History of Derivatives Market in India

Interestingly, derivatives have been existed in India since long time in one form or the other. But, they were not liberalised nor efforts were put to enlighten the public. The area of existence of derivatives was in commodities, it was association by traders in Bombay which was named as Bombay Cotton Trade Association (BCTA) in 1875 and started dealing with the futures contracts. By the starting of 19th century derivatives in India crawled to top making India one of the worlds largest in futures industry. But, in the early 1952 Government banned trade in cash-settlements and option contracts. As a result derivatives’ trading was shifted to informal forward contracts which were a normal practice. Trading at that time was restricted to only few brokers, and their trading practice was typical located under the banyan tree in front of the town hall in Bombay. This practise was followed for long time unofficially and finally The Bombay Stock Exchange (BSE) was formed in May 1927 under the supervision of Bombay Securities Control Act (BSCA, 1925).

Indian markets took so long to get accustomed with the financial instruments innovations, it was due to the financial markets were not organised well as it was under the British rule where they showed no interest in the growth of the Indian Economy. After the Independence, government took initiatives and started liberating people about the stock market and always kept a close eye on the market making several changes when necessary, like banned the trading of forward contracts called “Badla” in 1993. Later on, after much of lobbying in the government Badla was opened to markets again. Badla was similar to forward contracts it was invented by the BSE to overcome the liquidity problems in the secondary market. But unfortunately, this indigenous instrument could not last long as it was led with no. of undesirable practices and was put to an end by SEBI in 2001 for good in all the 23 exchanges.

SEBI was established on April 12th 1992, with the motive “…..to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”. Thus, SEBI started reforming the Indian market after its very constitution and led to the development of exchange traded derivatives market in India. As derivative market was lacking of the proper regulatory framework, SEBI formed a 24 member committee under the Chairmanship of L.C.Gupta on Nov 18th 1996, to form the regulatory framework on derivatives market in India. The committee then came up with the report on March 17th, 1998 with the idea of derivatives to be treated as securities, so that it need not form a new board and access it under the securities board and the same regulatory frameworks applies to derivatives. And a second board was setup in June 1998 under the leadership of Prof.J.R.Varma to discover the length and breadth of risk content in the Indian derivative market, soon the committee was back by Oct 1998 with the critical issues solutions like margining system, methodology for charging initial margins, broker net worth, deposit requirement and real time monitoring requirements. Thus, Securities Contract Act treated derivatives as legal since 1999 as long as they are traded in the exchanges. Finally, 30 year ban was lifted on the forward contracts. After the smooth and acceptable results of derivatives Badla was banned forever in 2001.

In June 2001 trading commenced in the BSE Sensex options, trading of options in individual securities started in July 2001 and futures contracts on individual stocks was commenced in the same year November.NSE was a head compared to BSE as its derivative trading opened up with S&P CNX Nifty Futures Index in June 2000, the trading in Index Futures and Options contracts on NSE are based on S&P CNX. Trading in index options was started in June 2001 and trading on individual securities commenced in July 2001. While, single stock futures were started in Nov 2001.

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