Author: Santosh Nair
Publisher: Pan Macmillan
Share trading in India may have been formally recognized in 1875 with the formation of the Native Share and Stock Brokers’ Association of Bombay (now the Bombay Stock Exchange). But dealing in shares was prevalent as early as 1840, though there were only about half a dozen people who professed to be share brokers.
This handful of brokers more than sufficed for the limited volume of share-trading business at that time, mostly in banks, textile mills and cotton presses. Cotton trading was a bigger business in Bombay in those days, since India was among the top cotton producing nations. More than half of the cotton produced in the country was marketed through Bombay.
Between 1840 and 1855, the brokers would meet for business in an open place somewhere at Cotton Green, which was also the venue for the cotton trading market. From 1855, the brokers conducted their transactions under the shade of some sprawling trees. There were no trading hours, and when the fever of speculation gripped the public, deals would be struck past sunset well until dinner time.
One of the important building blocks for stock trading in India was the formation of the Companies Act in 1850, which was largely based on the British Companies Act of 1844. This helped promote the concept of joint stock companies in the country. The Act was overhauled in 1857 to include the principle of limited liability.
By 1860, the number of share brokers had risen to 60, and they were led by Seth Premchand Roychand, who had earned sobriquets like the ‘Uncrowned King of Finance’ and the ‘Napoleon of Finance’. Premchand was said to be the first share broker who could read and write English.
Born in 1831, in a family of modest means, Premchand left his native town of Surat for Bombay in search of a livelihood, at the age of twenty-one. He found work with a successful broker and, within a few years, became one himself, transacting in cotton.
Premchand’s prowess and fame continued to rise and it was in 1862 that he took on the role of an operator in stocks, convinced of his ability to influence prices single-handedly. He was known to be a bull in many of the banking stocks of that time, notably The Commercial, The Mercantile, and the Asiatic Banking Corporation, which was set up in 1863. The shares of ABC were rigged up to a premium of 65 per cent, and the success spawned 94 other financial corporations, many of which did not last long after the market crash two years later. He is said to have been blessed with an elephantine memory and never jotted down his daily transactions with fellow brokers. In the evening, he would dictate them to his trusted clerk to be entered in the books.
The rally in shares between 1861 and 1865 was fuelled by profits coming in from the cotton boom, which coincided with the American Civil War. Because of the Civil war, the supply of cotton to Europe from America had stopped completely. As a result, the Lancashire cotton industry in England was starved of raw staples and its dependence on imports from India increased.
The volume of cotton bales exported from India to Lancashire almost trebled and the jump in terms of value was nearly six-fold. With a big chunk of that cotton finding its way to England through Bombay, huge capital flowed into the city. There being few attractive avenues for investing those profits, the money poured into the share market, which consisted mainly of banks, financial corporations, trading companies and land reclamation companies, setting off a speculative frenzy. It was something on the lines of the South Sea Bubble and the tulip mania of the eighteenth century.
The land reclamation paid a sum to the government, in return for which they got the right to reclaim land from the sea and develop it.
The Backbay Reclamation Company was set with the purpose of reclaiming land from the tip of Malabar Hill to the end of Colaba. Its Rs 5000 paid-up shares were soon quoting at a premium of Rs 55,000. The Rs 1000 paid-up Port Canning shares were trading at a premium of Rs 11,000, Mazgaon Land Reclamation was trading at a premium of Rs 9000 and Elphinstone Land was trading at six times its paid-up value. The prices were ridiculous by any standards, considering that the companies would take at least ten years to start delivering returns.
The ‘Share Mania’, as the first recorded boom in the Indian stock market came to be known, ended in grief and ruin for many, as is usually the case with any speculative orgy.
It also knocked Premchand Roychand from his lofty pedestal of Napoleon of Finance. At 34, Premchand’s brilliant career as a broker and financier ended in spectacular failure. The details of the financial losses he suffered are not known, but overnight, the ‘Uncrowned King’ became an object of revulsion and ridicule.
He would live on for another forty-two years, but never regained his pre-eminence in the stock market.
The trigger for the bursting of the bubble was the unexpected end to the American Civil War. Cotton supplies to Lancashire resumed, sending cotton prices in India crashing. This choked the stream of profits of that was flowing into the stock market, resulting in panic selling as it became evident that the shares would no longer be able to sustain their inflated prices.
July 1, 1865 was the day of reckoning for stock market investors and brokers as many deals were dishonoured, with the only beneficiaries of this great calamity being lawyers.
Reclamation companies like the Backbay Reclamation, Elphinstone Land and Bunder, and Mazgaon Land were bought back by the government at throwaway prices, and the shareholders suffered a huge loss of capital.
Three years after the great crash, the brokers formed an informal association, and continued in this manner till 1873.
All this while, the brokers used to ply their trades on the streets in and around their meeting ground on Esplanade Road, much to the annoyance of the general public, shops and banks, which had to put up with the noise and obstruction. When the market was booming, brokers were treated as a privileged class, and were indulged even by the police, despite complaints about the nuisance they were creating.
But after the market collapse, the public was no longer as tolerant about the brokers’ unruly ways and cops would be called in to clear out the brokers whenever they crowded the streets.
This is attributed as one of the reasons for the brokers getting together to form a formal association and find a place from which they could carry out business in a more orderly fashion.
In 1874, the association hired a trading hall in Dalal Street, in a building then known as Advocate of India building, at a rent of Rs 100 per month.
Finally, realizing that coming together as a formal association was in their interests, the Native Share & Stock Broker’s Association was formed on July 9, 1875. There was an admission fee, which was the price of the card for right of membership. This was Rs 15 to begin with, then was increased to Rs 20 in 1877 and to Rs 51 in 1886. The members had to pay an annual subscription fee of Re 1 for the first year, Rs 3 the following year and Rs 5 thereafter.
A decade before that, as Share Mania was nearing its peak, there were 200-250 stock brokers. Many were ruined in the subsequent crash and, as a fallout, the stock trading profession lost its charm. This led to a decline in the number of brokers in the following years.
But as things started looking up, as they do after any bust, however severe, stock broking regained its allure. By 1877, the Native Stock Brokers Association was able to boast of a membership strength of close to 300, most of them Gujarati Hindus and Parsees.
Among the actively traded shares in the early days of the stock market were those of textile mills like Oriental Mills, Maneckji Petit Mills, Lakhmidas Khimji Mills, Queen Mills, China Mills, Mazgaon Mills, Presidency Mills, Sun Mills, Lord Reay Mills, and cotton-pressing companies like Colaba Press, Indian Press, Akbar Press and Fort Press.
Unlike in the past, there were fixed hours for trading; it would commence at 1 pm and last a couple of hours.
Till 1900, there were no contracts notes issued between brokers for buying and selling. Such was the trust between the association members that business worth lakhs of rupees was conduct on a verbal agreement. A few trades would end in dispute, and some were dishonoured, but on the whole, the system worked well.
The problem often arose in the area of forward dealings, with the absence of any clear rules leading to price manipulation, sometimes by the bull cartel and at other times by the bear cartel.
It was possible for two or more brokers to form a syndicate, pool their resources and, through sheer money power, ramp up the price or beat it down.
To curb such practices, the Managing Committee of the Association passed a resolution giving itself the discretionary powers to set prices whenever manipulation was suspected.
When the First World War broke out in 1914, there was panic in the Indian market as well. The Association’s President, Shapurji Broacha, after consulting with banks which had loaned money against shares, convinced the Managing Committee that it was in everybody’s interests for the market to be kept closed indefinitely till there was clarity on how the war was shaping up.
Trading resumed six months later, in 1915, as raw material prices shot up. Imports of manufactured articles from England become difficult, and to take advantage of this situation, many companies went public by raising capital from the market.
The next five years were a period of boom in the stock market, thanks mainly to war profits.
This led to the creation of a rival stock exchange in Bombay in 1917, and another in Ahmedabad in 1920, called Gujarat Share and Stock Brokers. In Madras, a stock exchange came into being into being in 1920, with 100 members on its rolls.
Even as the market was booming, the Native Stock Brokers’ Association undertook some important systemic reforms, which would help boost its standing as well as reduce risks involved in doing business. In November 1915, a resolution was passed that dealings in any new share would require the prior permission of the Board of Directors. Also, restrictions were put on the number of stocks in which forward dealings would be allowed. Also, the rates of transaction in a single stock would vary during the course of a month. It was a tedious and complex process to go through every transaction before arriving at a settlement price for carrying forward the trade. To resolve this, a uniform rate—known as the havala rate—was fixed, which would then form the base price on which the carry forward rates would be decided.
Till 1916, all payments towards purchase of shares were made in cash despite the risks involved in the transporting of money. Hardly any brokers had bank accounts and that partly may have to do there being no pure Indian banks catering to the locals. It was quite common for brokers to bring lakhs of rupees in currency notes on the day of payment. But this represented a problem for the stock exchange as well.
On some days, the turnover would exceed a crore of rupees and the pay-in of funds would go on till past midnight, inconveniencing both the clerks of the Association as well as brokers, who resided in the suburbs.
The then Honorary Secretary and Treasurer, Jamnadas Morarjee, proposed that all payments to the stock exchange be made through cheques. There was some opposition to this proposal, but eventually the cheque system came into force from September 1916.
Morarjee was also instrumental in pushing through the system of a Clearing House for the stock exchange, to avoid frauds as well facilitate payments and deliveries.
Initially, there was opposition to this proposal as well, as it was thought to be impractical. But a fraud by one of the stock-exchange members drove home the necessity of a clearing-house arrangement. One Ibrahim Fazul purchased shares worth Rs 8 lakh in a single settlement and handed over cheques for that amount. But the account on which the cheques were drawn did not have even Rs 50. By the time this was discovered, however, Fazul had managed to sell the shares at market rates, collect the money and disappear for good.
After this incident, the proposal for a clearing house became more acceptable and, in February 1921, became operational.
With its membership base continuing to expand and the volume of business increasing, the Association purchased an adjoining plot for Rs 10.3 lakh in April, 1920. Interestingly, this same property been sold in 1913 for Rs 73,000. The War triggered a boom across asset classes, and the spectacular rise in property prices should give an idea about the kind of impact it had.
By then, the value of a membership card on the BSE had risen to over Rs 40,000.
For a while, between 1913 and 1918, there were no major attempts at manipulating shares on the stock exchange. But as the market boomed, bull and bear cartels began having a go at each other, by tampering with the prices.
Inevitably, the stock market cycle repeated itself and after the boom came the bust in 1921. Prices of cloth fell sharply, eroding the profits of textiles mills, which were in great demand in the stock market.
The Association had to temporarily postpone construction of its new building on the plot which it had purchased in 1920. The new building came up in 1924.
(Excerpted with permission from Pan Macmillan India)