With its massive population and bustling economy, India is an engine of growth. Although India’s stock exchanges equate to less than 3% of the total global market capitalization as of 2020 (latest information), upon closer inspection, you will find the same things you would expect from any promising market.
Here we’ll provide an overview of the Indian stock market and how interested investors can gain exposure.
KEY TAKEAWAYS
India has two primary stock markets where most of its trading takes place: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
The BSE is the older stock exchange and has more than double the firms listed than the NSE.
Trading at both exchanges takes place through an open electronic limit order book in which order matching is done by the trading computer.
Both indexes share the same trading hours, trading mechanisms, and settlement processes, and are regulated by the Securities Exchange Board of India (SEBI).
Two popular indexes based on the Indian markets are the Sensex and Nifty.
To invest in the Indian markets, one needs to be registered as a foreign institutional investor (FII).
The BSE and NSE
Most of the trading in the Indian stock market takes place on its two stock exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE has been in existence since 1875. The NSE, on the other hand, was founded in 1992 and started trading in 1994; however, both exchanges follow the same trading mechanism, trading hours, and settlement process.
As of June 2023, the BSE had 5,657 listed firms, whereas the rival NSE had 2,137 as of March 31, 2023.
Almost all the significant firms of India are listed on both exchanges. The BSE is the older stock market but the NSE is the largest stock market, in terms of volume. Both exchanges compete for the order flow that leads to reduced costs, market efficiency, and innovation. The presence of arbitrageurs keeps the prices on the two stock exchanges within a very tight range.
Trading Mechanism
Trading at both exchanges takes place through an open electronic limit order book in which order matching is done by the trading computer. There are no market makers and the entire process is order-driven, which means that market orders placed by investors are automatically matched with the best limit orders. As a result, buyers and sellers remain anonymous.
The advantage of an order-driven market is that it brings more transparency by displaying all buy and sell orders in the trading system. However, in the absence of market makers, there is no guarantee that orders will be executed.
All orders in the trading system need to be placed through brokers, many of which provide an online trading facility to retail customers. Institutional investors can also take advantage of the direct market access (DMA) option in which they use trading terminals provided by brokers for placing orders directly into the stock market trading system.
Settlement and Trading Hours
Equity spot markets follow a T+1 rolling settlement. This means that any trade taking place on Monday gets settled by Tuesday. All trading on stock exchanges takes place between 9:15 a.m. and 3:30 p.m., Indian Standard Time (+ 5.5 hours GMT), Monday through Friday. Delivery of shares must be made in dematerialized form, and each exchange has its own clearing house, which assumes all settlement risk by serving as a central counterparty.
Market Indexes
The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest market index for equities; it includes shares of 30 firms listed on the BSE. It was created in 1986 and provides time series data from April 1979, onward.
Another index is the Standard and Poor’s CNX Nifty; it includes 50 shares listed on the NSE. It was created in 1996 and provides time series data from July 1990, onward.
Market Regulation
The overall responsibility for the development, regulation, and supervision of the stock market rests with the Securities and Exchange Board of India (SEBI), which was formed in 1992 as an independent authority. Since then, SEBI has consistently tried to lay down market rules in line with the best market practices. It enjoys vast powers of imposing penalties on market participants, in case of a breach.
Investing in India’s Markets
India started permitting outside investments only in the 1990s. Foreign investments are classified into two categories: foreign direct investment (FDI) and foreign portfolio investment (FPI). All investments in which an investor takes part in the day-to-day management and operations of the company are treated as FDI, whereas investments in shares without any control over management and operations are treated as FPI.
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For making portfolio investments in India, one should be registered either as a foreign institutional investor (FII) or as one of the sub-accounts of one of the registered FIIs. Both registrations are granted by the market regulator, SEBI.
Foreign institutional investors mainly consist of mutual funds, pension funds, endowments, sovereign wealth funds, insurance companies, banks, and asset management companies. At present, India does not allow foreign individuals to invest directly in its stock market; however, high-net-worth individuals (those with a net worth of at least $50 million) can be registered as sub-accounts of an FII.
India has the fifth-largest economy in the world by GDP, with a 2022 GDP of $3.4 trillion.
Foreign institutional investors and their sub-accounts can invest directly in any of the stocks listed on any of the stock exchanges. Most portfolio investments consist of investments in securities in the primary and secondary markets, including shares, debentures, and warrants of companies listed or to be listed on a recognized stock exchange in India.
FIIs can also invest in unlisted securities outside stock exchanges, subject to the approval of the price by the Reserve Bank of India. Finally, they can invest in units of mutual funds and derivatives traded on any stock exchange
Restrictions and Investment Ceilings
The government of India prescribes the FDI limit, and different ceilings have been prescribed for different sectors. Over a period of time, the government has been progressively increasing the ceilings.
By default, the maximum limit for portfolio investment in a particular listed firm is decided by the FDI limit prescribed for the sector to which the firm belongs. However, there are two additional restrictions on portfolio investment.
According to SEBI, an FII can invest up to 10% of the equity of any one company, subject to the 24% limit on overall investments. The 24% limit may be raised to 30% for individual companies that have received shareholder approval to do so. FIIs are also allowed to invest 100% of their portfolios in debt securities.
Investments for Foreign Entities
Foreign entities and individuals can gain exposure to Indian stocks through institutional investors. Many India-focused mutual funds are becoming popular among retail investors. Investments could also be made through some of the offshore instruments, like participatory notes (PNs), depositary receipts, such as American depositary receipts (ADRs) and global depositary receipts (GDRs), exchange-traded funds (ETFs), and exchange-traded notes (ETNs).
As per Indian regulations, participatory notes representing underlying Indian stocks can be issued offshore by FIIs, only to regulated entities; however, even small investors can invest in American depositary receipts representing the underlying stocks of some of the well-known Indian firms, listed on the New York Stock Exchange and Nasdaq.
ADRs are denominated in dollars and subject to the regulations of the U.S. Securities and Exchange Commission (SEC). Likewise, global depositary receipts are listed on European stock exchanges. However, many promising Indian firms are not yet using ADRs or GDRs to access offshore investors.
Retail investors also have the option of investing in ETFs and ETNs, based on Indian stocks. India-focused ETFs mostly make investments in indexes made up of Indian stocks. Most of the stocks included in the index are the ones already listed on the NYSE and Nasdaq.
As of 2023, two of the most prominent ETFs based on Indian stocks are the iShares MSCI India ETF (INDA) and the Wisdom-Tree India Earnings Fund (EPI).
What Is the Main Stock Market in India?
The main stock market in India is the Bombay Stock Exchange (BSE) which has 5,657 listed firms.
What Is the Largest Company on the Indian Stock Market?
The largest company on the Bombay Stock Exchange (BSE) is Reliance Industries with a market cap of $211 billion as of July 23, 2023.
Can Americans Invest in the Indian Stock Market?
Yes, Americans can invest in the Indian stock market. There are a few ways of doing so, such as investing in exchange-traded funds (ETFs) or purchasing American depository receipts (ADRs) of the company you wish to invest in.
The Bottom Line
Emerging markets like India are fast becoming engines for future growth. Currently, only a very low percentage of the household savings of Indians are invested in the domestic stock market, but with gross domestic product (GDP) growing over 5% annually since 2017 (not counting the pandemic), and a stable financial market, we might see more money joining the race.
Source Link: Indian Stock Market: Exchanges and Indexes Explained