Over the counter exchange of

India(OTCEI)

Introduction

The market where second hand securities are bought and sold is referred to as the stock market. Presently, the stock market consists of 23 regional stock exchanges and two national stock exchanges known as the national stock exchange the over the counter exchange of India (OTCEI).

The OTCEI was incorporated in 1990 as a company under the companies Act’ 1952. It became fully operational on September 1992, with opening of a counter in Bombay. The OTCEI is recognized by the government of India as a recognized stock exchange under

section 4 of the securities control regulation Act, 1956.

Features of OTCEI

It is a national ring less and computerized exchange.

As opposed to the traditional ring in the stock exchange, the trading will be ‘screen based’. Transactions would take place through satellite communication telephone lines.

Trading on the OTCEI takes place through a net work of computers of OTC dealers located at different places within the same city and even across cities. These computers allow dealers to quote, query and transact through a central OTC computer, using the telecommunication links.

Small and medium sized companies with a paid up capital between rs.30 lakhs and rs.10 crores may be enlisted on the OTCEI the maximum limit has now been raised to rs.25 crores.

OTCEI deals in equity shares, preference shares, bonds, debentures and warrants.

A company which is listed on any other recognized stock exchange in India is not permitted simultaneously for listing on OTCEI.

The minimum offer should be 40% of the issued capital or rs.20 lakh worth of shares in face value, whichever is higher.

Participants in OTC marketThe various participants in the OTCEI are:

1. Members and Dealers appointed by OTCEI.

These members and dealers may act as broker and serve as market makers.

Market making is a process of making two way quotes i.e. buy as well as sell quotes for the same scrip by the sponsor. The maximum permissible spread between the buy and sell is 10%. Compulsory market making has to be undertaken by the sponsor of the scrip’s for a minimum period of 18 months from the date of public trading. At the end of 18 months, the

sponsor may withdraw for market making functions, provided an alternate compulsory market maker has been assigned for the scrip. The sponsor will arrange one or more member/dealer to make market in the scrip sponsored by it, known as additional market maker.

The compulsory and additional market maker must hold atleast 5% of public offering between themselves for the purpose of market making.

The members, in additional, carry out the vital functions of sponsorship. The sponsorship involves:

Appraising a company at its project. Certifying to OTCEI the investment

worthiness of the company and its project. Valuing the shares of the company. Obtaining governmental clearances

for the issue of shares. Managing the public issue of

securities. Servicing as a market maker in the

issued scrip for atleast 3 years from the date of trading commences. The member of OTCEI may be an

institution, a banking subsidiary, a merchant bank or a finance company approved by SEBI.

2. companies, whose securities are listed on OTCEI.

Every company desirous of listing would have to get sponsored by a member of the OTCEI.

3. Investors who trade in the OTCEI.

4. Registrar: Keeps custody of shares certificates. Maintains register of members.

5. settlement bankIt clears the payment between

counters.

6. SEBI and government which exercises an overall supervision on OTCEI

Trading in OTC exchangeEvery investor is required to register with

OTC prior to trading. The investor registration is required to be done only once and is valid for trading on any OTC counter in the country and in any scrip.

The registration is, at present, done free of cost. The purpose of investor registration is to facilitate computerized trading.

For buying and selling shares on OTC, an investor needs the INVEST OTC CARD which can be obtained from any OTC counter free of any charge just on filling the application form.

Steps involved in buying/selling scripsa) Walk into any convenient OTC counter.

b) The PTI OTC scan at each dealer’s counter continuously displays the best buy and sell quotes offered by market makers and also all other market related information. All quotes and transactions are entered in the central OTC computer which can be accessed by any dealer’s computer, through telephone lines with modems.

c) See the price of shares on the PTI-OTC scan at the counter.

d) Decides to buy/sell.

e) Ask counter operator to deal on your behalf.

f) Deal gets confirmed automatically at the best price.

g) In case of buying:a.Make cheques of payment.b.Get the counter receipt (CR). The CR

is tradable and contains all information which appears on share certificate.

c.Return CR when cheque is cleared.

d.Collect final CR within 7 days.

h) In case of sellinga.Give CR and transfer deed (TD) to

counter.b.Receive sales confirmation slip.c.Return when CR and TD are cleared

and collect cheque.

Depository systemThe OTCEI’s unique depository system

enables convenient and faster settlement for investors. The OTCEI’s depositor’s transfers delivery electronically to the purchaser as soon as the trade is completed. Share certificates are not delivered to the purchaser. Their movement in a national market is wrought with risk and operational delays. The OTCEI’s depository system minimizes the possibilities of bad deliveries on the exchange by ensuring the validity of the seller’s transfer deed at the time of transfer as on the other exchanges. The settlement on the OTC exchange takes place on a rolling basis three days after the day of trade. This means faster payments to the seller and faster deliveries to the buyer.

The OTC exchange offers a whole lot of investor services, namely-

Splitting/consolidation of PCRs (counter receipt)

Transfer/nomination

Change in joint holder’s names Exchange of PCR for share certificate and

vice versaThe OTC counter is truly a single window

for investments. For each of the above services requested by investors, an application acknowledgement slips (AAS) will be issued, nominal service charges may be levied and the services will be completed within reasonable time specified by OTCEI.

Listing on OTC exchangeThe OTC exchange can list companies

with issued capital from Rs.30 lakhs up to rs.25 crores. The eligibility for listing is:

The issue size should be a minimum of rs.20 lakhs or 255 of the paid up capital, whichever is higher.

Companies engaged in hire purchase or finance or leasing, amusement parks, etc., shall not be eligible for listing on the OTC exchange.

Companies covered under the MRTP/FERA may be listed on OTC exchange if they satisfy listing guidelines as on other recognized stock exchanges.

The minimum number of counters for collection of application forms for issues of securities shall be four.

The company will pay one time listing fee of rs.6,000 and annual listing fee of rs.0.05% of their paid up capital in case of equity shares and 0.05% of the gross amount issued in case of any other security.

Operational highlights

Performance of OTCEI from 1992-93 to 1995-96]

1992-93

1993-94

1994-95

1995-96

No. of companies

6 24 47 65

No. of deals 3568 25,145 2,27,322

61,130

Volume (no. of shares in lakhs)

3.66 69.03 921.57 287.66

Value of transaction(in crore)

1.55 38.74 365.02 119.86

No. of members

16 35 58 94

No. of dealers 89 167 225 235No. of investors

35,000

1,05,000

2,85,000

3,00,000

The OTCEI has been promoted to address the problem faced by medium sized companies and investors at large. It has set up a modern electronic stock exchange to evolve cost effective solution to these problems. It is now operating in 54 cities in 19 states. The OTCEI is moving towards setting higher standards to the benefit of the corporate and the investing community in India. The turnover in OTCEI during 2000-2001 was rs.126 crore.

Recent trends SEBI relaxed norms for listing on the

OTCEI during March 1995.

a) Finance and leasing companies were allowed to get listed on OTCEI.

b) The minimum post issue capital to be offered to the public to enable listing was lowered from 40 percent to 25 percent.

In April, 1995, OTCEI modified its guidelines to allow listing of finance companies with more stringency.

a) The minimum issued capital was increased from rs.30 lakh to rs.1 crore for finance companies.

b) A three year track record of profitability was made compulsory before listing takesplace.

c) OTCEI sponsor of these companies should hold atleast 10 % of the public offer as a market making inventory as against 5 percent for other companies.

To facilitate offers for sale of bought out deals, OTEI changed its guidelines in January 1996. The revised guidelines deed away with the requirement of making an offer for sale of the entire bought out deal to the public, except the market making inventory. The offerer can now offer a minimum 25 percent of the bought out deals to the public. At the same time, the ratio of involvement of OTCEI members has been brought down from 60:40 to 10:90.

The new guidelines issued by the SEBI stated that any company wanting to make a public issue should have a track record of dividend payment for atleast three years immediately preceding five years before making the public issue.

If the companies do not satisfy this requirement, then they must atleast get their project appraised by a financial institution or a nationalized bank which would participate in the public issue to the extent of atleast 10 % of the total outlay in the form of equity or long term debt.

With a view to review the working of the OTCEI and to make recommendations for its further improvement, SEBI appointed an eight member committee under the chairmanship of Dr. S.A.Dave on April 17, 1996.

The recommendations of Dave committee are as follows:

a) The companies which are unable to make public issue as a consequence of the above guidelines be allowed with some checks.

b) The companies which do not satisfy the criteria should be allowed to get listed on the OTCEI provided they appoint a sponsor and two market maker to the issue.

c)Companies which get delisted from regional stock exchanges should be

allowed to list on OTCEI since shareholders of delisted companies do not have platform to offload their holdings. These companies should, however, be treated under a special category on the OTCEI.

d) The companies discussed above should be allowed listing on the OTCEI with a minimum lock in period of three years. After three years these companies may either to choose to remain on the OTCEI or seek listing on other stock exchanges.

e) The ceiling of rs.25 crore on the equity capital of a company seeking listing on the OTCEI is removed.

f) The current rolling settlement system of three days should be increased to five years.

g) The committee stressed upon the need of increased involvement of the promoters of OTCEI.

Bibliography

Financial Markets and Services- Gordon Natrajan [Himalaya Publishing House]