Indian Stock Market: Exchanges and Indexes

With its massive population and bustling economy, India is an engine of growth. On Jan. 22, 2024, its stock market capitalization surpassed Hong Kong’s for the first time. According to data compiled by Bloomberg, the value of shares listed on Indian exchanges reached $4.33 trillion, compared to $4.29 trillion for Hong Kong.

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 was established in 1875. The NSE was founded in 1992 and started trading in 1994. Both exchanges follow the same trading mechanism, trading hours, and settlement process.

As of Dec. 2023, the BSE had 5,178 listed firms, whereas the rival NSE had 2,266 as of March 31, 2023.Almost all the significant firms of India are listed on both exchanges. The BSE is the older stock market, and the NSE is the largest in volume.

Trading and Settlement

Trading on both exchanges is through an open electronic limit order book where order matching is done by the trading computer. There are no market makers, and the entire process is order-driven by investors matched with the best limit orders. Buyers and sellers remain anonymous.

An order-driven market brings more transparency by displaying all buy and sell orders in the trading system. Institutional investors can use the direct market access (DMA) option, using trading terminals provided by brokers for placing orders directly into the stock market trading system.

Equity spot markets follow a T+1 rolling settlement, with any trade on Monday getting settled by Tuesday. All trading is conducted 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. 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.

The Standard and Poor’s CNX Nifty includes 50 shares listed on the NSE. It was created in 1996 and provides time series data from July 1990 onward.

Market Regulation

The development, regulation, and supervision of India’s stock market rests with the Securities and Exchange Board of India (SEBI), 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 permitted outside investments 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.

To make portfolio investments in India, one must be a foreign institutional investor (FII) or 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. FIIs can also invest in unlisted securities outside stock exchanges, subject to the approval of the price by the Reserve Bank of India.

Restrictions and Investment Ceilings

The government of India prescribes the FDI limit, and different ceilings have been prescribed for different sectors. 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 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. Investments can 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).

Participatory notes representing underlying Indian stocks can be issued offshore by FIIs, only to regulated entities, but 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).

Retail investors can invest in ETFs and ETNs, based on Indian stocks. India-focused ETFs mostly make investments in indexes made up of Indian stocks. Most of the equities included in the index are listed on the NYSE and Nasdaq. Two ETFs based on Indian stocks include the iShares MSCI India ETF (INDA) and the Wisdom-Tree India Earnings Fund (EPI).

The Bottom Line

Most of the trading in the Indian stock market takes place in the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). As of 2024, India ranked as the fourth largest market in the world. The two dominant Indian market indexes are Sensex and Nifty.