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Stock exchanges are one of the most significant participants in the financial markets, as they act as mediators between companies and investors. Stock exchanges are platforms that facilitate buying and selling of shares.
Every country has several stock exchanges for different purposes. Similarly, India has multiple exchanges offering different products with varied features. Today’s article deals with one such exchange – The OTCEI.
What is OTCEI?
The full form of OTCEI is Over-The-Counter-Exchange of India.
OTCEI was established in 1990 and commenced operating in 1992. It is an electronic stock exchange that facilitates the listing of small and medium-cap companies that are not eligible for listing on large exchanges like the National Stock Exchange or Bombay Stock Exchange.
Objectives of OTCEI
The primary objective of OTCEI was to allow small companies to raise capital from the public. It also aimed at providing technology-effective, transparent trading practices to companies and investors.
Features of OTCEI
- Known as the exchange for small companies, OTCEI was the first exchange to allow companies with paid-up capital as low as ₹3 crore to list for public trading.
- OTCEI was also called NASDAQ of India, as its technology was remodelled to match NASDAQ’s way of working. OTCEI was the first exchange to introduce electronic trading, where buy and sell orders matched automatically without human intervention.
- OTCEI adopted a single-window system to bring convenience to international trade. A single-window system is where a single agency handles international trade settlement activities on behalf of both traders.
Functions of OTCEI
Similar to the other stock exchanges, the main function of OTCEI was to facilitate a platform for traders to transact in financial markets.
- Primary market: OTCEI functioned as a primary market, allowing companies to list themselves for the first time through Initial Public Offerings (IPOs).
- Secondary market: OTCEI also provided platforms for secondary trades that involved transactions between investors to buy and sell stocks of companies.
- OTCEI’s brokerage and market-making functions – Of the crucial participants in the OTC exchange, the dealers are one of the important ones. Dealers in the OTC exchange acted in two capacities – As brokers, facilitating the buying and selling on behalf of end traders and as market makers, providing liquidity by maintaining the required quantity of stocks at all times.
- Custodian function – OTC also provided custody and safe-keeping services of stocks in electronic forms.
- Market scrutiny – OTCEI used strict and powerful monitoring practices to avoid fraudulent activities like market manipulation and insider trading, thereby protecting investors from losses due to fraud.
Pros and cons of OTCEI
The OTC exchange focussed on providing transparency and efficiency in trading. One of the other major advantages of OTC exchange was providing the opportunity for investors to diversify their portfolios by investing in small-cap companies.
However, the OTC market had limitations, too. Small-cap companies are generally risky in nature. Given their limited exposure and capital, their reactions to economic events are drastic, leading to rapid price fluctuations. Unlike large companies, small-cap companies do not provide stability in income. So, the number of investors willing to invest in such risky investments is usually low, which leads to low liquidity of securities listed on such exchanges.
Difference between NSE and OTCEI
OTCEI’s features are similar to those of other exchanges like NSE. For instance, both NSE and OTCEI promoted electronic trading and did not have a trading floor. Both exchanges facilitated trading access to people across the country without regional and state-wise boundaries.
Despite similar functioning, the two exchanges are different from each other concerning the core objective. Companies that do not qualify for listing on NSE and other exchanges were listed on OTCEI, meaning the eligibility criteria of both exchanges are different.
NSE allows trading in different securities, including stocks and money market instruments, whereas OTCEI was limited to stock trading.
Securities on the NSE are also highly liquid, as compared to securities listed on the OTC exchange. This is because NSE offers more variety to investors, hence attracting more crowds.
Bottomline
Over-the-counter-exchange of India was the first of its kind in the 1990s. The exchange’s working model resembled that of NASDAQ, and OTCEI was the first exchange to eliminate transactions on the trading floor and use computers instead. Though the exchange is not active today, its practices, like electronic trading and single-window systems are adopted by all other exchanges in India today.
FAQs
OTCEI is not an active exchange any longer. It was de-recognised by the Securities and Exchange Board of India (SEBI) in 2015, and the exchange filed for liquidation in 2017, claiming insolvency and bankruptcy.
Of the many reasons, participants not making sufficient gains and companies facing difficulties to attract investors to the OTC exchange were prominent. Brokers also earned low commissions. Some companies treated OTCEI as a dumping yard to list stocks that were on the verge of delisting.
India currently has eight active exchanges, including the National Stock Exchange and the Bombay Stock Exchange. The number includes exchanges for stocks, commodities and derivatives.
Like other securities, derivatives have the same distinction too. Derivatives traded on stock exchanges are standardised and regulated, while those traded on over-the-counter markets are less regulated and can be customised and negotiated. Trades on OTC markets involve counterparty risks, which are taken care of in exchange trades.
For companies to be listed on the OTCEI while it was active, they needed to have a minimum paid-up capital of ₹3 crores and a maximum paid-up capital of ₹50 crores.