Derivatives markets have had a slow start in India. Though the derivative instruments are being introduced in a phased manner, investors are yet to participate in the markets aggressively. There are still some structural issues that need to be addressed to realize the full potential of derivatives markets.

The origin of the stock markets in India goes back to the 18^th century when long-term negotiable securities were first issued. However, for all practical purposes, the real beginning was in the middle of the 19^th century after the enactment of the Companies Act 1850. This introduced the feature of limited liability, and generated investor interest in corporate securities. An important early event in the development of the stock market in India was the formation of the Native Share and Stock Brokers' Association in Bombay in 1875. It is this institution that became the famous Bombay Stock Exchange in later years. In order to promote a more orderly development of the stock market, the Central Government introduced a comprehensive legislation called the Securities Contracts (Regulation) Act in 1956. According to this regulation, it became mandatory on the part of the stock exchanges to seek government recognition.

In the subsequent period stock exchanges and listed securities grew in geometric proportions. From 1975 to 1990 the aggregate market capitalization increased more than 20 times. This, in fact, is a record that has no parallels. However, introduction of electronic trading during 1994 by V-SAT terminals caused a revolution in the form of trading in the Indian markets.

Until 1994, stock markets in India had been controlled by stockbrokers whose first priority was always their own interests. Investors were always at the receiving end. Trading in the stock markets was not transparent and the broker community exploited investors to the hilt. Stock market frauds and manipulation of stock prices through ring trading and other means were regular features. All efforts by the regulating authorities to put a rein on brokers failed.

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