Introduction A Well structured market ensures easy and quick marketability to the securities which imparts liquidity too.

The Over-the-Counter (OTC) market is one of the multi-tier markets to suit and benefits the securities. The Genesis of the term Over the Counter Exchange dates back to the late 18th Century and was evolved almost simultaneously with the development of securities trading in USA. In 1789, the US Govt. issued $ 80 million worth of Government bonds. Two years hence, the Bank of America was founded, partly by sale scrips to the public. Subsequently, other companies started raising resources through public issued too. As a result, trading in stocks by word of mouth in places like coffeehouses and through newspaper advertisements started. This term has remained, down the passage of time, and is the origin of the present date Over the Counter securities market. The OTCEI was recognized as a stock exchange under the Securities Contracts (Regulation) Act, 1956 with the effect from August 23, 1989. The exchange was incorporated as a company under Section 25 of the Companies Act, 1956, with an authorized capital of Rs. 10 crore and a paid-capital of Rs. 5 crore. It is based on the model of National Association of Securities Dealers Automated Quotation (NASDAQ) of USA, with modification to suit Indian conditions. It commenced operation from October 6, 1992.

The OCTEI arouse out of the need to have a second tier market in the country. It was set up to provide small and medium companies an access to capital for raising finance in a cost-effective manner and investors with a convenient, transparent, and efficient avenue for capital market investment. The OTCEI was first ringless, electronic national exchange with a screen-based trading system listing an entirely new set of companies of small size. It allowed companies with a paid-up capital as low as Rs. 30 lakh to get listed. It brought screen-based trading system in vogue for the first time. This meant that the buyer or seller could walk up to an OCTCEI counter, tap on the computer screen, find quotes, and effect a purchase or sale depending on whether the prices met their targets. This was quite different from the open outcry system at the BSE. Need of OTCEI in Indian financial market The stock market in India before the establishment of the Over the Counter Exchange of India faced many problems. Some of the major issues which were present in the stock exchanges are discussed below. 1. Transparency The trading of the shares is done in the floor based exchanges in India through the brokers of the exchange. It was done by open outcry on the floor. This resulted in the breach of secrecy at many occasions. Furthermore, the activities of the brokers were also suspicious. The prices charged by the brokers were also very high. Hence, a need for electronic based exchange was felt in the Indian market. 2. Liquidity

The scrips of the small companies were mostly illiquid in nature. The jobbers of the stock market used to give two quotes to these securities which used to be far from reality. The Concept OTCEI is a ringless and electronic national stock exchange. It is an exchange without a specified trading floor. It caters to the need of small businesses which have so far not met the requirements for listing on the stock exchange. The market is spread across the country through numerous counters of the operators of the exchange. Small and medium sized companies with a paid-up capital between Rs. 30 lakh and Rs. 10 crore can be enlisted. However, the maximum limit has now been raised to Rs. 25 crore. The minimum public offer should be 40% of the issued capital or Rs. 20 lakh worth of shares in face value, whichever is higher. As opposed to the traditional ring in the stock exchange, the trading here will be screen based. Transactions would take place through satellite communication telephone lines. Further, a company which is listed on any other recognized stock in India will not simultaneously be eligible for listing on the OTCEI. At the OTCEI, there are two ways of making a public offer: a direct offer and an indirect one. In a direct offer, a company can offer its share directly to the public after getting it sponsored, while under an indirect offer, the company may sell the shares first to a sponsor who would offload them later. The securities traded on the OTCEI are divided into three categories: listed, permitted and initiated companies. Initially, only those securities which were listed exclusively on the OTCEI were referred to as permitted securities. Units of UTI and other mutual funds are permitted to be traded on at least one lakh debentures of a particular company and appoints an OTC member to carry out compulsory market making. Characteristic Features of the Exchange The main feature of the OTCEI are as follows: 1. Offers small and medium sized companies access to a market nationwide, as well as a chance to raise finance from capital markets cost effectively 2. Provides a convenient avenue of capital market investment investors. 3. Implementing a computerized, ringless, scripless stock excjange with trading and settlement standards in tune with global standards. Participants in the OTC Market The various participants in the exchange are: 1. Members, dealers and representative officers operate OTC counters which are linked to a central OTCEI computer. 2. Companies, whose securities are listed on the OTCEI and are sponsored by members. 3. Investors, who trade and avail of investor services through any of the OTC counters. 4. A Registrar for transfer and related activities. The registrar also acts as a custodian keeping share certificates in safe custody. 5. A Settlement Bank, which clears the payment between counters. 6. SEBI and Government which exercise an overall supervision on stock exchanges on the country.

Steps to improve on the OTCEI During 1993-94, the OTCEI entered a memorandum of understanding with the NASDAQ for the enhanced cooperation between the two exchanges in the area of market technology, regulations, and business development. As part of its expansion programme, the OTCEI invited applications in January 1995 for dealership in 54 cities, in 19 states across the country, to achieve nationwide coverage. As a result the OTCEI could expand its dealer network from just five cities in 1995-96 to 23 cities during 1996-97. It has 60 national members and 145 dealers. In order to increase the popularity of the OTCEI, the SEBI relaxed norms for listing on the OTCEI during March 1995. The minimum post-issue capital to be offered to the public to enable listing was lowered from 40 per cent to 25 per cent. The SEBI also permitted finance and leasing companies to get listed on the OTCEI. With the exposure of price rigging scams of finance companies, the OTCEI modified its guidelines in April 1995, making the listing of finance companies more stringent. Companies covered under FERA/MRTP Act were permitted to be listed on the OTCEI. Hence, medium-sized companies belonging to big industrial groups could join OTCEI. Despite relaxing the norms for listing of securities, the trumover at the exchange steadily declined from 1994-95. Hence, the SEBI appointed two committees- Malegam and Dave Committee- to review the OTCEIs working and suggest measures to improve its functioning. The recommendations of these committees suggested relaxing the strict norms with which the OTCEI has begun operating . During 1997-98, the OTCEI re-launched trading in the permitted segment by moving over to a weekly settlement cycle in line with the recommendations of the Dave Committee. The relaunched permitted segment witnessed increased activity with coverage of 15 cities. Advantages of OTCEI The OTCEI was the first exchange in India to have an online trading-cum-depository. It became quote-driven and transparent system of trading. It provides a liquid cash market for retail investors with a T+2 rolling settlement system and no problem of bad or short deliveries. Companies such as VIP Advanta, Sonara tiles and Brilliant Mineral Water have benefitted by listing on the OTCEI. Despite the unique advantages of the system, the OTCEI got off to poor start. Trading volumes were thin, liquidity was poor, and most of the investors were not aware of its existence. This was result of the absence a nationwide network, lack of an online communication network of its own, and the fact that in the initial stages it restricted its business to Mumbai. For the Investor 1. In the Stock Exchange there is no transparency in the transaction and investor do not come to know what price the scrip was brought or sold at, whereas on the OTCEI investors have access to current prices of all scrips being traded on the PTI scan display. The computerized trading on the OTCEI will provide greater confidence in trading.

2. Definite liquidity is ensured to investors. 3. Automatic registration of shares lodged by an individual upto 0.5% of its total paid up capital. 4. A transaction in the stock exchange takes upto six months to be completed, whereas on the OCTEI, all transactions would be completed within 7 days. 5. Investors may get greater sense of security because all scrips have been researched and members have themselves been willing to invest in these scrips. For the Company 1. If a company want to raise funds immediately, it can pledge its equity with the sponsor and thereby reduce interest cost. 2. The company at one gets a nation-wide listing. 3. The cost of the public issue also comes down at costs reacting to the stipulation regarding the number of the form prospectus to be printed, number of collection centres to be appointed, publicity requirements, marketing costs, involvement of advisors, managers, comanagers etc. are reduced. 4. Wealth Tax is saved as no such tax is levied in respect of net wealth of any widely held industrial company. Also the rate of income tax would be lower in such a case. Critical Analysis and Role of OTC In the above context of prevailing structural weakness in the securities markets in India and the malpractices rampant in both the primary and secondary markets, drastic reforms are long overdue. Firstly, there is urgent need for legislative reforms by amendments to existing laws, and consolidating into one Act whereby the legal loopholes can be plugged and corporate behavior can be improved. Many malpractices and defaults of companies can be corrected by penal powers given to the SEBI. Secondly, control and supervision and supervision of the activities of the merchant bankers, advisors etc. are necessary to reduce the malpractices and improve the climate of new issues market. Thirdly, certain malpractice adopted by the Registrars of the new issues, banks, companies etc. involved in allotment of new issued to the public, dispatch of refund orders, share allotment letters, etc have all been brought under the net of penal provisions for protecting the interests of investors and public. Fourthly, as the major culprits in primary and secondary markets are the companies themselves, the provision relating to the new issues, transfer of shares, issue of divided warrants and services to investors in all forms should be brought into the ambit of heavy penalties imposed on companies for all investor complaints. Conclusion The Wasington based NASDAQ, on the lines of which the OCTEI was formed in the most vibrant OTC market in the world, mainly for small, growth oriented companies. Some of the most innovative companies in the USA like Microsoft Corporation, Intel Corporation and Oracle Corporation are listed on the NASDAQ. More than 50 per cent of the total shares traded in the USA are through the NASDAQ where trading is carried on by dealers or market makers.

Even though the OCTEI is based on the model of NASDAQ, it has been languishing right from the beginning. Inspite of the prevalence of exclusive concepts like marketing making, rolling-settlement, depositary based trading, sponsorship-based listing of companies and connectivity of operations simultaneously in 42 cities, the exchange has failed to take off. The main reason can be attributed for its poor performance in the failure to create a unique impression in the minds of investors, the majority of whom are hardly aware of its existence and its mode of operations. It is perceived as a kindergarten exchange. Low investors interest has killed it. Hence, it should either be closed or merged with other stock exchanges

Over the Counter Exchange of India: Legal Framework Over the Counter Exchange of India marked the introduction of multi-tier securities exchange model in India. It was established with the objective of providing an alternate market for the securities of smaller companies, public-sector companies, closely held companies which are desirous of listing in the stock exchange.1 The Over the Counter Exchange of India is established in the form of a company incorporated under the Companies Act, 1956. It is a non-profit company under Section 25 of the Companies Act. It is conferred the status of a recognized stock exchange as per Section 4 of the Securities Contracts Regulation Act. It means that the companies listed in the OTCEI are at par with the companies listed in other stock exchange in India. It has been promoted jointly by UTI, ICICI, IDBI, SBI Capital Markets Ltd., IFCI, GIC and Canbank Financial Services Ltd.2 OTCEI is generally regulated by the Securities Contracts Regulations Act and its own bye laws. The members of the OTCEI have to comply with the bye laws made by the OTCEI. Eligible Companies Closely held corporate houses upto 100 crore. New companies with minimum capital as of 50 crore. All currently listed companies on the various stock exchanges of the country.

Listing Norms The bye laws of the Over the Counter Exchange of India provide for the eligibility criteria for the listing of the securities of the company in the OTCEI. In addition to the bye laws, the SEBI ICDR Guidelines will be applicable to all OTCEI issues. Some of the main eligibility criteria are discussed in the subsequent paragraphs.

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The minimum paid capital of the company should be Rs. 30 lakhs.3 The minimum offer to the public should be 25% of the issued capital or Rs. 20 lakhs worth of shares in face value, whichever is higher.4 The sponsorship by a merchant banker of the exchange is must for the listing of every company. The merchant bankers who sponsor the listing of the companies must arrange for market makers to give Buy and Sell quotes in the securities for an initial period of 18 months.5

The bye laws of OTCEI provide that the public limited companies in addition to the above mentioned listing norms have to fulfill following eligibility criteria in order to get their securities listed in the OTCEI. The additional eligibility criteria for the public limited companies are discussed in the following paragraphs. Company Valuation The minimum Net Tangible Assets should be 1 crore or the minimum market capitalization of the company should be 5 crore or the minimum net income or profit of the company should be 0.25 crore.6 Shareholding7 Minimum shares which should be floated should be 11 lakhs out which the minimum shares offered to the public should be 5 lakhs. The market value of the shares which are floated should be 2.50 crore. The minimum offer to the public should be 25 % of the total paid up capital of the company which is going to list its securities. Minimum number of the shareholders of the company should be 1000. Market Making8 The minimum number of the market makers should be 2. The duration of the market making should be 18 months. The minimum market capitalization of the company should be 5 crore. There should be no defaults on the part of company in complying the laws and regulations governing them. The company should have a proper corporate governance mechanism.

Furthermore, the financial companies have to follow addition requirements in addition to the above requirements. 9 Some of the main additional requirements are discussed in the subsequent paragraphs.
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The Financial Companies have to compulsorily register themselves with the Reserve Bank of India as Non-Banking Financial Companies.10 The company should be in profit in last three years.11 The debt equity ratio of the company should be in accordance with the ratio given by the Reserve Bank of India.12

Continuous Listing Requirement The equity shares of the company which get listed in the OTCEI will be traded after 3 days after the listing. The company is required to provide a Bank Guarantee of 1 % of the issue amount in favour of the OTCEI for complying with the continuous requirement. The Bank Guarantee so furnished by the company should be valid for the period of three years and to be provided before the refund of security deposit. Procedure for listing the scrips A sponsor who is the OTCEI member is appointed by the company to appraise the project or the company on technical, managerial, technical and commercial aspects. It also certifies the exchange regarding the company. The price of the shares offered to the public, members and dealers of the OTCEI is also determined by the sponsor. All the statutory clearances are taken by the sponsors. They also have to ensure the compliance of the issue with the SEBI guidelines. Registration of the shares with the OTCEI is done by the sponsors. The company has to make the listing applications to the OTCEI in accordance with its rules and regulations. Allotment of the shares is done after getting the approval from the exchange. Trading of equity shares of the company listed on the OTCEI commences after three days of the listing of the shares.

The listing procedure can be depicted more clearly in the following manner.
Appointment of a Sponsor

Sponsor to appoint market makers

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Submission of registration application and getting approval

Submission of draft prospectus with OTCEI for approval

Trading Mechanism The trading in the listed segment of the Over the Counter Exchange of India is done through the OASIS system. It is basically a hybrid trading method that combines the best features of the quote based and order drive system. The trading cycle in the OTCEI is from Friday to Thursday. The trading in the OTCEI can be done through the brokers of the exchange. The investors who are interested in trading the shares listed in the exchange can approach the any of the brokers and can view the screen displaying the best current quotes/ prices offered. The OTCEI dealer/brokers screen has a sell and buys option. The sell option is present in the left side of the screen and the buy option is available on the right side of the screen. The sell counter gives the rate, the number of the shares offered and the name of the market makers. The sellers and buyers have to give their respective quotes. The quotes are entered into the computer once the deal is struck. Once the deal is done, an online message confirming the deal appears on the screen. The computer receipt is generated through computer which formally confirms the deal in paper. Settlement System The OTCEI is an online trading cum depository, quote driven and transparent system of trading. The settlement period of the trading of the shares in the OTCEI is five days i.e. T+5 days. The scrip wise net position is declared at each OTCEI counter on every Friday at the end of the trading hour. Furthermore, the securities are required to be delivered by the counter on every Monday. Cash payments are done on T+4 days and cash payouts are done on T+7 days.13

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OTCEI is basically a cash or retail markets for the small investors. The problems of bad securities and short deliveries are not possible because the system allows the execution of trades only on the basis of electronic inventory of the scrips. Another very important feature of the settlement system of the OTCEI is that it prevents speculation in the market as the future trading is not permitted. The short sales and squaring up has to be done within the trading cycle and certificate to the investor should be delivered within a fortnight from the date of the purchase. Hence, the speculation is completely ruled out.