of brokers to about 250. The economic prosp»erity brought a special status to the brokers and were treated as a privileged class. However, Post-American Civil War period resulted into rude shock and disillusionment. The one time privileged brokers became a hated class of people. The place of trading also was changed in quick succession as the broking business developed a feeling of nuisance to the customers and public at large. FORMATION OF THE BOMBAY STOCK EXCHANGE This disillusion period between 1868 - 1875 brought efforts to organize the association of the brokers called The Stock Exchange, Bombay, with the rules and regulations to govern the activities of the brokers, and the growth of the market. The tiien association of the brokers was called "Native 32 Share and Stock Brokers' Association". On 9th July, 1875 the Stock Exchange Bombay (Now Mumbai) was given formal recognition by the then Government of India. When the exchange was formed in 1875 the entrance fee for new member was Re.l and there were 318 members on the list. The number of members increased from time to time to about 478 in 1920 and the entrance fee also increased from Rs.5 in 1877 to Rs.48,000 in 1920. At present there are about 620 members with a right of nomination to transfer the right of membership with the approval of Governing Board of the Exchange. The membership right is called a "Card" which is similar to tlie concept of the "Seat" as is called in London and New York Stock Exchanges. Since the formation and recognition of the Stock Exchange at Bombay, as stated above it was later on called "The Stock Exchange, Bombay" and in brief BSE which short form is recognized all over the world and is valid even today. After the formal recognition of the stock exchange at Bombay brought the consolidation of the same in stages and exchange had its own piemises at the present location, situated in the comer of Dalai Street and Hamam Street facing Apollo Street (Now Mumbai Samachar Marg). This transfer took place from humble beginning of activity under the banyan tree in the Cotton Green or now known as Homimon Circle to the owned premises of the exchange as stated above. 33 FORMATION OF OTHER REGIONAL EXCHANGES With the development of BSE there were other regional stock Exchanges being established which were as follows : l.The Ahmedabad Share and Stock brokers' Association The cotton textile industry which was primarily established in Bombay also contributed to the development of Ahmedabad, as the next prominent city in the then Bombay Presidency. Soon after 1880 many cotton textile mills I were established in Ahmedabad and they all were successful. Therefore there was a need for trading in the shares of those companies which were set up as joint stock companies. Some of the residents of Ahmedabad had even inherited tradition for dealings in stocks and shares, having participated in the Share Mania of 1860s in Bombay. In fact many Bombay brokers hailed from Ahmedabad and nearby places. Accordingly, as the new textile mills were floated Ahmedabad brokers had canvassed for selling the shares of these mills.