OTCEI was promoted jointly by the ICICI, UTI, SBI Capital markets Ltd., Canbank Financial Services Ltd., GIC and LIC. It was recognized as a stock exchange under the securities Contracts (Regulation) Act, 1956 with effect from August 23, 1989. The exchange was incorporated as a company under section 25 of the Companies Act, 1956 on September 20, 1990, with an authorized capital of Rs 10 crore and a paid-up capital of Rs 5 crore.
It is based on the model of National Association of Securities Dealers Automated Quotation (NASDAQ) of USA with modifications to suit the Indian conditions. It commenced operation from October 6, 1992.
OTCEI arose 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 market for raising finance in a cost effective manner and investors with a convenient, transparent, and different avenues for capital market investment.
OTCEI was the first ring-less, electronic and 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 to an OTCEI counter, tap on the computer screen, find quotes, and effect purchase or sale depending on whether the prices met their targets. This was quite different from the open outcry system at BSE. Moreover, each strip listed on the exchange and at least two market makers who continuously gave two way quotes.
At OTCEI there are two ways of making a public offer: a direct offer and an indirect one. In direct offer, a company can offer its shares 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 OTCEI are divided into three categories; listed, permitted and initiated companies. Initially, only those securities which were listed exclusively on OTCEI were traded. Later OTCEI allowed trading in some listed companies on other stock exchanges. These are referred to as permitted securities. Units of UTI and other mutual funds are permitted to be traded on OTCEI. Initiated debentures can be offered for trading on OTCEI by any entity provided it holds at least 1 lakh debentures of a particular company and appoints an OTC member/dealer to carry out compulsory market making. OTCEI started trading in debt instruments from May20, 1993 with Infrastructure Leasing and financial Services Ltd as the compulsory market maker. It opened 25 representative offices in the major cities of the country. It has two major players; members and dealers who can perform the functions of broking, trading on their own accounts, and market making. While the members can engage in sponsorship the dealers cannot. Scheduled banks, mutual funds, banking subsidiaries, financial institutions, merchant bankers, ventures capital funds and non-banking finance companies other than finance and leasing companies having a minimum net with of Rs 2.5 crore can become members of OTCEI.
Members are authorized act as brokers for securities make market in scrips, and act as sponsors to companies. A sponsor is very important person in OTCEI as he is responsible for activities such as appraising the company management capability appraising the financial and technological viability of a project, valuing, holding and offering the scrip to the public, listing the scrip and doing compulsory market making in the scrip for at least three years from the date of commencement. The sponsor has to arrange for at least one more market makers for a period of one year.
Market makers are merchant bankers willing to make a market in securities by continuously offering buy and sell quotes. They act as a dealer cum stockist and do not charge any commission or brokerage. Their profit margin is the spread between the bid and offer prices. A voluntary market maker can be appointed for a period of six months. Market making is a unique connect of OTCEI.
Dealers are permitted to trade in securities listed with OTCEI on their own account or on behalf of their clients. To qualify as increased dealers, they have to clear a nationwide test undertaken by OTCEI.
The other player on OTCEI is the Registrar/Custodian – a safe-keeper of share certificates.