Security market in India

The security market of an economy is the section of a financial market where long-term capital is raised through instruments such as shares, securities, bonds, debentures, and mutual funds.

A security market consists of a security regulator (SEBI in India), stock exchanges, various share indices, brokers, FIIs, jobbers, and other participants. In a security market, several types of transactions take to happen, such as badla, reverse badla, future trading, insider trading (not authorized), private placement, and so on.

Primary and Secondary Market

There are two complementary markets in every security market: main and secondary. The primary market is the market in which security market instruments are traded (procured) directly between the capital-raiser and the instrument purchaser. As an example, a share purchased directly from the issuer may be the firm itself. The principal stakeholder is the individual. The secondary market is the market where securities market instruments are traded between primary instrument holders. Such transactions require an institutionalized trading floor, which is provided by stock exchanges.

Stock Exchange

A physically existing institutionalized set-up in which securities stock market instruments (shares, bonds, debentures, securities, and so on) are traded. Its main functions are as follows:

  • Provides a floor for stock buyers and sellers, bringing liquidity to the market. It is the most important institution in the securities secondary market.
  • Makes available the prices of trading as an important piece of information to the investors.
  • It ensures that stock market participants keep their promises by following institutionalized rules and procedures.
  • Passes updated information to the enlisted companies about their present stockholders (so that they can pass on dividends etc., to them).
  • By publishing its ‘Index’, it fulfills the purpose of projecting the moods of the stock market.

First stock exchange in the world

The first stock exchange in the world was founded in 1631 in Antwerp, Belgium (then part of the Netherlands), followed by the London Stock Exchange in 1773 and the Philadelphia Stock Exchange (the first in the New World) in 1790. 1 In 1870, the Bombay Stock Exchange, also known as The Native Share and Stock Brokers’ Association, became India’s first stock exchange.

The New York Stock Exchange, the NASDAQ, the Tokyo Stock Exchange, the London Stock Exchange, and the Bombay Stock Exchange are the world’s top five largest stock exchanges (by market capitalization) in decreasing order.

Brokers, jobbers, and market-makers are the intermediaries who facilitate stock exchange trading. According to the most recent data,4 India currently has 26 stock exchanges operating, with seven at the national level and the remaining 19 at the regional level (one of them, Coimbatore Stock Exchange recently sought withdrawal of recognition, the matter is sub-judice under SEBI). The ‘national-level stock exchanges’ are described briefly below.


The National Stock Exchange of India Ltd. (NSE) was established in 1992 and went live in 1994. The exchange is sponsored by financial institutions such as IDBI, LIC, and GIC, with IDBI serving as its promoter. S&P CNX-50 (Nifty Fifty) and S&P CNX-500 are two 50-share and 500-share indexes, respectively.


Despite the fact that the Over the Counter Exchange of India Ltd (OTCEI) was established in 1989, it did not begin trading until 1992. The UTI, ICICI, and SBI Cap, among others, promoted India’s first fully computerized stock exchange to address issues like lack of transparency and settlement delays that plagued older stock exchanges. Another important goal of the exchange was to give smaller companies access to the stock market (companies with paid-up capital from Rs.30 lakh to Rs.25 crore are enlisted here). Market-makers facilitate trading on this exchange, and commissions are fixed.


The Interconnected Stock Exchange of India (ISE) was established in 1998 as a single floor for India’s 15 regional stock exchanges. This allowed the RSEs to reach a wider audience. It’s a web-based system.


In 2002, the Bombay Stock Exchange Ltd. (BSE) converted from a regional to a national stock exchange. It is India’s largest stock exchange, accounting for nearly 75% of all stocks traded in the country and ranking fifth in the world (on the basis of market capitalization).

There are at present four indices connected with the BSE:

  • Sensex: The sensitive index (or Sensex) is a 30-stock BSE index that was expanded to 50 stocks in 2000 before being reduced to its original level. The Indian stock market is represented by this index.
  • BSE-200: This is a 200-stock BSE index (including the Sensex’s 30 stocks) that also has a Dollar version, the Dollex.
  • BSE-500: The BSE created a 500-stock index in mid-1999 that included major industries and many sub-sectors of the economy, with information technology receiving a significant weighting.
  • National Index: Since Sensex only contains 30 stocks, an index of 100 stocks that are traded nationwide (Bombay, Delhi, Kolkata, etc.) was created to provide a broader/wider representation of the stock market. The National Index includes the 30 stocks that make up the Sensex.

This index is computed by the Statistics Department of the BSE hence it is called the BSE National Index (BSENI).

Indo Next

In 2005, the BSE and the FISE jointly launched a new stock exchange to promote liquidity for stocks of small businesses (SMEs) (Federation of Indian Stock Exchanges, representing 18 regional stock exchanges).

The BSE Indo Next is its official name. It was also an attempt to resurrect the RSEs, which were experiencing declining trading volumes on their floors. Because of the lack of trading on the RSEs, SME stocks have become illiquid. All of the BSE’s B1 and B2 groups will be transferred to this exchange. The RSEs will also move their listed companies to the new exchange. RSEs will now be able to connect to the BSE network via the ‘Webex’.

SME Exchanges: BSESME and Emerge

The SME exchange is a stock exchange dedicated to trading the shares of small and medium-sized businesses (SMEs) that would otherwise struggle to get listed on the major exchanges. The concept was born out of SMEs’ struggles to gain visibility or attract sufficient trading volumes when listed alongside other stocks on major exchanges.

The company’s post-issue paid-up capital must not exceed Rs.25 crores in order to be listed on the SME exchange. This means that the SME exchange is not limited to small and medium-sized businesses (defined as businesses with an investment in plant and machinery of less than Rs.10 crores under the Micro, Small, and Medium Enterprises Development Act, 2006). Currently, the minimum paid-up capital required to be listed on the main boards, such as the National Stock Exchange, is Rs.10 crore, while the BSE’s is Rs.3 crore.

As a result, companies with paid-up capital of between Rs.10 crore and Rs.25 crore can choose to migrate to the Main Board or the SME exchange. Companies listed on the SME exchange are permitted to migrate to the Main Board once they meet the Main Board’s listing requirements. If the post-issue paid-up capital is likely to exceed the Rs.25 crore limit, SMEs will be required to migrate from the SME exchange.

Trading platforms/exchanges for SMEs’ shares are known by various names around the world, including Alternate Investment Markets, Growth Enterprises Market, SME Board, and so on. AIM (Alternate Investment Market) in the United Kingdom, TSX Ventures in Canada, GEM (Growth Enterprise’s Market) in Hong Kong, MOTHERS (Market of the High-Growth and Emerging Stocks) in Japan, Catalist in Singapore, and Chinext, the most recent initiative in China, are some of the well-known markets for SMEs.

SME Exchange is still at an evolving stage

Globally, most of these SME exchanges are still at an evolving stage considering the many hurdles they face-

  • Declining prices of listed stocks and their illiquidity,
  • A gradual decline in new listings and exchange profits, among other things (for instance, AIM had three predecessors; CATALIST succeeded SESDAQ with new regulations and listing requirements).
  • The idea of a separate exchange for SMEs has become unviable in most jurisdictions, so they tend to be platforms of existing exchanges, possibly cross-subsidized by the mainboard/exchange.

Similarly, in India, after two previous attempts—OTCEI (1989) and Indonext—the market regulator, SEBI, approved the establishment of a dedicated stock exchange or trading platform for SMEs on May 18, 2010. The existing Indian stock exchanges, BSE and NSE, launched a separate trading platform for small and medium businesses on March 13, 2012. (SMEs). The BSE’s SME platform is known as BSESME, while the NSE’s is known as Emerge. 

Due to the small size of the market, many of these SME exchanges in various countries operate on a global scale, allowing both domestic and foreign companies to list. Despite the fact that their names suggest they are for SMEs, these exchanges do not meet the definition of SMEs in their respective jurisdictions. Furthermore, many of them follow a ‘Sponsor-supervised’ market model, in which sponsors or nominated advisors determine whether a listing applicant is suitable for listing or not, i.e., no quantitative entry criteria such as track record of profitability, minimum paid-up capital, net worth, etc. are specified to be listed on these exchanges.

Instead, they are intended to be ‘buyer beware’ markets for knowledgeable investors. SEBI has designed SME exchanges in a similar format, with provisions for market making’ for the securities listed on the SME exchange. In comparison to the listing requirements on the Main Board (such as the BSE and NSE in India), certain relaxations are also provided to issuers whose securities are listed on the SME exchange, as is the case globally.

  • Publication of financial results on a ‘half-yearly basis’, instead of a ‘quarterly basis’, making it available on their websites rather than publishing it.
  • Option of sending a statement containing the salient features of all the documents instead of sending a full Annual Report.
  • No continuous requirement for a minimum number of shareholders, though at the time of IPO there needs to be a minimum of 50 investors, etc.
  • The existing eligibility norms like track record on profits, net worth/net tangible assets conditions, etc., have been fully relaxed for SMEs as is the case globally.
  • However, no compromise has been made on corporate governance norms.

Common facts about the National Stock Exchanges

Prior to the establishment of national stock exchanges, India lacked a national stock exchange—better yet, there was no Indian stock market, only regional stock exchanges. Furthermore, the national stock exchanges solved some major stock market problems, and their arrival can be considered part of India’s stock market reforms. These exchanges have a lot in common:

  • all are situated in Mumbai;
  • all do screen-based trading (SBT);
  • all have their trading terminals in the major cities of the country;
  • all are web-enabled;
  • all are limited liability companies;
  • the brokers registered here have no say in either the ownership or the management of the exchanges;
  • all are counted among the best and the most technology-equipped stock exchanges in the world.
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