Introduction Over the counter exchange of India was started in 1992 after the role models of NASDAQ(national association of securities dealers automated quotation) and JASDAQ. The OTCEI was started with the objective of providing a market for the smaller companies that could not afford the listing fees of the large exchanges and did not fulfill minimum requirements for listing. It aimed at creating a fully decentralised and transparent market.
Over the counter means trading across the country in scrips. The counter refers to the location of the member or dealer of the OTCEI where the deal or trade takes place. Every counter is treated like trading floor for the OTCEI where the investor can buy or sell. The member or dealers of OTCEI counters are linked to the central OTCEI computer. The member should have the computer and telecommunication facility.
The promoters OTCEI is incorporated as a company under section 25(c) of Indian companies act 1956. As per the registration norms, OTCEI will be obliged to plough back all its profits and will not be allowed to declare dividend on its share capital. The promoters are as follows UTI GIC ICICI SBI capital markets IDBI Canbank financial services IFCI LIC
PLAYERS IN THE OTCEI MARKET The players on the OTCEI exchange are the members and dealers. The activities of members and dealers are:1. Act as broker, buy and sell securities according to the instructions of investor.2. Market makers in securities, they quote the prices at which members are willing to buy and sell the specified no. of securities.
Members Members can be public financial institutions, scheduled banks, mutual funds, SEBI approved merchant banker, banking subsidiaries, venture capital funds and other non-banking financial companies with minimum net worth of 2.5 crores. Members pay a one time non-refundable admission fee of rs 10 lakh and rs 5 lakh after one year. The annual subscription fee is rs 1 lakh.
Dealers The dealers are individuals, partnership firm, and corporate entities with a minimum net worth of Rs 5 lakh. They should have adequate office space and telecommunication facilities. They have to pay one time non-refundable fee of rs 2 lakh and annual subscription fee of rs 5000. OTCEI may collect additional security deposit if it considers necessary, depending upon the business experience of applicant.
Scrips to be traded The minimum capital requirement for a company to be listed on the OTCEI is Rs 3 crores and the maximum is Rs 50 crore. For companies with an issued capital of more than 30 lakh but less than 300 lakhs, the minimum public offer should be 25% of the issued capital or 20 lakhs worth of shares in face value, which ever is higher. Companies with an issued capital of more than Rs 30 crores seeking to be listed have to comply with listing requirements and guidelines that are applicable to such companies in other stock exchanges.
Revised listing norms Closely held existing corporate houses upto 100 cr. New companies with paid up base of upto 50 cr. All currently listed companies on various stock exchanges.
Procedure for listing the scrips1. And OTCEI member is appointed as a sponsor for the company’s issue. The sponsor appraises the project or the company on technical, managerial, commercial, economical and financial aspects. The sponsor certifies the OTCEI regarding its appraisal.2. The sponsor determines the price of the company’s shares offered to the public, members and the dealers of OTCEI.3. The sponsor gets all statutory consent and compliance with SEBI guidelines.4. The sponsor registers the issue with OTCEI and places the equity
5. The listing application has to be made to the OTCEI as per its rules and regulations.6. After getting the approval the allotment is made. Once the allotment is over, the equity is listed and the trading commences. The sponsor is sole underwriter to the issue. He can sub write his liability with the syndicate of members and dealers.
The trading system The OTCEI dealer’s screen has a left and right half for the sell and buy counters. The sell counter gives the rate, the no. of shares offered and the name of the market maker. It is always in ascending order with the lowest buy quotes given at first. The sell quotes are displayed in descending order and the seller can decide to unload at the highest price displayed.
Once the deal is struck, it is entered into computer. To confirm the transaction on line message appears on screen. The confirmation slip or trading document is generated through the computer in duplicate. One copy is retained and other is sent to the OTCEI counter. This is known as counter receipt.
The counter receipt gives the following details:(I) Transaction number(II) Names of previous holder and the new holder(III) Date and time of transaction(IV) Price and value of transaction The name of the dealer, brokerage charged and distinctive no. of scrips. The counter receipts are used for further transactions.
Settlement system At present the settlement procedure has five days trading cycle. Forward trading is not permitted on OTCEI. Short sales and squaring up have to be done within the trading cycle and certificate to the investor must be delivered within a fortnight from the date of purchase. Thus it avoids speculation.
Market making concept In the market making, market makers offer tow way quotes continuously i.e. buy quote and sell quote. The main objective behind the market making concept is to make the merchant bankers accountable even after an issue is over. This promotes liquidity to the small investor. There are three types of market making:(I) Compulsory market making(II) Additional market making(III) Voluntary market making
Compulsory market making: This responsibility is undertaken by the sponsor of the issue for a period of three years from the date of public trading. Even if the market making responsibility is assigned to some other member by sponsor, the sponsor is responsible for satisfactory discharge of compulsory market making. At the end of three years period, the sponsor can withdraw from the market making function only if he could provide another compulsory market for the scrip.
The market maker can apply for termination of duty only if the scrip sponsored has incurred cash loss for three years or if the company is insolvent or the company’s prospects are bleak. The OTCEI exchange may terminate if it thinks fit. Even after the termination, if the company regains once again, the trading would be permitted by OTCEI. The compulsory and additional market makers should possess 5 % of the public offer.
Additional market making The additional market maker is appointed by the sponsor for a period not less than one year from the date of public offering. The additional market maker can be more than one.
Voluntary market making This is offered voluntarily by the member and once offered, he should continue at least three months from the date of commencement. He can offer buy and sell quotes. He has to refrain from giving sell quotes if he does not possess the quantity specified by OTCEI.
The present situation Sluggish growth Lack of liquidity