NSE: An Agent To Separate The Wheat From Chaff

The NSE opened the doors for many who worked under big brokers.

The trading framework we have in place today is the outcome of efforts made by all market participants, including the regulator, the exchanges, the intermediaries, the support machinery of demat services, custodial services, banking services —the entire ecosystem. The evolution of this framework begins with one of the last laws to be passed by Parliament before Independence, the Capital Issues Control Act, which was enacted on 18 April 1947. It was about who would be in charge of capital in a socialist India: the government, through the Controller of Capital Issues (CCI).

Today’s Securities and Exchange Board of India (Sebi) was initially set up in 1988 under an administrative arrangement. It was given statutory powers with the enactment of the Sebi Act, 1992. Capital Issues (Control) Act was repealed and the Office of CCI abolished. Control over price and premium of shares was removed; companies were now free to raise funds from securities markets after filing a letter of offer with Sebi. Sebi introduced regulations for primary and secondary market intermediaries and played a pivotal role in the development of our capital market systems, including formation of the National Stock Exchange (NSE).

In the 1990s, the Indian capital market was fragmented, with the presence of multiple stock exchanges throughout the country. A few big players including BSE and Delhi Stock Exchange had a major chunk of the country’s total trade volume. The nature of the trades was regional, with long procedures, lack of transparency and mismanagement of clients’ money. Trades in other parts were coordinated through regional brokers. Regional stock exchanges traded in stocks of local companies. Investors, who wanted stocks from BSE or Calcutta Stock Exchange had to pay in advance. However, this was also the time of liberalization and new-age economic reforms in India. The then Union government knew that attracting foreign investment was not possible in such an environment. On the recommendations of the Pherwani committee, the ministry of finance decided that there should be a nationwide electronic exchange.

The first NSE office was started at Mahindra House, Worli, Mumbai, in a room that was previously used as a canteen. NSE was the first stock exchange in the world to use VSAT for communication and connectivity. This technology resulted in middlemen losing their importance and led to cost reduction from percentage points to basis points. Today, we have zero-brokerage or near-zero brokerage trades through online brokerages, thanks to technology and system improvements.

The new exchange opened the doors for many who worked under big brokers. They could now be a member of the exchange and start their own business. In a way, NSE gave birth to a fresh ecosystem. The absence of opaque trades changed the fundamentals of trading systems, processes and costs. Many who had knowledge of the trade started investment consultancies. In the last three decades, India saw the rise of many brokerages and consultancies which communicated stock fundamentals to every nook and corner of the country. NSE was one of the first demutualized exchange in the world and the first in India. Before demutualization, exchanges were owned and operated by brokerages which resulted in conflict of interest. NSE segregated ownership, trading rights and management, eliminating conflict issues. The exchange offered membership for all, with basic eligibility criteria.

Today, NSE is the leading exchange in the country, with the lion’s share of the equity cash segment, almost the entire share of equity futures and options, and the major share of currency futures and options. Its cash market daily average turnover was ₹2,805 crore in 2001; this increased to ₹69,645 crore in 2021. In equity derivatives, the daily average turnover has increased manifold over the same period. Today NSE is the world’s largest derivatives exchange by the number of contracts traded and fourth-largest in cash equity by number of trades. By value of transactions though, it is a different story in the global picture.

Net-net, we keep on advising you, to stay away from the noise and focus on your financial goals. Similarly, the robustness of the ecosystem of our capital market is intact, with a meticulous regulator watching over; don’t mind the noise.

Source: https://www.livemint.com/money/personal-finance/nse-an-agent-to-separate-the-wheat-from-chaff-11647880859622.html

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