You might have heard about the National Stock Exchange or the Bombay Stock Exchange. NSE and BSE have become synonymous with the stock market itself. The iconic Dalal Street in Mumbai has emerged as a popular attraction.
But have you heard about the Over-the-Counter Exchange of India? What is its role in the Indian stock market?
What is the OTCEI?
It is a type of stock exchange. But, the OTCEI is very different from the NSE or the BSE.
As the name suggests, the OTCEI is characterised by the absence of a proper trading floor. Instead, transactions take place over the counter or OTC.
Of course, I don’t mean brokers actually go to the trading floor in the stock exchange to place their orders. No, with the advancements in technology, brokers can now place their orders from anywhere in the world. All they require is access to a secured trading terminal.
Now, the OTCEI does not have any such secured trading terminal. The system is more relaxed and operates through an online network. There is no physical trading exchange.
What is the purpose of the OTCEI?
To understand the purpose of the OTCEI, we first need to understand why companies sell shares in the first place.
Let’s consider an example. You and your friend have finally landed on a cracker of a startup idea. You’re convinced that this has the potential to revolutionise the retail consumer space in India. It will change how people perceive content.
To make the prototype of your product, you need capital. You need to hire a few people and pay for some web infrastructure.
But your product is not live. Clearly, you’re not earning any revenue yet. So where will the money come from?
The money comes from investors. Startups generally dilute a portion of their equity to raise capital.
Now, on the basis of the market potential of your idea, a valuation is assigned to your startup. Say, the current market valuation is Rs 10 crores. You and your friend are equal shareholders at the moment, and you each hold 50% equity.
If you sell 10% equity in your company to investors, you will be able to raise Rs 1 crore upfront. You can use this money to build your prototype, launch your product and start generating revenue.
Equity capital is one of the best sources of financing. It is easy to raise funds and it has quite a rapid turnaround time as compared to other sources. This is one of the reasons why companies eventually list their equity shares in the stock market.
However, it is quite difficult to list shares on the stock market. There are numerous prerequisites that have to be satisfied.
The OTCEI offers a solution to this problem.
How is the OTCEI different from the other stock exchanges?
According to the regulations set forth by SEBI and NSE, any company that wants to launch its IPO in the Indian stock markets has to fulfil the following conditions:
- Minimum paid-up capital of Rs 10 crores
- Minimum equity capitalisation of Rs 25 crores
These conditions ensure that only companies of a certain size can list their shares on the stock exchange. Apart from this, there are other checklists that also have to be ticked before an IPO is approved. In short, it’s a long and complicated process.
What is the solution? Enter the OTCEI.
The eligibility criteria to be listed on the OTCEI are as follows:
- Minimum equity capital of Rs 30 lakhs
- Maximum equity capital of Rs 25 crores
Also, all companies listed on the OTCEI need to maintain an average base capital of Rs 4 lakhs at all times.
Compared to the conventional IPO, this is much easier. The OTCEI thus allows small and mid-sized companies to take advantage of equity financing.