How end of American Civil War in 1860s led to formation of BSE/Dalal Street etc..

This is a fab speech by SEBI’s former chairman GN Bajpai. It is a superb short historical preview of how securities markets came up in India. A must read for all finance students and practitioners.

He divides the speech as a meal:

• Appetiser – explains how India’s securities (read equity) markets are so advanced compared to even developed world
• Side dish – history
• Main course – fast forward to 1990s
• Deserts – road ahead

Going to the side dish right away. First, how did it all start:

Though the historical records relating to securities market in India is meagre and obscure, there is evidence to indicate that the loan securities of the East Indian Company used to be traded towards close of the 18^th century. By 1830’s, the trading in shares of banks started. The trader by the name of broker emerged in 1830 when 6 persons called themselves as share brokers. This number grew gradually. Till 1850, they traded in shares of banks and securities of the East India Company in Mumbai under a sprawling Banyan Tree in front of the Town Hall, which is now in the Horniman Circle Park. It is no surprise that the majestic Phiroze Jeejeebhoy Towers is located at the Horniman Circle. In 1850, the Companies Act introducing limited liability was enacted heralding the era of modern joint stock company which propelled trading volumes.

He explains how there was a bubble in 1860s post American Civil War. Just like the many bubble manias it followed boom and bust. As brokers lost money they decided to organise themselves better and led to formation of BSE:

The American Civil War broke out in 1861 which cut off supply of cotton from the USA to Europe. This heightened the demand for cotton from India. Cotton prices increased. Exports of cotton grew, payments were received in bullion. The great and sudden spurt in wealth produced by cotton price propelled setting up companies for every conceivable purpose. Between 1863 and 1865, the new ventures raised nearly Rs.30 crore in the form of paid up capital and nearly Rs. 38 crore of the premia. Rarely was a share which did not command a premium between 1861 and 1865. The Back Bay Reclamation share with Rs.5,000 paid up was at Rs.50,000 premium, the Port Canning share with Rs. 1,000 paid up was at Rs.11,000 premium, etc. There was a share mania and every body was after a piece of paper, variously called ‘allotments’, ‘scrips’ and ‘shares’. The people woke up only when the American Civil war ended. Then all rushed to sell their securities but there were no buyers. They were left with huge mass of unsaleable paper. This occurred then. This also occurs today at regular intervals. I think, little seems to have changed since then; the bubbles and burst continue to be a perennial feature of the securities market world over.

The depression was so severe that it paved way for setting up of a formal market. The number of brokers, which had increased during the civil war to about 250, declined. During the civil war, they had become so influential and powerful that even the police had only salams for them. But after the end of the civil war, they were driven from pillar to post by the police. They moved from place to place till 1874 when they found a convenient place, which is now appropriately called Dalal Street after their name. They organized an informal association on or about 9^th July 1875 for protecting their interests. On 3^rd December 1887, they established a stock exchange called ‘Native Share and Stock Brokers’ Association’. This laid the foundation of the oldest stock exchange in India. The word ‘native’ indicated that only natives of India could be brokers of the Exchange.

This is superb stuff. Was not aware of it… He then explains how regional SEs came up:

In 1880s a number textile mills came up in Ahmedabad. This created a need for trading of shares of these mills. In 1894, the brokers of Ahmedabad formed “The Ahmedabad Share and Stock Brokers’ Association”. The 1870s saw a boom in jute prices, 1880s and 1890s saw boom in tea prices, then followed coal boom. When the booms ended, there were endless differences and disputes among brokers in eastern India which was home to production of jute, tea and coal. This provoked the establishment of “The Calcutta Stock Exchange Association” on June 15, 1908. Then followed the proliferation of exchanges, many of them even do not exist today. The rest is history.

I am leaving rest of the meal to the reader…