History and Evolution of the Financial Market

The story of the financial market is probably as old as the story of mankind.

A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials, and precious metals, which are known in the financial markets as commodities. In Ancient Mesopotamia (the region is now home to modern-day Iraq, Kuwait, Turkey, and Syria) around 3400–3000 BC encouraging trade and securing the supply of commodities, both in time and geographical distance, the rulers’ codes required that purchases, sales and other commercial agreements be in written form to provide buyers and sellers with the greatest possible legal certainty to engage in trade. The purpose was to minimise the “your word against mine” maxim in case of disputes. Records of contracts have been found in cuneiform script on clay tablets.  Some types of contracts were arrangements on the future delivery of grain that stipulated for instance before planting that a seller would deliver a certain quantity of grain for a price paid at the time of contracting. Such types of contracts not only dealt with grain but also with all sorts of commodities.

The first modern stock trading market was created in Amsterdam when the Dutch East India Company was the first publicly traded company. To raise capital, the company decided to sell stock and pay dividends of the shares to investors. Then in 1611, the Amsterdam Stock Exchange was created. The history of the share market of India dates back to 1875.  The name of the first share trading association in India was “Native Share and Stock Broker’s Association” which later came to be known as the Bombay Stock Exchange (BSE).

The financial markets have developed appreciably over the years. The evolution of the present-day financial market can be divided into three broad phases viz. Traditional phase, Transitional phase, and Modern phase.

Traditional Phase:

The period between 1920 and 1940 is considered a traditional phase of the financial market. During this period phase, was primarily on earning more funds to grow the business. Companies focus on arranging funds, accounting between investors and the firm, instruments of financing and procedures used in capital markets, and the legal aspects of financial events, business expansion, merger, reorganization, and liquidation during the life cycle of the firm.

Transitional Phase:

The period between 1940 and 1950 is the transitional phase. The main focus of this phase was mainly on working capital management. However, the nature of financial management during the traditional phase and transitional phase remains the same.

Modern phase:

The modern phase commences from 1950. Financial market management witnessed an accelerated pace of development, integrated financial systems, and controls which can enable an organization to monitor as well as regulate the way funds are consumed in their business with well-managed finance departments. The financial manager’s role is to track current cash flow, estimate future cash needs, and be prepared to free up working capital as needed. Arranging funds for the business at reduced cost, ensuring an investment of funds to earn maximum profit, distribution of profits, retention of profits, and dividends distributions are becoming the responsibility of the financial managers.

Indian Financial Market:

The Indian financial markets have developed appreciably over the years.  Three decades from independence till the year 1980, the Indian economy is characterized by an administered interest rate regime, fixed foreign exchange rate, captive Government securities market, and current account and capital account transactions.

Land Mark changes in the Financial System during the above period;

• The Reserve Bank of India was nationalized with effect from 1st January 1949 based on the Reserve Bank of India (Transfer to Public Ownership) Act, 1948. All shares in the capital of the Bank were deemed transferred to the Central Government on payment of a suitable compensation.
• The State Bank of India was incorporated on 01 July 1955. The Imperial Bank of India (IBI) was one of the oldest and largest commercial banks in India, as per its royal charter, acted as the central bank for India before the formation of the Reserve Bank of India (RBI) in 1935. The Government of India nationalized the Imperial Bank of India in the year 1955 with the Reserve Bank of India taking a 60% stake and the name was changed to State Bank of India.
• Nationalization of LIC and GIC in 1956 to spread life and general insurance much more widely and in particular to the rural areas to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost.
• NBFCs started humbly in India in the 1960s as an alternative for savers and investors whose financial needs were not sufficiently met by the existing banking system. The NBFCs initially operated on a limited scale without making much impact on the financial industry. NBFC is largely in the field of leasing, hire-purchase, and bill discounting facilities. They also engage in the business of loans and advances, acquisition of shares, bonds, debentures, securities issued by the Government or local authority, or other marketable securities such as insurance business, chit business, etc.
• Cooperative Movement: Cooperatives developed very rapidly after Indian independence and today Cooperative Movement in India is the largest in the world. The cooperative movement in India plays a crucial role in the agricultural sector, banking, and housing. The National Co-operative Development Corporation (NCDC) was set up in 1963 to promote the co-operative movement in India. Cooperatives developed very rapidly after Indian independence.

•  14 major commercial banks were nationalized in 1969 and 6 more banks in 1980 to control private monopolies, Reduce regional imbalance, consolidate the economy, deposit mobilization, develop banking habits, flow funds to agriculture, and small and village industries for their expansion and further economic development and social welfare, for expansion of banking in unbanked rural areas.
• Microfinance institutions: In India, the concept of microfinance first came into existence in 1974. The credit goes to the Self-Employed Women’s Association (SEWA) established in Gujarat for bringing microfinance into popularity. Microfinance, involving the extension of small loans and other financial services to low-income groups, is a very important economic conduit designed to facilitate financial inclusion and assist the poor in working their way out of poverty.
• The National Bank of Agriculture and Rural Development (NABARD) was initially promoted by the Reserve Bank of India in 1982 under the National Bank of Agriculture and Rural Development Act 1981. NABARD serves as an apex financing agency for the institutions providing investment and production credit for promoting various developmental activities including the development of the cottage industries, handloom industries, MSMEs, and other rural industries in rural areas. While the production credit is generally given to individuals, NABARD encourages commercial banks to lend to self-help groups (SHGs) under the ‘SHG Bank Linkage Program’. NABARD offers to refinance to state co-operative agriculture and rural development banks (SCARDBs), State co-operative banks (SCBs), Regional Rural Banks (RRBs), Land Development Banks, Commercial Banks, and other financial institutions approved by RBI for their lending to the farm sector and non-farm sector in rural areas.
• Small Finance Bank and Payment Banks are the type of niche bank created by the Reserve Bank of India (RBI) in the country, in 2014. The first payment bank in India, Airtel Payments Bank, was set up in January 2017. Capital Small Finance Bank (erstwhile Capital Local Area Bank) is India’s first small finance bank founded in April 2016 as a microfinance lender, with its headquarters in Jalandhar, India.
• The Government has also created a wide range of institutions like SIDBI, IFCI, IDBI, UTI, etc. in the public sector to cater to the financial needs of industries and between them cover the whole range of Industries.

Legislation for Investors protection:

• The Companies Act, of 1956
• The Capital Issues Act, 1947
• Securities Contracts Act, 1956
• Monopolies & Restrictive Trade Practices Act, 1970
• Foreign Exchange Regulation Act, 1973

The post-independence India has had to deal with several obstacles, such as massive poverty, high illiteracy and unemployment levels, a low GDP, and disease.  As a necessity, the Government of India established State Owned Enterprises (SOEs) in independent India. The challenges including economic, social, developmental, and industrial problems caused India’s government to adopt appropriate industrial policies and launch SOEs, which was a major step toward becoming a developed country.

Privatization:

Privatization means the transfer of ownership, management, and control of the public sector enterprises to the private sector. Over the period the conservative philosophy of the development process in India shifted to free market economies. The institutional structure has become more capital market-oriented. This is reflected in the changes in roles, organizational policies, term lending, commercial banks, mutual funds, and so on.

The notable developments in the Indian Financial System during this phase are

• The setting up of private mutual funds and banks under the guidelines of RBI came into existence.
• Privatizing important financial institutions like the conversion of the IFCI into a public limited company,
•  IDBI offered equities to private investors as a part of privatization.
• Bharat Aluminium Company (BALCO), Hindustan Zinc (both to Sterlite Industries), Indian Petrochemicals Corporation Limited (to Reliance Industries), and VSNL  and  Air India (to the Tata group).

The Indian economy was liberalized in the year 1991 with several objectives – industrialization, expansion in the role of private and foreign investment, and introducing a free market system. Policy measures during the decade of the 1990s set the stage for a transition to market-determined interest and exchange rates, a shift to a multiple indicator approach, and eventually to flexible inflation targeting in the conduct of monetary policy, convertibility in the current account, and gradual liberalization of the capital account.

The following are the key legislative changes during this period;

•  Foreign Exchange Management Act (FEMA), 1999;
• Government Securities Act, 2006;
•  Amendments to the RBI Act in 2006 to give explicit regulatory powers to the Reserve Bank
• over government securities, derivatives, and money market instruments;
•  Payment and Settlement Systems Act, 2007.
• Clearing Corporation of India Ltd. was set up in 2001 to provide clearing and guaranteed settlement for money, government securities, forex and derivative markets.
• A Real Time Gross Settlement System (RTGS)and National Electronic Fund Transfer (NEFT) system managed by RBI
•  The NDS-OM platform was operationalized. (NDS-OM is a screen-based electronic anonymous order matching system for secondary market trading in Government securities owned by RBI. Presently the membership of the system is open to entities like Banks, Primary Dealers, Insurance Companies, Mutual Funds, etc. i.e. entities who maintain SGL accounts with RBI.)
• CCIL Trade Repository (TR) Services in 2007 (CCIL hosts Trade Repository Services for OTC Rate, Credit and Forex Derivatives. Rate Derivatives: Under RBI’s guidance, CCIL started its Trade Repository services with the capture of data on Rupee denominated Interest rate Swaps )

India recently crossed the UK to become the 5th largest economy in the world with a per capita income of $2000. The IMF expects the per-capita income to grow at 6% till March 2025 (FY25). At $2,000 levels, income crosses the minimum expenditure level & incremental income is used for spending & investments.