Why two stock exchanges in India?

You might be wondering why I am saying it that there are two stock exchanges in India (BSE and NSE) however there are other stock exchanges also exists in India.

But here I am talking about major Stock exchanges currently operating in India very effectively. Ever wondered if BSE was handling all the investments and Investors then what the requirement of NSE was.

What is Bombay Stock Exchange (BSE):-

BSE, the first ever stock exchange in Asia established in 1875 and the first in the country to be granted permanent recognition under the Securities Contract Regulation Act, 1956, has had an interesting rise to prominence over the past 143 years.

The journey of BSE is as eventful and interesting as the history of India’s securities market. Following are some of the key milestones and achievements.

National Stock Exchange (NSE):-

NSE was incorporated in 1992. It was recognized as a stock exchange by SEBI in April 1993 and commenced operations in 1994 with the launch of the wholesale debt market, followed shortly after by the launch of the cash market segment.

But Why need has arisen for NSE: –

National Stock Exchange was incorporated in the year 1992 to bring about transparency in the Indian equity markets. Instead of trading memberships being confined to a group of brokers, NSE ensured that anyone who was qualified, experienced, and met the minimum financial requirements was allowed to trade.

In this context, NSE was ahead of its time when it separated ownership and management of the exchange under SEBI’s supervision. Stock price information that could earlier be accessed only by a handful of people could now be seen by a client in a remote location with the same ease. The paper-based settlement was replaced by electronic depository-based accounts and settlement of trades was always done on time. One of the most critical changes involved a robust risk management system that was set in place, to ensure that settlement guarantees would protect investors against broker defaults.

Major Difference between BSE and NSE:-

Indices: –

The main Index of BSE is SENSEX while that of NSE is CNX Nifty. The other indices at BSE are: BSE 500, BSE 100, BSE 200, BSE PSU, BSE MIDCAP, BSE SMLCAP, BSE BANKEX, BSE Teck, BSE Auto, BSE Pharma, BSE Fast Moving Consumer Goods (FMCG), BSE Consumer Durables (SYMBOL: Cons Dura), BSE Metal.

NSE also set up as index services firm known as India Index Services & Products Limited (IISL) and has launched several stock indices, including: S&P CNX Nifty, CNX Nifty Junior, CNX 100, S&P CNX 500, CNX Midcap (introduced on 18 July 2005 replacing CNX Midcap 200).

Era of Early 1990’s in Stock Market: –

In the early 1990’s, banks in India were not allowed to invest in the equity markets. However, they were expected to post profits and to retain a certain ratio (threshold) of their assets in government fixed interest bonds. Harshad Mehta squeezed capital out of the banking system to address this requirement of banks and pumped this money into the share market.

He promised the banks higher rates of interest, while asking them to transfer the money into his personal account, under the guise of buying securities for them from other banks. At that time, a bank had to go through a broker to buy securities and forward bonds from other banks. Harshad Mehta used this money temporarily in his account to buy shares, hike up demand of certain shares, sell them off, pass on a part of the proceeds to the bank and keep the rest for himself. This resulted in stocks like ACC, which was trading in 1991 for ₹200/share, catapult to nearly ₹9,000 in just 3 months.

Harshad Mehta, a registered and well-known broker, manipulated the Bombay Stock Exchange (BSE) along with his partners by taking advantage of loopholes in the banking system. Hence it was a need of time to setup another Stock market exchange otherwise Investor was fully worried about their investments as some key players of market were playing with the law and regulations of Stock market.

The era of early 90’s, triggered many changes in India’s financial regulatory system. The Securities Laws (Amendments) Act was passed in 1995, widening Sebi’s jurisdiction and allowing it to regulate depositories, FIIs, venture capital funds and credit-rating agencies. To secure investor interest, Sebi could also make it mandatory for companies issuing securities to make disclosures and there was a need to regulate exchange in efficient manner to gain trust of investors.

How NSE Changed Stock Market of India?

The main objective behind NSE establishment was to improve functions of   trading facility nationwide for all types of securities. It also ensures equal access to all investors in the country through the process of an appropriate telecommunication network. NSE was able to achieve its objectives within a very short span of time. BSE or Bombay Stock Exchange is the oldest stock exchange in Asia that was established in 1875. It’s a regional stock exchange of Maharashtra unlike NSE which is nationwide.

During the early part of the 1990s, the ranking of the Indian capital market with reference to the standard global indices relating to efficiency, safety, market integrity, etc., was not at all flattering. But after the NSE was set up, the entire atmosphere changed. The broker-owned and managed exchanges started worrying more about the competitive threat that NSE posed to their business and how they should meet investors’ minimum demands so that they did not lose out completely to NSE .

Which One is Best Exchange for Investment and Trade: –

BSE is more suitable for beginners, while NSE is more suitable for seasoned investors and traders. If you are an investor in India who want to invest in shares of new companies, BSE would be an ideal choice. But if you are a day trader, risking share trading with derivatives, futures and options would be the preferred choice. Also, NSE has better software for high-risk online transactions. For conservative investors, who like to sit and watch their investments grow, BSE is the right choice.

NSE and BSE have different methods of levying a tax. Taking that into consideration, NSE is suitable for lesser turnovers, and BSE is ideal for more significant turnovers.

Both are secure and provide good online services; hence both are excellent choices.

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Disclaimer: The purpose of the article is to enlighten the readers with the above-mentioned Subject so they can understand and follow the learning’s of these notifications. Under no circumstances, the author would be held liable in any way for any damage arising from using this article.

The author can also be reached at casharmaamit1@gmail.com