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.
 OVER THE COUNTER EXCHANGE OF
INDIA (OTCEI)
• Over The Counter Exchange of India (OTCEI) can be defined as a stock
exchange without a proper trading floor.
• All stock exchange have a specific place for trading their securities through
counters.
• But the OTCEI is connected through a computer network and the transactions are
taking place through computer operations.
• Thus, the development in information technology has given scope for starting
this type of stock exchange.
• OTCEI is recognized under the Securities Contract (Regulation) Act and so all
the stocks listed in this exchange enjoy the same benefits as other listed securities
enjoy.
 Features of OTCEI
1. Use of Modern technology: Unlike other stock market, OTCEI does not
have any special counters and it is an electronically operated stock exchange.
2. Restrictions for other stocks: Stocks and shares listed in other stock
exchanges will not be listed in the OTCEI and similarly, stocks listed in OTCEI
will not be listed in other stock exchanges.
3. Minimum issued capital requirements: Minimum issued equity capital
should be Rs. 30 Lakhs, out of which minimum public offer should be Rs. 20
Lakhs.
4. Restrictions for large companies: No company with the issued equity share
capital of more than Rs. 25 Crores is permitted for listing.
 Features of OTCEI
5. Base Capital requirement for members: Members will be required to maintain
a minimum base capital of Rs. 4 Lakhs to trade on the permitted or on listed
segment.
6. All India Network: The network of counters links OTCEI members, located in
different parts of the country.
7. Satellite facility: The satellite required for OTCEI for its operations is jointly
held with Press Trust of India (PTI) and hence, PTI-OTCEI scan displays the prices
of OTCEI’s scripts.
8. Computerization of transactions: Computers at each counter enable to dealers
to enter various transactions or queries or quotes through a central OTCEI
computer, using telecommunications links.
 Promotion of OTCEI
• OTCEI has been incorporated under Section 25 of the Companies Act. As a
result of which the word ‘Limited’ need not be used since it is promoted for a
common cause of promoting the interest of small and medium companies. This
privilege has been given to the company by the Central Government.
• This company was promoted by a group of financial institutions owned by the
Government of India, consisting of UTI, ICICI, IDBI, SBI Capital Market,
IFCI, LIC, GIC; and Can Bank Financial Services (which is a subsidiary of
Canara Bank).
• The top executives of the promoters are on the Board of Directors of OTCEI
• The operations are supervised by SEBI and the Government of India
 Participants in OTCEI
OTCEI commenced its operations in 1992.
• Companies
• Dealers
• Members
• Investors
• Custodian or Settlers
• Transfer agents
• OTCEI
• Government and
• SEBI.
 Trading in OTC Exchange
• The members of the OTCEI will invite companies to list on the exchange for
raising capital.
• There are dealers who perform the dual role of a broker and market maker.
• A broker acts on behalf of buyer or seller, while a market maker has a
responsibility to make available toe particular share in the maker for transactions
and to maintain reasonable price through supply and demand forces.
• The market makers will prevent abnormal fluctuations in the price of securities
by regulating the supply and demand forces of securities in such a manner than
acute scarcity or abundant supply of any security will be avoided.
 Trading in OTC Exchange
• If 1000 shares are demanded among different categories so that the price will not
fluctuate abnormally.
• The custodian or a settler is one who validates the trading documents, stores the
trading documents and also arranges for the clearing of daily transaction.
• It is the settler who gives the net monetary position of each member with regard
to the market as a whole.
• The registrar and transfer agents ensure share transfers and allotments of shares
and also inform the developments of various companies in the market.
 Listing requirements in OTCEI
• Once a company lists its securities in the market, it cannot delist its securities for
a minimum period of 3 years.
• There are certain norms to be fulfilled by companies for sale of equity shares or
any other securities under bought out deal (i.e., a company at its early stage may
issue shares with an understanding that it will buy back after 5 years at the market
price from out of its profits.)
• 20% of the issued capital should be retained by the promoters for a period of not
less than 3 years.
• There should be two market makers as per the guidelines of OTCEI.
Advantages of Over The Counter Exchange
of India (OTCEI)
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.
Advantages of Over The Counter Exchange of India (OTCEI)

To Companies:
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

To Investor:
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.
 Advantages of Over The Counter Exchange of India (OTCEI)

To Economy:
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.
 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.