In a bid to boost the liquidity in small-cap stocks listed on the exchange, it has decided to allow permit short sales in this category. With this move the exchange will move out of the niche that it had created for itself. It will also put the exchange on the same level as other exchanges, sources say.

The board of directors of the exchange decided to effect these changes at its last meeting. OTC has initiated this exercise as part of its revival package which has been formulated to revive the exchange. The exchange is expected to kick off weekly settlements in the listed segment in August. The settlement is expected to be from Thursday to Wednesday.

The exchange will also permit the dealers to adjust their entrance fees to trade in thepermitted segment with their base capital and allow payment in installments. The permitted segment on the exchange will incorporate about 100 stocks listed on the NSE during phase I. This will be followed by another 150 stocks during phase II. The stocks to be incorporated will basically be B1 group stocks. The exchange will also seek the Department of Telecommunication's permission to allow trading on common satellites as this will enable common members between the NSE and the OTC to use the same satellite.

The exchange is in the process of changing the entire trading software for the listed segment. According to market sources, the exchange will incorporate the National Stock Exchange's `NEAT' trading software on the OTC trading terminal. OTC currently uses the DELTA trading software for its permitted and national market segments. The exchange will use the National Securities Clearing Corporation (NSCCL) system for the settlement of shares in this segment. The exchange already uses the NSCCL clearingsystem for the permitted and the NMS categories.

OTC was the only exchange which introduced a rolling settlement at its inception. Besides this the exchange also did not permit short sales. The exchange had a T+5 settlement cycle with the entire settlement, including payment, being completed by the fifth day from the date of trading.

The exchange was also the first to initiate paperless trading before the Depository Act came into existence as it followed a system of issuing counter receipts (CRs) for each transaction. These CRs were issued in lieu of the original share certificates, while the share certificates were kept in custody with the registrars. This was because the Depository Act had not come into existence at the time of inception of the exchange. Under this system, once a dealer/member puts in a trade, the exchange will check if the dealer/member really has those quantity of shares and only then will it clear the transaction.

Insight

The OTCEI as a concept was much ahead of its time.The nature of changes that are sought to be implemented by the OTC board is a reminder of that reality. The concept of market-making, for example, was impossible to implement profitably under Indian conditions. And with the rolling settlement the conditions were such that there was a complete absence of liquidity. The fact that the exchange is planning to move to a weekly settlement is very good as it will infuse a lot of liquidity, market capitalisation permitting. How the proposal to sell short will work is another matter as the bulk of the stock is concentrated either in the hands of the promoters or the existing market-makers. But the fact of the matter is that the exchange has seen too many changes without a comprehensive business plan, including the crucial question of what role the exchange has within the capital markets. Had the above steps been taken earlier it would probably have led to the exchange developing into a viable alternative for small-cap companies seeking exposure to the capital markets.