- Meaning of Over The Counter Exchange of India (OTCEI).
- Definition of OTCEI.
- Features of OTCEI.
- Benefits of OTCEI.
- Trading Mechanism of OTCEI.
What do you mean by Over The Counter Exchange of India (OTCEI) ?
The establishment of the Over The Counter Exchange of India (OTCEI) marked the down of a new era in the history of a stock exchanges in India. It is regarded a blessing for the small, both existing and new, companies and for investors, particularly small investors. The OTCEI which was incorporated in 1990 become fully operational in 1992.
Meaning of OTCEI
Over The Counter Exchange of India (OTCEI) was promoted as a non-profit making organisation and has been registered as a limited company under section 25 of the Companies Act, 1956. Over The Counter Exchange of India is a company limited by shares but because of its status under section 25 of the Companies Act, 1956, it does not use the word 'Limited' with its name.
Definition of OTCEI
"Over The Counter Exchange of India can be defined as an exchange without a specified trading floor."
It does not have a market place physically and the market is spread across the country through counters. All the counters are connected through a computer network and transactions takes place through satellite Communication.
Over The Counter Exchange of India allows nationwide listing and trading in securities, widely disbursed trading across centres provides for greater liquidity and less risk of intermediary charges, there is no arbitrage. The main feature is screen based scrip less trading, settlement is faster and no physical delivery of scrips is involved. The approach is highly professional.
Authorised Share Capital :
The authorised share capital of Over The Counter Exchange of India is Rs. 10 crores and the share of promoters is as under :
1) Units Trust of India (20%).
3) Industrial Development Bank of India (17%),.
5) Life Insurance Corporation of India (8%).
7) SBI Capital Markets Limited (8%).
8) Canbank Financial Services Limited (8%).
The Finance Ministry has granted recognition to Over The Counter Exchange of India under section 4 of the Securities Contracts (Regulation) Act, on 23 August, 1989 for a period of five years up to 22nd August, 1994. Over The Counter Exchange of India was dedicated to the nation on 28th November, 1992 by Finance Minister Dr. Manmohan Singh at Bombay.
Features of Over The Counter Exchange of India (OTCEI)
Unique features of Over the Counter Exchange of India can be given as follows :
1) Ringless Trading :
Over the Counter Exchange has eliminated the traditional trading ring with a view to have greater accessibility to the investors. Trading will instead take place through a network of computers (screen based) of Over the Counter dealers at located several places within the same city and even across cities. These computers allow dealers to quote, query and transact through a central Over the Counter computer using telecommunication links. Investors can walk into any of the counters of members and dealers and see the quote display on the screen, decide to deal and conclude the transaction.
2) National Network :
Unlike other Stock Exchanges, the Over the Counter Exchange will have a nationwide reach enability widely dispersed trading across the cities, resulting in greater liquidity. Companies, thus, have the unique benefit of nationwide listing and trading of their script by listing at one exchange, Over the Counter Exchange.
3) Computerized Totally :
All the activities of the Over the Counter trading process will be computerized, making for more transparent, quick and disciplined mark. The trading mechanism brings on these features of the system.
4) Exclusive List of Companies :
The Over the Counter Exchange will not list and trade in companies listed on any other stock exchange. It will therefore list an entirely new set of companies sponsored by members of the Over the Counter Exchange.
5) Two Ways of Making Public Offer :
Another unique of Over the Counter Exchange of India is its two ways of making public offer. Under 'direct offer' a company can offer its shares directly to the public after getting it sponsored by sponsored but under indirect offer', the company may give its shares first to the sponsor who a long with the company can at a later and convenient time make a public offer.
6) Faster Transfers and Trading Without Shares :
Over the Counter trading also provides for transfer of shares by Registrars, up to a certain percentage per folio. This results in faster transfers. The concept of immediate settlement makes it better for the investors. Investors will trade, not with share certificates, but with a different tradable documents called Counter Receipt (CR). However, an investor can always exercise his right of having a share certificate for Counter Receipt surrendering the Counter Receipt and again exchanging the share certificate for Counter Receipt when he wants to trade. There will be a custodian who will provide this facility along with a settler who will do the signature verification and Counter Receipt validation.
7) Investor Registration :
Yet another feature of Over the Counter Exchange of India is investor registration, introduced for the first time in India. The investor registration is required to be done only once and is valid for trading on any Over the Counter in the country in any scrip. The purpose of the investor registration is to facilitate computerized trading. It also provides greater safety of operations to the investors.
Benefits of Over The Counter Exchange of India
1) To Companies :
a) Method for Raising Funds :
It provides a method of raising funds through capital market instrument which are priced fairly. In Over the Counter, the company will be able to negotiate the issue price with the sponsors who will market the issue.
b) Saves Unnecessary Expenses :
It saves unnecessary issue expenses on raising funds from capital markets The method of sponsors placing the scrip's with members of Over the Counter who will in turn off-load the scrip's to public will obviate the need for a public issue. Therefore, almost all associated costs will be eliminated.
c) Retention of Management Stability :
It retains greater degree of management stability. The Over the Counter exchange will list scrip's with 20% of the capital made available for public trading.
d) Provides Accessibility :
It Provides greater accessibility to large pool of captive investor base, enhancing fund raising power substantially. Over the Counter Exchange will create a nationwide network, where investors will be serviced who will form the captive investor base for companies.
2) To Investor :
a) Easier Investment :
Investment in stocks will become easier. Over the Counter Exchange's wide network will bring the stock exchange to the street corner.
b) Provides Confidence and Fidelity of Trade :
It provides greater confidence and fidelity of trade. Investor can look-up the prices displayed at each Over the Counter. He knows he is trading scrip's at the right market price as there is a transparency of price.
c) Quick Transactions :
it 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.
d) Provides Liquidity :
It will provide definite liquidity to investors. The market making system in the Over the Counter will have two way prices which are quoted regularly to provide sufficient opportunity for investors to exit.
e) Security :
Investor may get a greater sense of security because all scrip's have been researched and members have been willing to invest themselves in these scrip's.
f) Short Duration :
In the case of public issue / offer for sale the allotment will be done in 28 days and trading in 30 days. This will immensely benefit the investors.
3) To Environment :
a) Spreading of Operations :
Over the Counter Exchange will help spread the stock exchange operation geographically and integrated capital market investment into a national forum.
b) Publicity :
It encourages closely held companies to go to the public.
c) Venture Capital :
It encourages venture capital activities to boost entrepreneurship.
Trading Mechanism of OTCEI
The Trading Mechanism of Over the Counter Exchange of India can be given as follows :
1) Share Certificate :
The share certificate is issued in the form of Counter Receipt (CR).
2) Initial Public Offer :
In the Initial Public Offer (IPO) or when a scrip is brought Over the Counter, Counter Receipt (CR) is issued, which has the following details:
1) Name of Investor2) Name of company whose shares were sold by Counter.3) Number of shares brought and price at which brought.4) Name of custodian/ settler holding shares underlying the report.5) Address and telephone number of the custodian.6) Brokerage Charged.7) Total value of the transaction.8) Time and date of transaction.9) Investor's signature.10) A unique transaction code.11) Name and Code of Issuing Counter.12) Name and signature of authorized signatory of the Counter.
3) Copies of Certificates :
Three copies of such receipt will be simultaneously prepared: one for the investors, one for the counter and one for the custodian/settler.
4) Receipt :
The receipt will certify that the above transaction is a valid transaction.
5) Details of Buyers :
Before issuing the Counter Receipt, the details and signature of the buyer are obtained. The counter fills up the seller details and signature. In case of transfer, Application Acknowledgment Slip (AAS) is also generated in three copies and investor also gives to counter the stamped and attested Transfer Deed.
6) Sending of Transfer Deeds to Custodian :
At the end of the day, all transfer deeds along with relevant Counter Receipts and Application Acknowledgement Slip are sent to the custodian/ settler.
7) Appointment of Agencies or Services :
Over the Counter Exchange of India will appoint commission agencies who nave or will set-up registrar services, to undertake the task of maintaining company wise shareholders list, effect transfer, update and report to the company the list of shareholders periodically. Such an agency will also issue actual share certificates, if so required by the investor, in exchange for the Counter Receipt.
The Counter will not accept share certificates itself during transactions. The share certificates will be ostensibly only used as security. When the investor wants to sell, he will have to surrender the share certificate to the custodian / settler in return for the Counter Receipt.
8) Compilation of Manual :
Over the Counter Exchange of India will compile a manual of all Over the Counters along with the name and signature of the representative authorized to deal on the Over the Counter Exchange. Such manuals will be circulated to all the members/ dealers. A code will also be assigned to each counter. These codes will be altered from time to time. The list of code and the date from which they become valid will be intimated to each member/dealer. A book containing all the codes assigned to each counter along with the period for which they were valid will be compiled and sent to all members /dealers, periodically.
9) Sale Confirmation Slip :
When an investor comes to a counter to sell, he produces the Counter Receipt. The Counter Receipt particulars of the counter which sold to the investor, such as its code name and signature of the authorized representative will be checked
against the manual and book circulated by Over the Counter Exchange of India. When it matches, the deal is put through and the investor is given the Sale Confirmation Slip (SCS).
10) Completion of Transfer Deed :
The seller is also asked to fill up the transfer deed, if the shares have been transferred to his name. This transfer deed is taken by the counter before giving the Sale Confirmation Slip and cheque to the investor. The counter will fill up its own particulars and complete the Transfer Deed (TD). The counter will first issue a Sale Confirmation Slip (SCS) to the investor. The Sale Confirmation Slip will contain the following details :
a) Name of the investor.b) Name of the company whose shares have been brought by the counter.c) Number of shares and price at which shares bought by Counter and Commission charged.d) Stamp duty charged.e) Total value of transaction.f) Name of the counter.g) Date and time of transaction.h) Corresponding Counter Receipt Number.
11) Copies of Sale Confirmation Slips :
Three copies of Sale Confirmation Slips will be prepared simultaneously, one each for the investor, the Counter and the Custodian.
12) Updating :
At the end of each day, all the Counter Receipts and Sale Confirmation Slip along with the relevant Transfer Deeds will be sent to the custodian / settler for updating.
13) Consolidated Statement :
At the end of each day, each counter will send to Over the Counter Exchange of India the details of Counter Receipts and Sale Confirmation Slips issued by it along with a consolidated statement showing company wise transaction.
14) Contract for Updated List of Shareholders :
The sponsor / company will have a contract with the Registrar to send them updated list of shareholders at such intervals of time as may be agreed upon mutually.
15) Sending of Deeds to Registrar :
The counters will send to the Registrar the Transfer Deeds filled in by sellers and may not transfer the scrip in their own name. When the scrip's are sold back, in case of buyers seeking transfer, the buyer's particulars would be directly filled up separate Transfer Deeds on the transferee part and sent to the custodian /settler for matching with the transferor's part and completing transfer to the buyer. The existing provision under the Companies Act will govern the period for keeping the transfer open.
16) New Counter Receipt :
Each Counter Receipt will be for the full number of shares (up to 1000 shares per Counter Receipt) purchased by the investor. If the investor wants to sell only part of the holding in a Counter Receipt, then he will first have to exchange in Counter Receipt for new Counter Receipt (by splitting, with the relevant holding details) and may then proceed to transact accordingly.
17)Weekly Consolidated Statement by Custodian :
The custodian/ settler will issue a consolidated statement to each counter once in a week to confirm that the Counter Receipts accepted by the counter were valid after checking its records of Counter Receipts issued by various counters. The counters can then destroy the Counter Receipts collected by them.
18) Automatic Transfer :
Automatic transfer to the transferor's name within seven days will occur for transaction involving less than a certain specified size of holding, which may be 0.5 percent of the company's equity or such other limit specified by over the Counter Exchange of India. If the holding of the investor exceeds this limit, the counters will send the Transfer Deed to company for endorsement. Any transactions involving more than 900 shares will be reported on the same day to the company.
19) Explore Possibility of Merging :
It is intended to explore the possibility of merging the Transfer Deed / Counter Receipt / Sale Confirmation Slip into a self-contained document. Till such time the above system will be followed.
20) Use of Computerized System :
The whole process, will also be developed on a computerized system, so that compilation on a daily basis becomes easy.