Over the Counter Exchange of India (OTCEI) : Commerce YouTube Lecture Handouts

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Topics to be covered are?

  • What is OTCEI
  • Why OTCEI was established?
  • Salient features of Over The Counter Exchange Of India
  • Participants of OTCEI
  • Promoters of OTCEI
  • The mechanism of trade – OTCEI
  • Transfer process of OTCEI
  • What are the listing requirements in OTCEI?
  • Advantages of OTCEI
  • Disadvantages of OTCEI

What is OTCEI

Over the Counter Exchange of India (OTCEI) was incorporated in October 1990 under section 25 of the companies act, 1956 with the objective of setting up a national, ring-less, screen-based, automated stock exchange. It is recognized as a stock exchange under section 4 of the securities contracts (regulations) act, 1956. It was set up to provide investors with a convenient, efficient and transparent platform for dealing in shares and stocks; and to help enterprising promoters set up new projects or expand.

Why OTCEI Was Established?

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:

  • Poor liquidity of scrips on the Indian bowsers
  • Delay in settlement
  • Lack of transparency

Salient Features of over the Counter Exchange of India

  • Ring-less and Screen-based Trading
  • Sponsorship
  • Transparency of transactions
  • Listing of Small and Medium-sized companies
  • Technology
  • Nation-wide listing
  • Restrictions for other stocks
  • Restrictions for large companies
  • Satellite facility

Participants of OTCEI

  • Member and dealers
  • Companies
  • Investors
  • Registrar
  • Settlement bank
  • SEBI and government

Promoters of OTCEI

  • ICICI Bank Limited
  • Administrator of Specified Undertaking of Unit Trust of India
  • IDBI Bank Limited
  • SBI Capital Markets Limited
  • IFCI Limited
  • Life Insurance Corporation of India
  • Can bank Financial Services Limited
  • General Insurance Corporation of India
  • The New India Assurance Company Limited
  • The Oriental Insurance Company Limited
  • United India Insurance Company Limited
  • National Insurance Company Limited

The Mechanism of 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.

Transfer Process of OTCEI

  • The transfer and the transferee signs separate transfer deeds. The registrars of the company match the two transfer documents and execute the deal. The OTCEI has a 5 day trading cycle. As the exchange does not allow short selling or forward buying, the deals are concluded at the time of confirmation.
  • One of the ‘over the counter exchanges’ operating in U. S. A is called National Association For Securities Dealers Automated Quotation (NASDAQ) . The majority of the shares traded in it are those of software companies

What Are the Listing Requirements in OTCEI?

For any company to list its shares in OTCEI, it requires sponsorship by members of the OTCEI and it must also have two market makers. The OTCEI has also laid down rules regarding listing requirements.

  • 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 OTCEI

To Companies

  • Provides method of raising funds through capital market instruments which are priced fairly.
  • Saves unnecessary issue expenses on raising funds from capital markets.
  • Offer documents of companies seeking listing on OTCEI will not be investigated by SEBI.
  • Retains greater degree of management stability.
  • Provides greater accessibility to large pool of captive investor base.

To Investor

  • Investment in stocks becomes easier.
  • Provides greater confidence and fidelity of trade.
  • Enables transactions to be completed quickly
  • Provides definite liquidity to investors.
  • Investors may get a greater sense of security.

To Economy

  • OTC exchange will help spread the stock exchange operations geographically and integrate capital market investment into a forum.
  • Encourages closely held companies to go public,
  • Encourages venture capital activities to boost entrepreneurs.

Disadvantages of OTC

  • The key risks involved in trading over-the-counter (OTC) stocks stem from lack of dependable information and the fact that OTC stocks are usually very delicately traded markets. Lack of a clearinghouse or exchange results in increased credit or default risk associated with each OTC contract.
  • Precise nature of risk and scope is unknown to regulators which leads to increased systemic risk.
  • Lack of transparency
  • Speculative nature of the transaction causes market integrity issues.

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