In 1992 , to provide improved services, the country’s first ring less, scrip less and electronic stock exchange Over The Counter Exchange of India(OTCEI) was created by some of the prominent financial institutions like UTI, ICICI, IDBI , SBI Capital Markets, IFCI, GIC, Canbank Financial Services. The trading at OTCEI is done over the centers across the country. The securities traded at OTCEI are classified into listed securities, permitted securities and initiated debentures. The feature of this exchange is that instead of share certificate, a counter receipt is generated out at the counter which substitutes the share certificate and the same is used for all transactions.
Recommended Reading: Over The Counter Exchange of India(OTCEI)
Trading on OTCEI
Trading on Over The Counter Exchange of India(OTCEI) is the first of its kind in India. It is fully computerized set-up where trading takes place through a network of computers at the member/dealer end which in turn are connected to a central computer at OTCEI, Mumbai.
- Initial Allotment: The tradable document on OTCEI is the Initial/Permanent Counter receipt. The investor who has been allotted a share on OTCEI would be receiving an Initial Counter Receipt.
- Buying Process in the Secondary Market: An investor desiring to purchase shares listed on OTCEI in the Secondary market would have to first get himself registered at any of the counters if he has not already registered himself. Then he can approach any of the counters of OTCEI situated in any part of the country and specifies the scrip name and the quantity that he desires to purchase. The investor can specify the price range for the scrip he wishes to purchase. When the transaction takes place, the investor is given a Permanent Counter Receipt (PCR).
- Selling Process in the Secondary Market: An investor, who has been allotted securities or who has purchased securities in the secondary market, can approach any of the counters situated in the country and fill in a Order Request From specifying the scrip name and the quantity that he desires to sell. The investor has to surrender the PCR + Transfer Deed (TD) to the counter. In case, the PCR is a non-transferred PCR, then the investor has only the PCR to surrender. The counter makes payment to the investor after registrar’s validation of the signatures on the PCR.
The OTCEI Composite Index
The Over The Counter Exchange of India(OTCEI) composite index has been introduced. as a broad parameter for investors and analysts. It acts as an indicator of the market movement. The base date for the OTC Composite Index is 23rd July, 1993 when the index was 100. The scrip’s included in the OTCEl composite index are only listed equities.
Market Makers on OTCEI
A market maker on the Over The Counter Exchange of India(OTCEI) is somewhat akin to a jobber on the regular stock exchange. Their job is to provide two-way-buy and sell-quotes for a scrip and provide liquidity. Any OTCEI counter can be a market maker. The idea is to create an environment of competition among market makers to produce efficient pricing and narrow spreads between buy and sell quotations. The market makers analyse the companies and provide information about them to their investors thus generating investor’s interest. The market makers are required to give quotes for a minimum depth of three market lots. There are three types of market makers: Compulsory Market Maker (CMM), Additional Market Maker (AMM) and Voluntary Market Maker (VMM).
“Bought-out-deals” on the OTCEI
Floating public issue in the primary market involves a lot of formalities and a time lag of at least 3-4 months. In case, where a company wants to get money earlier, it can find a member of the OTCEI, who would be interested in acting as a Sponsor for the Company to get it listed on the OTCEI. As a Sponsor, the member would ‘buy out’ the total equity which the company intends to offer to the public. The member would later sell the shares of the company to the public through an ‘offer for sale’. This method of getting listed on OTCEI is also called a ‘Bought-out-Deals’. Sponsors can be authorized members of the OTCEI or a Merchant Banker. They acquire shares in the bought out arrangement and off-load it at a pre-determined price. They provide funds to the promoters and make them free of issue responsibilities. Thus, sponsors act as an important intermediary in mobilization of savings.
Benefits to a Company listed on OTCEI
- Fast way to get money, as the company does not have to wait for 3-4 months like in regular public issue.
- No worry about under-subscription of the issue.
- Issue cost depends on negotiations with members.
- A new promoter with no track record can get a premium in the market if the sponsor finds the project promising.
- The company need not have an established name in the market to sell the issue. The issue sales based on the market reputation of the sponsor.
Benefits to an OTCEI Member
- Sponsor can buy the shares of the company and sell it at a later time at a premium. For example, a sponsor has bought shares of a company at Rs. 10, if the company does well in six months, and the market conditions of coming out with a public issue are favorable, then the member can sell the shares at Rs. 16 at a later stage, and thereby making a profit of Rs. 6 per share.
- At the time of the issue, the sponsor need not appoint underwriters to the issue, and can save on underwriting costs.
- The sponsor can time the issue and come in the market when the market conditions for a primary issue are favourable.
- There is no restriction on the holding period. The sponsor can hold the shares for as long as he wants.
- For good projects, the sponsor can help the company to get premium in the market.
Chapter XIV of the SEBI Guidelines, 2000 deals with the regulation of public issue at Over The Counter Exchange of India(OTCEI).