BSE@150: India’s economic heritage

By Amol Agrawal

Few symbols are markers of a country’s economic development. The iconic tall building of the Bombay Stock Exchange (BSE) is one such symbol associated with India’s development. After all, there are few economic institutions that have witnessed the unfolding of Indian history over 150 years.

The BSE, established in July 1875, turns 150 this year. To mark the 150 years of stock markets, the Securities Exchange and Board of India (SEBI) has recently launched a wonderful digital archive named “Dharohar: Milestones in the Indian Securities Market”. Dharohar, translated as heritage in English, is a treasure trove of Indian securities markets through articles, interviews, videos, etc. The archive helps trace the fascinating early history of Indian stock markets and the BSE.

The history of Indian stock markets goes back to 1860s. In 1861, the American Civil War disrupted supply of cotton from America to the Lancashire mills. The British zeroed in on India’s Deccan region as an alternative source of supply. The cotton was transported from the Deccan fields to Bombay via railways (started in 1953) and shipped to England via the Suez Canal (opened in 1859).

The Bombay region, which boasted enterprising Gujaratis and Parsis, saw a huge opportunity in cotton. Instead of forming the cotton business as self-owned or partnership, they set up joint-stock companies (JSCs) and banks. JSCs could now be formed as the Companies Act was enacted in 1857. To enable their formation, there was a need for stock brokers. There was already a broking community in commodities and with the cotton boom, the stockbrokers rose to prominence with Premchand Roychand at the helm. The new technologies and innovations (railways, telegraph, Companies Act, and Suez Canal) enabled the creation of the share market.

Charles Kindleberger, in his classic book Manias, Panics and Crashes, wrote how the initial hype of a commodity’s fortune becomes a mania leading to eventual panic and crash. The Bombay cotton mania also met the same fate. DE Wacha wrote A Financial Chapter in The History of Bombay City detailing the crisis. The Civil War ended and supply of cotton resumed from the Americas. Several cotton companies and banks, including the esteemed Presidency Bank of Bombay, failed.

The banks blamed the crisis on stockbrokers. The stockbrokers responded by organising themselves and forming the Native Share and Stock Brokers’ Association in 1875. The association was formalised in 1887, and its name was changed to the Bombay Stock Exchange in 1899. The BSE was the first stock exchange in Asia. Europe had already seen stock exchanges with Amsterdam in 1601 and London in 1801.

With the establishment of the first stock exchange, Bombay took the lead over Calcutta in terms of the development of capital markets. The Calcutta Stock Exchange was established 33 years later in 1908. The stock exchange in Ahmedabad was established before Calcutta in 1894. In banking, Calcutta had led with the East India Company establishing the first Presidency Bank in the city in 1806, followed by one in Bombay in 1840.

The BSE’s early history is riddled with crisis and committees. During World War I, share prices (epecially of cotton and cement) rose wildly leading to high speculation. The value of BSE membership increased from Rs 2,000 in 1914 to Rs 48,000 in 1921. The period also saw the emergence of new exchanges in Bombay and Ahmedabad. There were complaints about the BSE’s conduct leading the government to establish a committee under the chair Sir Wilfrid Atlay in 1923. It made various recommendations including a uniform common code of contract, extension of trading hours, less holidays, disciplinary rules, governance of board, etc. The report also presented the first index of securities. The markets faced another crash in 1925, leading to the enactment of the Bombay Securities Contracts Control Act, 1925, (2025 marks 100 years of the first legislation on securities markets). The Act made all the contracts void, unless approved by the government.

The Great Depression followed, leading to another BSE crash and suspension of trading for seven weeks in 1933. Post-Depression, activity resumed and speculation returned leading to crises in 1935 and 1936. Another committee was established in 1937 under WB Morrison that recommended introducing a margin system, and government powers to impose rules on the exchange and supersede the BSE board.

World War II led to volatility in the securities markets, resulting in the suspension of forward trading in 1942. The government also imposed minimum prices on its own securities. The period saw the emergence of stock exchanges in other centres such as Lahore, Nagpur, and Cawnpore (Kanpur), raising their overall number to 21. It also saw the rise of trading outside stock exchanges in unorganised markets that remained a big  concern.

After India’s independence, a committee was constituted under PJ Thomas, who was also the first economic adviser to the government. The committee recommended establishing a securities market regulator, uniform regulations for stock markets across the country, and serious tackling of malpractices. The post-Independence history of Indian stock markets needs more reflection. One hopes that with the milestone of 150 years of the BSE and the launch of SEBI’s Dharohar, there is more research on the fascinating history of India’s securities markets.

The author teaches at Ahmedabad University.

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