In this article we will discuss about:- 1. Introduction to OTCEI 2. OTCEI – The Concept 3. Features of OTCEI 4. Advantages of OTCEI 5. The Mechanism of Trade – OTCEI 6. Participants of OTCEI.
Contents:
- Introduction to OTCEI
- OTCEI – The Concept
- Features of OTCEI
- Advantages of OTCEI
- The Mechanism of Trade – OTCEI
- Participants of OTCEI
1. Introduction to OTCEI:
The Indian capital market has witnessed sweeping changes over the last few years. There were new instruments and new institutions. The existing stock exchanges were insufficient in infrastructure facilities to cope up with the new situation. In order to overcome the pitfalls and loop-holes of the existing system, a new institution called OTCEI came into existence in 1990 and started functioning in 1992.
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The Pherwani Committee has identified the shortcomings of the existing stock exchange system as follows and recommended establishment of OTCEI which has tried to address the following issues:
1. Poor liquidity of Scrips on the Indian Bousers:
There are about 1000 odd companies listed on the Indian stock exchanges. But day to day transactions are carried out in only 250 of them and the remaining companies have no liquidity at all. Brokers and dealers usually have a tendency to pursue a handful of blue chip securities which are most profitable. Consequently, the investors who need cash desperately for domestic or other purposes have to plead before brokers and dealers to sell off their holdings. In many number of occasions they just cannot get their shares en-cashed.
2. Delay in Settlement:
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Small and marginal investors have been suffering from delays in settlements and transfers. They are kept blind to the actual price at which their transactions took place on their behalf. When the investors buy stock they-get it at the highest price of the day and when they sell the scrips, they get lowest price of the day. This amounted to loss of interest in the scrips.
3. Lack of Transparency:
The investors could not understand at what prices their shares are sold or bought since there is no clear-cut display of the quotations. Unscrupulous brokers often exploit investors out of their ignorance. Moreover, small and newly incorporated companies had the problem of raising capital through a public issue at exorbitant costs and delays involved in realization of proceeds.
2. OTCEI – The Concept
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OTCEI concept is a great innovation in the Indian Stock market. It is a recognized stock exchange under the Securities Contract (Regulations) Act, 1965 as well as the Indian Companies Act. OTCEI is a computer based screen system exhibiting the quotations of the scrips of the companies of different industries of the nation. It has a national network and there is no geographical barrier for listing. Dealers and Investors can take decisions on the spot more quickly than on the regular stock exchanges. It is a great boom to the small and marginal investors who are greatly neglected till today.
OTCEI was incorporated in October 1990. This company was promoted by a consortium of premier financial institutions, namely, UTI, ICICI, IDBI, SBI Capital Markets Ltd., IFCI, QIC and its subsidiaries and Canbank Financial Services Ltd. OTC Exchange is recognized by the Government of India as a “recognized stock exchange” under section 4 of the Securities Contract Regulations Act, 1965.
Companies listed on the OTCEI will enjoy the same listing status as available to other companies listed on any other stock exchange in the country except that a company listed on OTCEI cannot be listed /traded on any other stock exchange in India. The corporate office is situated in Bombay. It started functioning in 1992.
OTCEI has been linked to 42 centers all over India through computers. OTCEI operates with the use of INET the country’s first public switched data network and Telex – the first nationwide information dissemination network and RABMN – Remote Area Business Message Network.
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Any counter in any of the four hundred cities in India can receive the scrip prices, which are generated by OTCEI’s central computer in Bombay. Any person or Indian citizen can apply for dealership or membership of the OTC provided he adheres to the prescribed conditions.
The aspirants would also have to pass a computer -based written test. Preference would be given to professionals and people having experience in the field with sound network. Those having proper infrastructural facilities like telephone, computers, telex, fax, office space and other networks would also be given due weightage and preference.
3. Features of OTCEI
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Following are the features of OTCEI:
1. Ringless Trading:
For greater accessibility to the investor, the OTC Exchange has eliminated the trading ring. Trading will take place through a network of computers of OTC dealers located at several places within the same city and even across cities. The exchange allows dealers to quote, query and transact through a central OTC computer using telecommunication links.
2. National Reach:
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Unlike other stock exchanges, the OTC Exchange has a nationwide reach. This enables widely dispersed trading across cities, resulting in greater liquidity. Companies thus, have the unique benefit of nationwide listing and trading of their scrips by listing at just one exchange, the OTC exchange.
3. Computerized:
All the activities of the OTC trading process are computerized. This facilitates a more transparent, quick and disciplined market. The trading mechanism brings out these features of the system.
4. Exclusive List of Companies:
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The OTC Exchange will not list and trade in companies listed on any other exchange. It will list an entirely new set of companies, sponsored by members of the OTC Exchange.
5. Closeness:
Initially counters were opened at Bombay and were followed by counters at other centers. OTCEI will give public notice as to the availability of counters where trading take place. Facility for trading will be available after the offer at the counters of the sponsor and the additional Market Maker addresses will be given in the new issue application attached to offer for sale document (OSD) and with all the dealers of OTCEI.
6. Authorized Dealers:
All members and dealers are authorized and approved by the OTCEI
7. Liquidity through Market Making:
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The sponsor-member requires day quotes (buy and sell) for the 12 months from the date of commencement of trading. Besides compulsory market maker, there are additional market maker and voluntary market maker who give two way quotes for the scrip.
8. Efficient Market Pricing:
Competition among market makers produces efficient pricing. This reduces spreads between buy and sell quotations. It also increases the capacity to absorb larger volumes, to the benefit of investors’ .The market makers continually analyze companies and provide information about them to their investors, thus helping investors to make an informed investment decision.
9. Transfer of Securities:
Investors will be required to submit transfer deeds to any of the OTCEI counters for transferring the shares in their names. Shares will be automatically transferred in the name of the investors, if the consolidated holding of the shares does not exceed 0.5% of the issued capital of the company.
10. Investor Registration:
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For buying and selling shares on the OTCEI and investor needs “INVESTOTC Card”. Application for “INVESTOTC Card” can be made at any of the counters of OTCEI and also at the time of applying for new issues on the OTCEI. The share application form includes the necessary details to be filled in for obtaining INVESTOTC Card.
11. Transparency of Transactions:
At the OTC Exchange, the investor can see the available quotations on the computer screen at the dealer’s office before placing the order. The confirmation slip/trading document generated through the computer gives the exact price of the transaction and the brokerage charge. So the investor’s interest is totally safeguarded. This system also ensures that transactions are done at the best prevailing quotation in the market.
12. Faster Delivery and Payment:
On the OTC Exchange, the transaction is settled within a period of 7 days. Further, the investor actually gets the delivery of the scrip or the payment for the scrip sold within 7 days.
13. Sponsorship:
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The companies that seek listing on the OTC Exchange have to approach one of the members appointed by the OTC for acting as a sponsor to the issue. The sponsor makes thorough appraisal of the project, resulting in investors getting a choice of quality companies. Through the sponsor-ship agreement, the sponsor is committed to making market in that scrip by giving a buy / sell quote for a minimum period of 1 year from the date of listing. Investors are benefited by this as it enhances the liquidity of the scrips listed on the OTC Exchange.
14. Listing of Small and Medium Sized Companies:
In the past, many small and medium sized companies were not able to enter the capital market, due to the listing requirement of the Securities Contract (Regulation) Act, 1956. The Act specified that a minimum issued equity capital of Rs. 3 crores and maximum 25 crores for issuing.
The OTC Exchange provides an ideal opportunity to these companies to enter the Capital market. In fact, any company with an issued capital of more than Rs. 30 lakhs and less than Rs. 25 crores can raise finance from the capital market through the OTC Exchange.
15. Bought-Out Deals:
Through the concept of bought-out deals, OTCEI allows companies to place their equity meant to be offered to the public with the sponsor -member at a mutually agreed price. This ensures swifter availability of funds to companies for timely completion of projects and a listed status at a later date.
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4. Advantages of OTCEI:
The Advantages of Over The Counter Exchange of India (OTCEI) to Companies, to Investors, and Economy at large are described below:
To Companies:
1. Provides method of raising funds through capital market instruments which are priced fairly. In OTCEI the company will be able to negotiate the issue price with the sponsors who will market the issue.
2. Saves unnecessary issue expenses on raising funds from capital markets. The method of sponsors pricing the scrips with members of OTCEI who will in turn, off – load the scrips to public will obviate the need for a public issue as we know them today. Therefore, almost all associated costs will be eliminated.
3. Offer documents of companies seeking listing on OTCEI will not be vetted by SEBI. Such companies shall only file their offer documents with SEBI and SEBI will communicate its comments to the issuer company and lead manager within 21 days.
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4. Retains greater degree of management stability. The OTC Exchange will list scrips even with 40% of the capital made available for public trading.
5. Provides greater accessibility to large pool of captive investor base. This enhances fund raising power substantially. OTC Exchange will create a nationwide network, where investors will be serviced who will form the captive investor base for companies.
1. Investment in stocks becomes easier. OTC Exchange’s wide network will bring the stock exchange to the street corner.
2. Provides greater confidence and fidelity of trade. Investor can look up the prices displayed at each OTC counter. He knows he is trading scrips at the right market price.
3. Enables transactions to be completed quickly. Investors can settle the deals across the counter and the money or scrip proceeds from the deal will be settled in a matter of days if not earlier.
4. Provides definite liquidity to investors. The market making system will have two way prices which are quoted regularly to provide sufficient opportunity for investors to exit.
5. Investors may get a greater sense of security because researchers have been researched and members to get their considered opinion.
1. OTC Exchange will help spread the stock exchange operations geographically and integrate capital market investment into a forum.
2. Encourages closely held companies to go public,
3. Encourages venture capital activities to boost entrepreneurs.
5. The Mechanism of Trade
– OTCEI:
Investor visualizes the price on OTC screen placed in the office of every dealer. Investor conveys decision of purchases to the dealer. The dealer confirms the deal and blocks the scrip on OTC computer. Investor makes a cheque for the amount. Temporary counter Receipt (TCR) is given to investor. After cheque clearance, Permanent Counter Receipt (PCR) is issued in place of TCR.
For sale, investor watches price on OTC screen and conveys the decision to sell to the dealer. Sales Confirmation Slip (SCS) is given by the dealer to investor. Investor gives his PCR and Transfer Deed to the dealer. PCR and TD are validated by the Registrar and a cheque is issued to investor in exchange for SCS.
6. Participants of OTCEI
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1. Companies which list their shares on OTCEI.
2. Members, dealers who operate OTCEI counters.
3. Registrars who transfer and keep share certificates.
4. Investors.
5. Settlement bank
6. SEBI and government.