STOCK MARKETS

MODULE 2
STOCK MARKETS
• Stock Exchange (also called Stock Market or Share Market) is one
important constituent of capital market. Stock Exchange is an
organized market for the purchase and sale of industrial and financial
security. It is convenient place where trading in securities is
conducted in systematic manner i.e. as per certain rules and
regulations.
• It performs various functions and offers useful services to investors
and borrowing companies. It is an investment intermediary and
facilitates economic and industrial development of a country.
Definitions of Stock Exchanges
• According to Husband and Dockerary, “Stock exchanges are privately
organized markets which are used to facilitate trading in securities.”
• The Indian Securities Contracts (Regulation) Act of 1956, defines
Stock Exchange as, “"An association, organization or body of
individuals, whether incorporated or not, established for the purpose
of assisting, regulating and controlling business in buying, selling and
dealing in securities."
Stock markets-Nature
• Stock exchange is an organized market for buying and selling corporate and other
securities.
• Securities are purchased and sold out as per certain well-defined rules and
regulations.
• It provides a convenient and secured mechanism or platform for transactions in
different securities.
• Such securities include shares and debentures issued by public companies which
are duly listed at the stock exchange, and bonds and debentures issued by
government, public corporations and municipal and port trust bodies.
• Stock exchanges are indispensable for the smooth and orderly functioning of
corporate sector in a free market economy.
• A stock exchange need not be treated as a place for speculation or a gambling
den. It should act as a place for safe and profitable investment, for this, effective
control on the working of stock exchange is necessary.
• This will avoid misuse of this platform for excessive speculation, scams and other
undesirable and anti-social activities.
• London stock exchange (LSE) is the oldest stock exchange in the world.
While Bombay stock exchange (BSE) is the oldest in India. Similar Stock exchanges
exist and operate in large majority of countries of the world.
Features of Stock Exchange

• Market for securities : Stock exchange is a market, where securities of corporate bodies,
government and semi-government bodies are bought and sold.
• Deals in second hand securities : It deals with shares, debentures bonds and such
securities already issued by the companies. In short it deals with existing or second hand
securities and hence it is called secondary market.
• Regulates trade in securities : Stock exchange does not buy or sell any securities on its
own account. It merely provides the necessary infrastructure and facilities for trade in
securities to its members and brokers who trade in securities. It regulates the trade
activities so as to ensure free and fair trade
• Allows dealings only in listed securities : In fact, stock exchanges maintain an official list
of securities that could be purchased and sold on its floor. Securities which do not figure
in the official list of stock exchange are called unlisted securities. Such unlisted securities
cannot be traded in the stock exchange.
• Transactions effected only through members : All the transactions in securities at the
stock exchange are effected only through its authorised brokers and members. Outsiders
or direct investors are not allowed to enter in the trading circles of the stock exchange.
Investors have to buy or sell the securities at the stock exchange through the authorised
brokers only.
• Association of persons : A stock exchange is an association of persons or body of
individuals which may be registered or unregistered.
• Recognition from Central Government : Stock exchange is an organised
market. It requires recognition from the Central Government.
• Working as per rules : Buying and selling transactions in securities at the
stock exchange are governed by the rules and regulations of stock
exchange as well as SEBI Guidelines. No deviation from the rules and
guidelines is allowed in any case.
• Specific location : Stock exchange is a particular market place where
authorised brokers come together daily (i.e. on working days) on the floor
of market called trading circles and conduct trading activities. The prices of
different securities traded are shown on electronic boards. After the
working hours market is closed. All the working of stock exchanges is
conducted and controlled through computers and electronic system.
• Financial Barometers : Stock exchanges are the financial barometers and
development indicators of national economy of the country. Industrial
growth and stability is reflected in the index of stock exchange.
Functions of stock exchange
1. Continuous and ready market for securities: Stock exchange provides a ready and
continuous market for purchase and sale of securities. It provides ready outlet for
buying and selling of securities. Stock exchange also acts as an outlet/counter for
the sale of listed securities.
2. Facilitates evaluation of securities: Stock exchange is useful for the evaluation of
industrial securities. This enables investors to know the true worth of their holdings
at any time. Comparison of companies in the same industry is possible through
stock exchange quotations (i. e. price list).
3. Encourages capital formation: Stock exchange accelerates the process of capital
formation. It creates the habit of saving, investing and risk taking among the
investing class and converts their savings into profitable investment. It acts as an
instrument of capital formation. In addition, it also acts as a channel for right (safe
and profitable) investment.
4. Provides safety and security in dealings: Stock exchange provides safety, security
and equity (justice) in dealings as transactions are conducted as per well defined
rules and regulations. The managing body of the exchange keeps control on the
members. Fraudulent practices are also checked effectively. Due to various rules
and regulations, stock exchange functions as the custodian of funds of genuine
investors.
5. Regulates company management: Listed companies have to comply with rules
and regulations of concerned stock exchange and work under the vigilance (i.e.
supervision) of stock exchange authorities.
6. Facilitates public borrowing: Stock exchange serves as a platform for marketing
Government securities. It enables government to raise public debt easily and
quickly.
7. Provides clearing house facility: Stock exchange provides a clearing house facility
to members. It settles the transactions among the members quickly and with ease.
The members have to pay or receive only the net dues (balance amounts) because
of the clearing house facility.
8. Facilitates healthy speculation: Healthy speculation, keeps the exchange active.
Normal speculation is not dangerous but provides more business to the exchange.
However, excessive speculation is undesirable as it is dangerous to investors & the
growth of corporate sector.
9. Serves as Economic Barometer: Stock exchange indicates the state of health of
companies and the national economy. It acts as a barometer of the economic
situation / conditions.
10. Facilitates Bank Lending: Banks easily know the prices of quoted securities.
They offer loans to customers against corporate securities. This gives convenience
to the owners of securities.
Role of stock exchanges in capital market of India.
1. Effective Mobilization of savings: Stock exchanges provide organized market for an individual as well as
institutional investors. They regulate the trading transactions with proper rules and regulations in order to
ensure investor's protection. This helps to consolidate the confidence of investors and small savers. Thus, stock
exchanges attract small savings especially of large number of investors in the capital market.
2. Promoting Capital formation: The funds mobilized through capital market are provided to the industries
engaged in the production of various goods and services useful for the society. This leads to capital formation
and development of national assets. The savings mobilized are channelized into appropriate avenues of
investment.
3. Wider Avenues of investment: Stock exchanges provide a wider avenue for the investment to the people and
organisations with investible surplus. Companies from diverse industries like Information Technology, Steel,
Chemicals, Fuels and Petroleum, Cement, Fertilizers, etc. offer various kinds of equity and debt securities to the
investors. Online trading facility has brought the stock exchange at the doorsteps of investors through
computer network. Diverse type of securities is made available in the stock exchanges to suit the varying
objectives and notions of different classes of investor. Necessary information from stock exchanges available
from different sources guides the investors in the effective management of their investment portfolio
4. Liquidity of investment: Stock exchanges provide liquidity of investment to the investors. Investors can sell
out any of their investments in securities at any time during trading days and trading hours on stock exchanges.
Thus, stock exchanges provide liquidity of investment. The online trading and online settlement of de-mat
securities facilitates the investors to sellout their investments and realize the proceeds within a day or two.
Even investors can switch over their investment from one security to another according to the changing
scenario of capital market.
5. Investment priorities: Stock exchanges facilitate the investors to decide his investment priorities by providing
him the basket of different kinds of securities of different industries and companies. He can sell stock of one
company and buy a stock of another company through stock exchange whenever he wants. He can manage his
investment portfolio to maximize his wealth.
6. Investment safety: Stock exchanges through their by-laws, Securities and Exchange Board of India
(SEBI) guidelines, transparent procedures try to provide safety to the investment in industrial
securities. Government has established the National Stock Exchange (NSE) and Over The Counter
Exchange of India (OTCEI) for investors' safety. Exchange authorities try to curb speculative practices
and minimise the risk for common investor to preserve his confidence.
7. Wide Marketability to Securities: Online price quoting system and online buying and selling
facility have changed the nature and working of stock exchanges. Formerly, the dealings on stock
exchanges were restricted to its head quarters. The investors across the country were absolutely in
dark about the price fluctuations on stock exchanges due to the lack of information. But today due
to Internet, on line quoting facility is available at the computers of investors. As a result, they can
keep track of price fluctuations taking place on stock exchange every second during the working
hours. Certain T.V. Channels like CNBC are fully devoted to stock market information and corporate
news. Even other channels display the on line quoting of stocks. Thus, modern stock exchanges
backed up by internet and information technology provide wide marketability to securities of the
industries. Demat facility has revolutionized the procedure of transfer of securities and facilitated
marketing.
8. Financial resources for public and private sectors: Stock Exchanges make available the financial
resources available to the industries in public and private sector through various kinds of securities.
Due to the assurance of liquidity, marketing support, investment safety assured through stock
exchanges, the public issues of securities by these industries receive strong public response
(resulting in over subscription of issue).
9. Funds for Development Purpose: Stock exchanges enable the government to mobilize the funds
for public utilities and public undertakings which take up the developmental activities like power
projects, shipping, railways, telecommunication, dams & roads constructions, etc. Stock exchanges
provide liquidity, marketability, price continuity and constant evaluation of government securities.
10. Indicator of Industrial Development: Stock exchanges are the symbolic
indicators of industrial development of a nation. Productivity, efficiency,
economic-status, prospects of each industry and every unit in an industry is
reflected through the price fluctuation of industrial securities on stock
exchanges. Stock exchange Sensex and price fluctuations of securities of
various companies tell the entire story of changes in industrial sector.
11. Barometer of National Economy: Stock exchange is taken as a Barometer
of the economy of a country. Each economy is economically symbolized
(indicators) by its most significant stock exchange. New York Stock Exchange,
London Stock Exchange, Tokyo Stock Exchange and Bombay Stock Exchange
are considered as barometers of U.S.A, United Kingdom, Japan and India
respectively. At both national and international level these stock exchanges
represent the progress and conditions of their economies.

Thus, stock exchange serves the nation in several ways through its diversified
economic services which include imparting liquidity to investments,
providing marketability, enabling evaluation and ensuring price continuity of
securities.
BSE
• Established in 1875, BSE (formerly known as Bombay Stock Exchange Ltd.), is Asia's first & the Fastest Stock
Exchange in world with the speed of 6 micro seconds and one of India's leading exchange groups.
• Over the past 141 years, BSE has facilitated the growth of the Indian corporate sector by providing it an
efficient capital-raising platform. Popularly known as BSE, the bourse was established as "The Native Share &
Stock Brokers' Association" in 1875.
• Today BSE provides an efficient and transparent market for trading in equity, currencies, debt instruments,
derivatives, mutual funds. It also has a platform for trading in equities of small-and-medium enterprises
(SME).
• India INX, India's 1st international exchange, located at GIFT CITY IFSC in Ahmedabad is a fully owned
subsidiary of BSE. BSE is also the 1st listed stock exchange of India.
BSE provides a host of other services to capital market participants including risk management, clearing,
settlement, market data services and education. It has a global reach with customers around the world and a
nation-wide presence.
• BSE systems and processes are designed to safeguard market integrity, drive the growth of the Indian capital
market and stimulate innovation and competition across all market segments.
• BSE is the first exchange in India and second in the world to obtain an ISO 9001:2000 certification. It is also
the first Exchange in the country and second in the world to receive Information Security Management
System Standard BS 7799-2-2002 certification for its On-Line trading System (BOLT).
• It operates one of the most respected capital market educational institutes in the country (the BSE Institute
Ltd.). BSE also provides depository services through its Central Depository Services Ltd. (CDSL) arm.
BSE's popular equity index - the S&P BSE SENSEX - is India's most widely tracked stock market benchmark
index. It is traded internationally on the EUREX as well as leading exchanges of the BRCS nations (Brazil,
Russia, China and South Africa).
• BSE Ltd, the first ever stock exchange in Asia established in 1875 and the first in the country to be
granted permanent recognition under the Securities Contract Regulation Act, 1956, has had an
interesting rise to prominence over the past 140 years.
While BSE Ltd is now synonymous with Dalal Street, it was not always so. The first venue of the
earliest stock broker meetings in the 1850s was in rather natural environs - under banyan trees -
in front of the Town Hall, where Horniman Circle is now situated.
• A decade later, the brokers moved their venue to another set of foliage, this time under banyan
trees at the junction of Meadows Street and what is now called Mahatma Gandhi Road.
• As the number of brokers increased, they had to shift from place to place, but they always
overflowed to the streets. At last, in 1874, the brokers found a permanent place, and one that
they could, quite literally, call their own. The new place was, aptly, called Dalal Street (Brokers'
Street).
The journey of BSE Ltd. is as eventful and interesting as the history of India's securities market. In
fact, as India's biggest bourse in terms of listed companies and market capitalisation, almost every
leading corporate in India has sourced BSE Ltd. services in raising capital and is listed with BSE
Ltd.
Even in terms of an orderly growth, much before the actual legislations were enacted, BSE Ltd.
had formulated a comprehensive set of Rules and Regulations for the securities market. It had
also laid down best practices which were adopted subsequently by 23 stock exchanges which
were set up after India gained its independence.
BSE Ltd., as a institutional brand, has been and is synonymous with the capital market in India. Its
S&P BSE SENSEX is the benchmark equity index that reflects the health of the Indian economy.
BSE Achievements
• At par with international standards, BSE Ltd. has been a pioneer in several areas over the decades
and has many firsts and key achievements to its credit. BSE is the first exchange in India to
Launch a special platform for trading in SME securities
• Introduce Equity Derivatives
• Launch a Free Float Index - S&P BSE SENSEX
• Launch Exchange Enabled Internet Trading Platform
• Obtain ISO certification for a stock exchange
• Exclusive facility for financial training – BSE Institute Ltd.
• Launch its website in Hindi and regional languages
• Host the popular opening-bell ceremony in Indian capital markets
• Launch mobile-based trading in India in Sept 2010
• Become securities market infrastructure member of SWIFT in India and provide corporate actions
to custodians in ISO 15022 format
• Launched S&P BSE SENSEX Realized S&P BSE Volatility (REALVOL) Index in Nov 2010
• BSE has taken large strides in product and service innovation for the
benefit of its members and investors, notable ones being.
Launch of a reporting platform for corporate bonds
• Launch of the S&P BSE IPO index and S&P BSE PSU website
• Revamp of its website with wide range of new investor-friendly features
• Launch of trading in S&P BSE SENSEX futures on EUREX and leading
exchanges of the BRICS nation bloc
• Launched Smart Order Routing for members and investors
• Introduced SACT (SMS alert & Complaint Tracking system)
• Launched co-location facility at BSE premises in November 2010
• Reduction in membership fees to Rs. 10 lakh for new memberships to
promote financial access and inclusion
• Launch of web-based mutual fund trading platform for investors
Sustainable Stock Exchanges (SSE)
• The United Nations had been playing a catalyzing role through a
series of Global Dialogues - held in New York (2009), Xiamen (2010)
and Rio de Janeiro (2012) - the initiative had become a platform for
exploring how exchanges can work with investors, regulators and
companies to enhance corporate sustainability and promote
responsible investment.

The Exchange's pro-active work had been noticed by UNCTAD.

UNCTAD has approached BSE to get on board of SSE by signing the
commitment letter to promote long term sustainable investment and
improved environmental, social and corporate governance disclosure

BSE is the first stock exchange from Asia to join Sustainable Stock
Exchange Initiative.
• BSE - Corporate Social Responsibility Index.
BSE and Indian Institute of Corporate Affairs (IICA - Established by Ministry
of Corporate Affairs), have signed a Memorandum of Understanding (MoU)
on September 23, 2013 to work collaboratively in the domains of business
sustainability, Corporate Social Responsibility (CSR), investor education and
other allied areas.
BSE - IICA are going to launch Corporate Social Responsibility Index. An
Advisory Committee (AC) consisting officials from IICA and BSE is formed to
guide the CSR Index construction, design and roll-out processes.
• This Advisory Committee will be having a consultative approach and shall
interact with various stakeholders. Corporate Social Responsibility (CSR) in
BSE is aligned with its tradition of creating wealth in the community with a
three pronged focus on Education, Health and the Environment.
• Besides funding charitable causes for the elderly and the physically
challenged, BSE has been supporting the rehabilitation and restoration
efforts in earthquake-hit communities of Gujarat. BSE has been awarded
the Golden Peacock Global - CSR Award for its initiatives in Corporate
Social Responsibility (CSR) by the World Council of Corporate Governance.
NSE
• The National Stock Exchange of India Limited (NSE) is India's largest
financial market. Incorporated in 1992, the NSE has developed into a
sophisticated, electronic market, which ranked fourth in the world by
equity trading volume in 2015. Trading commenced in 1994 with the
launch of the wholesale debt market and a cash market segment
shortly thereafter.
• Today, the exchange conducts transactions in the wholesale debt,
equity and derivative markets. One of the more popular offerings is
the NIFTY 50 Index, which tracks the largest assets in the Indian
equity market. US investors can access the index with exchanged
traded funds (ETF) like the iShares India 50 ETF, which is listed under
the ticker symbol INDY.
• The National Stock Exchange of India Limited was the first exchange in India to provide modern, fully
automated electronic trading.
• It was set up by a group of Indian financial institutions with the goal of bringing greater transparency to the
Indian capital market.
• As of March 2016, the National Stock Exchange had accumulated $1.41 trillion in total market capitalization,
making it the world's 12th-largest stock exchange. The flagship index, the NIFTY 50, represents about 63% of
total market capitalization listed on the exchange.
• The total traded value of stocks listed on the index makes up about 44% of the traded value of all stocks on
the NSE for the last six months.
• The index itself covers 12 sectors of the Indian economy across 50 stocks. Besides the NIFTY 50 Index, the
National Stock Exchange maintains market indices that track various market capitalizations, volatility, specific
sectors, and factor strategies.
• The National Stock Exchange has been a pioneer in Indian financial markets, being the first electronic limit
order book to trade derivatives and ETFs.
• The exchange supports more than 3,000 VSAT terminals, making the NSE the largest private wide-area
network in the country. Ashok Chawla is the Chairman of the Board of Directors and Vikram Limaye is the
Managing Director and CEO of the exchange.
• Benefits of Listing on the NSE:
• The National Stock Exchange is a premier marketplace for companies preparing to list on a major exchange.
The sheer volume of trading activity and application of automated systems promotes greater transparency in
trade matching and the settlement process. This in itself can boost visibility in the market and lift investor
confidence. Using cutting-edge technology also allows orders to be filled more efficiently, resulting in greater
liquidity and accurate prices.
History of National Stock Exchange of India

• After the outbreak of 1992 security scam in which a BSE member, Harshad Mehta, was exposed
manipulating the market, the government of India decided to promote establishing NSE based on
recommendations made by High Powered Study Group on Establishment of New Stock
Exchanges. The immediate aim was to provide equal access to investors from all across the nation
and make participating in stock market easier.
• In November 1992, NSE was established as a tax-paying company with key investors including Life
Insurance Corporation of India, State Bank of India, IFCI Limited, IDFC Limited and Stock Holding
Corporation of India Limited. It was recognized as a stock exchange under the Securities Contracts
(Regulation) Act, 1956 in April 1993 and commenced operations in the Wholesale Debt Market
(WDM) segment in June 1994. Operations in the equity segment were started in November 1994
followed by Derivatives segment in June 2000.
• NSE was the first stock exchange in India where ownership, management and trading were
handled by three independent set of people. While the ownership is with various financial
institutions and banks, the management is handled by independent professionals who are
forbidden from directly or indirectly trading on the exchange. This demutualization has eliminated
the kind of conflict of interest that was at the root of 1992 security scam.
Functions of NSE
• The NSE was set-up with an express objective to fulfil the following functions:
• establishing a nation-wide trading facility for equities, debt and other hybrid instruments
• ensuring equal access to investors across the nation through an appropriate communication
network
• providing a fair, efficient and transparent securities market to investors using electronic trading
systems
• enabling shorter settlement cycles and book entry settlements systems and
• meeting the current international standards of securities markets
• NSE successfully fulfilled these functions by establishing the first electronic stock market of the
nation. NSE was instrumental in creating National Securities Depository Limited (NSDL), the first
depository in India, allowing investors to hold and trade securities electronically. This not only
made investing simple, but also provided increased transparency. The price information that was
earlier available only to a handful of traders present at the exchange, was now widely
broadcasted and available to everyone at their own remote location.
• Before the system introduced by NSE, an investor who wanted to trade a security not listed on the
nearest exchange had to route orders through a series of correspondent brokers to the
appropriate exchange. This resulted in increased uncertainty and high transaction costs. NSE
made it possible for an investor to access the same market and order book, irrespective of
location and at the same cost as every other investor. NSE trading terminals are now present in
363 cities and towns across India and can be accessed through brokers from anywhere on the
globe.
Features of National Stock Exchange

• NSE, like every other leading stock exchange today, runs an order-driven market as opposed to quote-driven
market. The fully automated screen based trading system that it runs is called National Exchange for
Automated Trading (NEAT).
• The order management system under NEAT gives a unique number to each order received and if a match is
not found immediately, it is added to an order book where the sequence of orders to be matched are
determined based on price-time priority. That is, if two orders are entered into the system, the order having
the best price gets the higher priority and within the orders of the same price priority is given to the older
order.
• Order matching is done by comparing the best buy order, the buy order with the highest price, with the best
sell order, the sell order with the lowest price. This is because a seller would like to sell to the buyer offering
the highest price and vice versa. While orders can be partially matched till the complete order can be
completed, the matches are always made based on the passive price of the order and not the active price at
which the match is made.
• NEAT also allows members to specify conditional clauses on the submitted orders These clauses can be of
the following kinds:
• ime related condition
• Price related condition
• Quantity related condition
• Time related conditions include
• Day order – the order is valid only for the day on which it is entered. If the order is not matched during the
day, it will get cancelled at the end of the trading day.
• Good Till Cancelled (GTC) order -the order remains in the system until it is cancelled by the member. It will
therefore span multiple trading days if it does not get matched. The maximum number of days a GTC order
can remain in the system is notified by NSE from time to time.
• Good Till Date (GTD) order – the order stays in the system till the date mention3ed by the member. The
maximum number of days a GTD order can remain in the system is notified by NSE from time to time.
• Immediate or Cancel (IOC) order – if the order is not executed on release, it will be removed from the
market. If a partial match happens, the unmatched portion of the order is cancelled immediately.
• Price related conditions include:
• Limit Price/Order– the expected price is mentioned by the member while entering the order into the
system.
• Market Price/Order – the expected price is set as the best price available at the time the order was placed.
• Stop Loss (SL) Price/Order– an order which gets activated only when the market price of the relevant
security crosses a threshold price.
• Quantity related conditions include:
• Disclosed Quantity (DQ) order– an order in which only a part of the order quantity is disclosed to
the market. For example, an order of 10000 units with a disclosed quantity condition of 2000
units will mean that 2000 units are displayed to the market at a time. After this is traded, another
2000 units will be released till the full order is executed. NSE may set a minimum disclosed
quantity criteria from time to time.
• Minimum Fill (MF) order – an order in which the partial match should be of at least the specified
quantity. For example, an order of 1000 units with minimum fill 200 will require that each trade
be for at least 200 units.
• All or None (AON) order – an order which cannot be partially matched.
• While NSE supports MF and AON orders, these are disabled at the present as per SEBI directives.
• NSE employs a rolling settlement mechanism where each trading day is considered as a trading
period and trades executed during the day are settled based on the net obligations for the day.
NSE settles the trades on T+2 basis, that is a trade is settles on the 2nd working day after it has
been executed.
• Segments
• NSE provides trading across following sectors:
• Equities
• Equities
• Indices
• Mutual Funds
• Exchange Traded Funds
• Initial Public Offerings
• Security Lending and Borrowing Scheme
• Derivatives
• Equity Derivatives
• Currency Derivatives
• Interest Rate Futures
• Debt
• Corporate Bonds
• Trading schedule
• The market timings of the equities segment are:
• (1) Pre-open session
• Order entry & modification Open: 09:00 hrs
• Order entry & modification Close: 09:08 hrs
• (2) Regular trading session
• Normal/Retail Debt/Limited Physical Market Open: 09:15 hrs
• Normal/Retail Debt/Limited Physical Market Close:
• Equity trading takes place on all days of the week, except for
Saturdays, Sundays and other holidays declared by NSE in advance.
• With a total market capitalization of more than US$1.41 trillion, NSE
is the world’s 12th-largest stock exchange today and the fourth
largest by equity trading volume in 2015, according to World
Federation of Exchange. In 1994, NSE was equipped to handle 2
orders a second. This increased to 60 orders a second by 2001. Today
NSE can handle 1,60,000 orders per second. The settlement cycle has
been reduced from T+3 to T+2.
OTCEI
• The over-the-counter exchange of India (OTCEI) is an electronic stock
exchange based in India that consists of small- and medium-sized firms
aiming to gain access to the capital markets like electronic exchanges in the
U.S. such as the Nasdaq, there is no central place of exchange, and all
trading occurs through electronic networks.
The first electronic OTC stock exchange in India was established in 1990 to
provide investors and companies with an additional way to trade and issue
securities. This was the first exchange in India to introduce market makers,
which are firms that hold shares in companies and facilitate the trading of
securities by buying and selling from other participants.
• The first electronic OTC stock exchange in India was established in 1990 to provide investors and companies
with an additional way to trade and issue securities. This was the first exchange in India to introduce market
makers, which are firms that hold shares in companies and facilitate the trading of securities by buying and
selling from other participants.
• Over-the-Counter Exchange of India: OTCEI and OTC Trading in U.S. Markets
• In the U.S. and worldwide over-the-counter or OTC markets exist outside of formal exchanges. In the U.S.
these include the New York Stock Exchange (NYSE), Toronto Stock Exchange or the NYSE MKT, formerly
known as the American Stock Exchange (AMEX). In the U.S. OTC also refers to debt securities and other
financial instruments, such as derivatives, which trade via a dealer network.
• The OTC Markets Group operates some of the most popular OTC networks, including the OTCQX Best
Market, the OTCQB Venture Market, and the Pink Open Market. While Nasdaq operates as a dealer network,
Nasdaq stocks are generally not classified as OTC. The Nasdaq is considered a stock exchange.
• Today, fewer differences exist among traditional exchanges and OTC networks, due to advances in
technology that allow for improvements in electronic quotation and trading. These have facilitated higher
liquidity and better information sharing. However, on a formal exchange, each party is exposed to offers by
every other counterparty. In dealer networks, this may not be the case, given less transparency and less
stringent regulation on these exchange.
• Over-the-Counter Exchange of India: OTCEI and BRIC
• India is part of the BRIC economic bloc that consists of Brazil, Russia, India and China (BRIC). BRIC refers to
the notion that by 2050 China and India will become the world's dominant suppliers of manufactured goods
and services, while Brazil and Russia will become similarly dominant as suppliers of raw materials. (BRIC now
includes a fifth nation, South Africa.) May investors and companies cite BRIC as a source of foreign expansion
opportunity, due to lower labor costs.
• 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 Bousers:
• There are about 1000 odd companies listed on the Indian stock exchanges. But day to day
transactions are carried out in only 250 of them and the remaining companies have no liquidity at
all. Brokers and dealers usually have a tendency to pursue a handful of blue chip securities which
are most profitable. Consequently, the investors who need cash desperately for domestic or other
purposes have to plead before brokers and dealers to sell off their holdings. In many number of
occasions they just cannot get their shares en-cashed.
• 2. Delay in Settlement:
• Small and marginal investors have been suffering from delays in settlements and transfers. They
are kept blind to the actual price at which their transactions took place on their behalf. When the
investors buy stock they-get it at the highest price of the day and when they sell the scrips, they
get lowest price of the day. This amounted to loss of interest in the scrips.
• Lack of Transparency:
• The investors could not understand at what prices their shares are
sold or bought since there is no clear-cut display of the quotations.
Unscrupulous brokers often exploit investors out of their ignorance.
Moreover, small and newly incorporated companies had the problem
of raising capital through a public issue at exorbitant costs and delays
involved in realization of proceeds.
• Companies listed on the OTCEI will enjoy the same listing status as available to other
companies listed on any other stock exchange in the country except that a company
listed on OTCEI cannot be listed /traded on any other stock exchange in India. The
corporate office is situated in Bombay. It started functioning in 1992.
• OTCEI has been linked to 42 centers all over India through computers. OTCEI operates
with the use of INET the country’s first public switched data network and Telex – the first
nationwide information dissemination network and RABMN – Remote Area Business
Message Network.
• Any counter in any of the four hundred cities in India can receive the scrip prices, which
are generated by OTCEI’s central computer in Bombay. Any person or Indian citizen can
apply for dealership or membership of the OTC provided he adheres to the prescribed
conditions.
• The aspirants would also have to pass a computer -based written test. Preference would
be given to professionals and people having experience in the field with sound network.
Those having proper infrastructural facilities like telephone, computers, telex, fax, office
space and other networks would also be given due weightage and preference.
• Features of OTCEI:
• Following are the features of OTCEI:
• 1. Ringless Trading:
• For greater accessibility to the investor, the OTC Exchange has eliminated the trading ring. Trading
will take place through a network of computers of OTC dealers located at several places within
the same city and even across cities. The exchange allows dealers to quote, query and transact
through a central OTC computer using telecommunication links.
• 2. National Reach:
• Unlike other stock exchanges, the OTC Exchange has a nationwide reach. This enables widely
dispersed trading across cities, resulting in greater liquidity. Companies thus, have the unique
benefit of nationwide listing and trading of their scrips by listing at just one exchange, the OTC
exchange.
• 3. Computerized:
• All the activities of the OTC trading process are computerized. This facilitates a more transparent,
quick and disciplined market. The trading mechanism brings out these features of the system.
• 4. Exclusive List of Companies:
• The OTC Exchange will not list and trade in companies listed on any other exchange. It will list an
entirely new set of companies, sponsored by members of the OTC Exchange
5. Closeness:
Initially counters were opened at Bombay and were followed by counters at other centers. OTCEI will give public notice as to the availability of counters
where trading take place. Facility for trading will be available after the offer at the counters of the sponsor and the additional Market Maker addresses
will be given in the new issue application attached to offer for sale document (OSD) and with all the dealers of OTCEI.
6. Authorized Dealers:
All members and dealers are authorized and approved by the OTCEI
7. Liquidity through Market Making:
The sponsor-member requires day quotes (buy and sell) for the 12 months from the date of commencement of trading. Besides compulsory market
maker, there are additional market maker and voluntary market maker who give two way quotes for the scrip.
8. Efficient Market Pricing:
Competition among market makers produces efficient pricing. This reduces spreads between buy and sell quotations. It also increases the capacity to
absorb larger volumes, to the benefit of investors’ .The market makers continually analyze companies and provide information about them to their
investors, thus helping investors to make an informed investment decision.
9. Transfer of Securities:
Investors will be required to submit transfer deeds to any of the OTCEI counters for transferring the shares in their names. Shares will be automatically
transferred in the name of the investors, if the consolidated holding of the shares does not exceed 0.5% of the issued capital of the company.
10. Investor Registration:
For buying and selling shares on the OTCEI and investor needs “INVESTOTC Card”. Application for “INVESTOTC Card” can be made at any of the counters
of OTCEI and also at the time of applying for new issues on the OTCEI. The share application form includes the necessary details to be filled in for
obtaining INVESTOTC Card.
• 11. Transparency of Transactions:
• At the OTC Exchange, the investor can see the available quotations on the computer screen at the dealer’s office before placing the order. The confirmation slip/trading
document generated through the computer gives the exact price of the transaction and the brokerage charge. So the investor’s interest is totally safeguarded. This system also
ensures that transactions are done at the best prevailing quotation in the market.
• 12. Faster Delivery and Payment:
• On the OTC Exchange, the transaction is settled within a period of 7 days. Further, the investor actually gets the delivery of the scrip or the payment for the scrip sold within 7
days.
• 13. Sponsorship:
• The companies that seek listing on the OTC Exchange have to approach one of the members appointed by the OTC for acting as a sponsor to the issue. The sponsor makes
thorough appraisal of the project, resulting in investors getting a choice of quality companies. Through the sponsor-ship agreement, the sponsor is committed to making market in
that scrip by giving a buy / sell quote for a minimum period of 1 year from the date of listing. Investors are benefited by this as it enhances the liquidity of the scrips listed on the
OTC Exchange.
• 14. Listing of Small and Medium Sized Companies:
• In the past, many small and medium sized companies were not able to enter the capital market, due to the listing requirement of the Securities Contract (Regulation) Act, 1956.
The Act specified that a minimum issued equity capital of Rs. 3 crores and maximum 25 crores for issuing.
• The OTC Exchange provides an ideal opportunity to these companies to enter the Capital market. In fact, any company with an issued capital of more than Rs. 30 lakhs and less
than Rs. 25 crores can raise finance from the capital market through the OTC Exchange.
• 15. Bought-Out Deals:
• Through the concept of bought-out deals, OTCEI allows companies to place their equity meant to be offered to the public with the sponsor -member at a mutually agreed price.
This ensures swifter availability of funds to companies for timely completion of projects and a listed status at a later date.
•
• Advantages of OTCEI:
• The Advantages of Over The Counter Exchange of India (OTCEI) to Companies, to Investors, and Economy
at large are described below:
• To Companies:
• 1. Provides method of raising funds through capital market instruments which are priced fairly. In OTCEI the
company will be able to negotiate the issue price with the sponsors who will market the issue.
• 2. Saves unnecessary issue expenses on raising funds from capital markets. The method of sponsors pricing
the scrips with members of OTCEI who will in turn, off – load the scrips to public will obviate the need for a
public issue as we know them today. Therefore, almost all associated costs will be eliminated.
• 3. Offer documents of companies seeking listing on OTCEI will not be vetted by SEBI. Such companies shall
only file their offer documents with SEBI and SEBI will communicate its comments to the issuer company and
lead manager within 21 days.
• 4. Retains greater degree of management stability. The OTC Exchange will list scrips even with 40% of the
capital made available for public trading.
• 5. Provides greater accessibility to large pool of captive investor base. This enhances fund raising power
substantially. OTC Exchange will create a nationwide network, where investors will be serviced who will form
the captive investor base for companies.
• To Investor:
• 1. Investment in stocks becomes easier. OTC Exchange’s wide network will bring the stock exchange to the
street corner.
• 2. Provides greater confidence and fidelity of trade. Investor can look up the prices displayed at each OTC
counter. He knows he is trading scrips at the right market price.
• 3. 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.
• 4. Provides definite liquidity to investors. The market making system will have two way prices which are
quoted regularly to provide sufficient opportunity for investors to exit.
• 5. Investors may get a greater sense of security because researchers have been researched and members to
get their considered opinion.
• To Economy:
• 1. OTC Exchange will help spread the stock exchange operations geographically and integrate capital market
investment into a forum.
• 2. Encourages closely held companies to go public,
• 3. Encourages venture capital activities to boost entrepreneurs.
• The Mechanism of Trade – 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.

• 6. Participants of OTCEI:
• 1. Companies which list their shares on OTCEI.

• 2. Members, dealers who operate OTCEI counters.

• 3. Registrars who transfer and keep share certificates.

• 4. Investors.

• 5. Settlement bank

• 6. SEBI and government.