Indian Capital Markets are one of the oldest in Asia. The earliest records of security dealings in India are ambiguous and roughly dates back to 200 years ago. Initially, in the eighteenth century, East India Company securities were traded in the country. Later in 1861 with the American Civil War began and opening of the Suez Canal, led to a tremendous increase in Exports to the United Kingdom and United States. Several companies were registered under the British Companies Act during this period and many banks came forward to handle the finances relating to these trades. An unincorporated body of a dozen of stockbrokers, which informally traded cotton in the city, under a banyan tree in front of the Town hall in Mumbai formed an association. Afterwards, in 1985 it became an incorporated body, which we know known by the name of Bombay Stock Exchange (BSE). Until the end of the nineteenth century securities trading remained unorganized with the main trading centers in Mumbai and Kolkata. Trading activities flourished during this period, resulting in a boom in share prices. This boom, the first in the history of the Indian capital market lasted for about half a decade. However, there had been much fluctuation in the stock market on account of the American war and the battles in Europe, therefore it was more prominently known as ‘Satta Bazar’, which means a market of speculations.

Pre-Independence Era of Indian Capital Market

British government was not interested in the economic growth of the country. As a result, many foreign companies depended on the London capital market for funds rather than in the Indian capital market. Hence, the Indian capital market was not properly developed before Independence. The growth of the industrial securities market was very much hampered since, there were very few companies and the number of securities traded in the stock exchanges was still smaller. A large part of the capital market consisted of the gilt-edged marker for government and semi-government securities. Business was essentially confined to company owners and brokers, with very little interest displayed by the general public.

Post-Independence Era of Indian Capital Market

In the post-independence period also, the size the capital market remained relatively small. During the first and second five-year plans, the government’s emphasis was on the development of the agricultural sector and public sector undertakings. The public sector undertakings were healthier than the private undertakings in terms of paid-up capital but shares were not listed on the stock exchanges. Moreover, the Controller of Capital Issues (CI) closely supervised and controlled the timing, composition, interest rates pricing allotment and floatation consist of new issues. These strict regulations de-motivated many companies from going public for almost four and a half decades.

However, since 1951, the Indian capital market has been broadening significantly and the volume of saving and investment has shown steady improvements. All types of encouragement and tax relief exist in the country to promote savings. Besides, many steps have been taken to protect the interests of investors, to illustrate, the government enacted the Securities Contracts (regulation) Act and Companies Act in 1956. A very important indicator of the growth of the capital market, is the growth of joint stock companies or corporate enterprises. In 1951 there were about 28,500 companies, both public limited and private limited companies with a paid-up capital of Rs. 775 crores.

In the 1950s, Tata Steel, Bombay Dyeing, National Rayon, Kohinoor mills and Century textiles were the favorite scripts of speculators. Speculation, non-payment or defaults were prominent features of the market.

The 1960s was characterized by the wars and droughts in the country which led bearish trends. Financial institutions such as LIC and GIC helped to revive the sentiment by emerging as the most important group of investors. The first mutual fund of India, the Unit Trust of India (UTI) came into existence in 1964.

In the 1970s Badla trading was resumed under the disguised forms of hand delivery contracts. Badla trading involved buying stocks with borrowed money with the stock exchange acting as an intermediary at an interest rate determined by the demand for the underlying stock and a maturity not greater than 70 days. This revived the market. However, the capital market received another severe setback in 1974, when the government broadcasted the Dividend Restriction ordinance. An Act to provide, in the interests of national economic development, for temporary restrictions on the power of certain companies to declare dividends out of profits and for matters connected therewith or incidental thereto. This led to a slump in market capitalism at the BSE by about 20 per cent overnight and the stock market did not open for nearly a fortnight.

Foreign Exchange Regulation Act (FERA) was promulgated in 1973. This act enforced all non-banking foreign branches and subsidiaries with foreign equity exceeding 40 per cent had to obtain permission to establish new undertakings, to purchase shares in existing companies, or to acquire wholly or partly any other company. Several MNCs opted out of India. One hundred and twenty-three MNCs offered shares worth Rs 150 crore, creating 1.8 million shareholders within four years. The offer prices of FERA shares were lower than their intrinsic worth. Hence, for the first the FERA dilution created an equity cult in India. It was the spate of FERA issues that gave a real fillip to the Indian stock markets. For the first time, many investors got an opportunity to invest in the stocks of such MNCs as Colgate and Hindustan Liver Limited. One mass participation by retail investors came into picture, when in 1980s, entrepreneur, Mr. Dhirubhai Ambani came up with the Reliance IPO, followed by BSE introducing the BSE Sensex, providing a means to measure overall performance of the exchange to the investors.