An Introduction to the Indian Stock Market
India is a growing market with the potential to expand quickly, and the Indian stock market has also come true to this point. For decades, the Indian stock market has produced wealth for savvy investors. Nowadays, it is currently drawing more investment than it did previously.
The stock market was an investment instrument owned or controlled by the privileged few a few decades back. However, as technology develops and becomes more widely available, the general public is becoming more interested in the stock market and taking advantage of this fantastic opportunity.
The long-term performance of the Indian equities market has consistently outperformed that of other asset groups. To make the most of it, all it takes is some knowledge and patience.
The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the two stock exchanges that govern the Indian stock market. The Government of India legally approved 22 stock exchanges under the Securities Contracts (Regulation) Act of 1956. These were the regional stock markets, which also included ones in Hyderabad, Jaipur, Madras, and other places, but most of them are no longer in use. Under SEBI's departure strategy, most of these regional stock exchanges have been shut down in recent years.
The two stock exchanges, BSE and NSE, currently account for nearly all of the country's stock trading activity and are the biggest and most popular stock exchanges in India. These exchanges use digital platforms for trade. In these two exchanges, each has a unique electronic automated trading system. These systems are among the quickest and most sophisticated in existence.
The National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) are two other central depositories. The shares in India are digitally recorded by these depositories.
Depository Participants, or D.P. for short, refer to a number of the central depositories' members. For investors to use the services of central depositories, they must create a Demat account with one of these D.P.s.
Like bank accounts store money, your Demat account keeps digital records of your shares. The majority of brokers, big banks, and NBFCs are D.P.s. It is the investor's choice to choose a Depository Participant and should be followed accordingly for creating a Demat account. However, the investors can also communicate with the central depository via this Demat account.
Before the development of central depositories, stock trading took place in person. The buyer and seller exchanged shares using a physical share document. This previously came with several dangers, including poor delivery, false share certificates, ripped or patched certificates, delayed certificate delivery, etc. These dangers associated with physical certificates were reduced with the development of digitized central depositories, such as NSDL and later CDSL. In 1996, the NSDL was first released. On the same ideas, a second repository called CDSL was launched later in 1999.
The NSE and BSE
The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd. are the two biggest stock exchanges in India. The BSE is the oldest stock exchange in Asia and India. It has been around since 1875, although the NSE only enabled trading in 1994. Mumbai is home to both the Bombay Stock Exchange and the National Stock Exchange.
The BSE eventually implemented a fully computerized digital trading system, but the NSE was the first Indian stock exchange to employ a computerized, screen-based electronic trading system.
Both exchanges currently employ the BOLT (BSE On-Line Trading) and NEAT (National Exchange for Automated Trading) technologies for automated digital trading.
To match and execute an order, both exchanges employ a computerized open limit order matching mechanism. This process automatically matches all purchase orders with the corresponding sell limit orders.
The BSE has more listed businesses than any other stock market in the world, with more than 5500. At the same time, the NSE lists roughly 2000 firms. About half of the firms listed on the BSE do not frequently trade, making their shares relatively illiquid. About 90% of the BSE and NSE market capitalization is made up of the top 500 listed companies.
The two market indices that are most frequently reported in both local and foreign media are Sensex and Nifty.
The primary index of the Bombay Stock Exchange is called "Sensex" or "S&P BSE Sensex," whereas the benchmark index of the National Stock Exchange is called "Nifty 50".
While Nifty is a composite index of 50 well-established corporations from all main sectors, Sensex consists of 30 well-established blue chip companies from various industries.
The values of the Sensex and the Nifty are determined using the "free-float market capitalization technique". On both exchanges, several additional, less well-known indexes also exist, including Nifty Midcap 100, Nifty 500, S&P BSE 100, S&P BSE 500, etc. Other sector-specific indices, such as Nifty Auto, S&P BSE Bankex, S&P BSE FMCG, Nifty I.T., etc., are available too.
The trading computer matches orders in an open electronic limit order book used for trading at both exchanges. Since there are no market makers involved and orders rule the whole process, investors' market orders are automatically matched with the best limit orders. As a consequence, both buyers and sellers remain anonymous.
A market that is driven by orders has the advantage of being more transparent because all buy and sell orders are shown in the trading system. Order fulfilment is not guaranteed in the absence of market makers. The trading system requires that all orders be put through brokers, many of which provide ordinary customers with an internet trading platform. Institutional investors can use the direct market access (DMA) option to place orders directly into the stock market trading system utilizing trading terminals provided by brokers.
Settlement Period for the Indian Stock Market
All stock deals at the NSE and BSE are settled on a rolling T+2 basis, which means they all close out on the second working day.
T stands for the trading day, which means that any trades made on that day will be resolved on the second day after that trade. Deals done on Monday will thus be finalized on Wednesday. However, the arrival at the settlement day does not include any intervening holidays, including Saturdays, Sundays, BSE/NSE holidays, government holidays, bank holidays, etc.
Market Control Agent
The Securities and Exchange Board of India (SEBI) oversees the regulation of the Indian securities market. The organization was given the status of a statutory entity when the Securities and Exchange Board of India Act 1992 was established. The main organization in charge of policing the activity of the stock markets in India is SEBI. It also regulates the activities of depositories, corporate promoters, underwriters, retail bankers, institutional investors, foreign institutional investors investing in India, portfolio managers, investment advisers, and others.
To provide a level playing field in the Indian securities market, SEBI prevents unfair trading activities like insider trading and price manipulation. SEBI may question companies and investors about their transactions on the Indian stock market. It frequently enforces sanctions on dishonest traders and businesses if found to be engaging in any illicit trading activity. It can temporarily or permanently prohibit users from entering the market and engaging in trade.
Investor complaints against brokers, depositories, depository participants, businesses, and other entities are also handled by SEBI. SEBI also regulates the operations of mutual funds and venture capital.
The market regulator SEBI also organizes several educational programmes and advertising efforts to educate investors about frequent scams and hazards in the securities market. SEBI supports capital market development initiatives as well. In a nutshell, SEBI's job is to safeguard investors' interests and maintain the integrity of the Indian capital market.
Foreign investment in Indian Stock Market
India didn't start accepting outside investment till the 1990s. Foreign direct investment (FDI) and foreign portfolio investment (FPI) are the two types of foreign investments. FPIs are defined as stock purchases made with no ownership or control over management or operations. Even yet, if the investor participates in the ongoing management and operations of the business, all investments are recognized as FDIs.
One must be registered as a foreign institutional investor (FII) or as a sub-account of a registered FII in order to invest in a portfolio in India. The market regulator SEBI has given its approval to both registrations. Mutual funds, pension funds, endowments, sovereign wealth funds, insurance companies, banks, and asset management firms make up the majority of foreign institutional investors. Currently, direct foreign investment is not allowed on the Indian stock market. High-net-worth people, on the other hand, can be registered as sub-accounts of an FII if they have a net worth of at least $50 million.
Any stock listed on any stock market may be directly acquired by foreign institutional investors and their subaccounts. The vast majority of portfolio investments are made in primary and secondary market securities, including the shares, debentures, and warrants of Indian companies that are listed on or are anticipated to be listed on a respectable stock exchange.
Aside from stock exchanges, FIIs are also permitted to invest in unlisted securities as long as the Reserve Bank of India authorizes the price. They can also invest in derivatives sold on any stock market as well as mutual fund units.
If registered as a debt-only FII, an FII may invest entirely in debt securities. Other FIIs must invest at least 70% of their money in equities. Debt investments may be made with the remaining 30%. FIIs are required to transfer funds into and out of India using individual non-resident rupee bank accounts. Such an account's balances may be entirely repatriated.
Limitations and Investment Caps
The Indian government sets the FDI ceiling, and several ceilings have been established for various industries. The administration has been slowly raising the ceilings over time. Most of the time, FDI ceilings are between 26% and 100%.
The applicable FDI cap for the sector in which the business operates usually sets a maximum limit for portfolio investment in a certain listed firm. However, there are also two restrictions on portfolio investment. First, a total investment cap of 24% of a company's paid-up capital has been set for all FIIs, including all their sub-accounts. With the consent of the company's board of directors and shareholders, the same may be increased all the way to the sector cap.
Second, no single FII should invest more than 10% of the company's paid-up capital in any given enterprise. Regulations provide a separate 10% investment cap for each of an FII's subaccounts in a given business. However, the same ceiling is just 5% in the case of foreign businesses or people investing as a sub-account. Investing in equity-based derivatives traded on stock exchanges is also governed by rules.
Foreign Entity Trading
Foreign businesses and individuals can access Indian shares through institutional investors. Regular investors are becoming more and more interested in mutual funds with an emphasis on India. Exchange-traded funds (ETFs), participatory notes (P.N.s), depositary receipts like American depositary receipts (ADRs) and global depositary receipts (GDRs), and exchange-traded notes (ETNs) are some examples of offshore products through which investments can be made.
According to Indian rules, FIIs may only issue offshore participation notes to authorized firms that represent the underlying Indian equities. However, even tiny investors can purchase American depositary receipts, which are listed on the Nasdaq and New York Stock Exchange and reflect the underlying equities of several well-known Indian companies. ADRs are subject to U.S. Securities and Exchange Commission (SEC) laws and have a dollar value. In a similar vein, global depositary receipts are traded on stock markets in Europe. Many prospective Indian companies do not yet use ADRs or GDRs to connect with foreign investors.
Retail investors also have access to ETFs and ETNs that are based on Indian stocks. ETFs with an emphasis on India sometimes invest in indexes composed of Indian-based corporations. The NYSE and Nasdaq already have most of the stocks that make up the index listed for trading. Two of the most well-known ETFs that have invested in Indian companies as of 2020 are the Wisdom-Tree India Earnings Fund and the iShares MSCI India ETF (INDA). However, the iPath MSCI India Index Exchange Traded Note is the most popular ETN. ETFs and ETNs provide appealing investing alternatives for outside investors.
The Bottom Line
India is one of the countries with emerging markets that is quickly developing into a growth engine. Only a very small portion of Indians' household savings is now placed in the local stock market, but GDP has grown at 7% to 8% annually over the past several years, although at a slower pace for 2018 and 2019. With a stable banking system, perhaps more money will start joining the race.