The Report on the Regulation of the Stock Market in India (1948) was commissioned by the Ministry of Finance in response to the chaotic state of the Indian stock market during and after World War II. It was chaired by P. J. Thomas, Economic Adviser, Ministry of Finance. The war saw a surge in stock market activity, with the number of stock exchanges increasing from 7 to 21 and speculative money shifting from commodities to stocks after the Defence of India Rules were implemented. Defence Rule 94C, introduced in 1943 to curb speculation, proved ineffective. After the war, the need for peacetime regulation became evident. The role of the Capital Issues Committee, formed during the war to control inflation and direct capital toward essential industries, was reconsidered to include regulation of the stock market and protection of investor interests.
The report revealed severe disorganization and detrimental practices within the stock market, characterized by violent price fluctuations and significant investor losses. Multiple rival stock exchanges, street markets, and independent firms competed within the same cities, undermining regulatory efforts. Between March 1946 and May 1947, the market experienced both booms and crashes, causing vast losses to the investing public. Reckless speculation by bull operators caused market booms, while bear syndicates exploited crashes to force panicky selling and profit at investors’ expense. Comparative analysis showed that Western countries had tight control over stock exchanges to prevent such manipulations, unlike India. The fluctuations in security prices had significant repercussions on the national economy, affecting the money market and the credit system.
The report recommended establishing a central authority to regulate the stock market, with legislation to prevent manipulative practices and protect investors. Specific provisions included limiting speculative activities, allowing only well-regulated stock exchanges to operate, enforcing strict rules against market manipulation by powerful operators, and ensuring fair practices and safety for all market participants. A competent public authority was suggested to administer and enforce the new regulations, coordinating the activities of different stock exchanges to ensure compliance with the law. Additionally, the report recommended regulating forward trading, standardizing listing regulations, and introducing compulsory margins to prevent excessive speculation and protect investors. These recommendations aimed to provide a stable and fair stock market, crucial for the country’s economic development and investor protection.
Control of capital issues had been introduced in 1943 through the Defence of India Rules, enacted under the Defence of India Act of 1939, to direct resources to the war effort. This control was maintained after the war, with modifications, to regulate the raising of capital by companies and to ensure national resources were aligned with governmental priorities while protecting investor interests. The relevant provisions in the Defence of India Rules were replaced by the Capital Issues (Continuance of Control) Act in April 1947. Under the Constitution, which came into force on January 26, 1950, stock exchanges and forward markets fell under the exclusive authority of the central government.
The report addressed the disorganization and manipulative practices in India’s post-war stock market, recommending the establishment of a central regulatory authority to oversee stock exchanges, curb speculative activities, and protect investors. It emphasized measures such as regulating forward trading, standardizing listing requirements, and enforcing margins to ensure market stability and align the stock market with national economic priorities.
