February 19, 2020
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An Inglorious End

The Composite Index dips to 99.45, below its base value of 100

An Inglorious End
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IT’s only six years old, and dying prematurely. India’s NASDAQ (National Association of Securities Dealers Automatic Quotations of the US), the OTCEI (Over The Counter Exchange of India), was born in 1990 and started trading two years later to provide a gateway for small and medium-sized companies to the capital markets. Last week, in an event unparalleled in the history of Indian stockmarkets, the exchange’s Composite Index crashed to 99.45, below its base value of 100.

How long, then, before the exchange shuts down? OTCEI’s newly-appointed Managing Director M. Pushpangadan is optimistic. While agreeing that the fall in the composite index is a bad omen, he explains: "The index is hypersensitive. It rises fast in a bullish market but goes down equally fast in a bear phase. We are waiting for SEBI to clear the Dave Committee’s report on OTCEI’S modernisation."

 The OTC Composite Index is an unweighted simple price index of all scrips listed on the exchange. It is calculated by comparing the total of prices on the current day with the total of those on the base day, July 23, 1993. Also, it considers only the buy quotes rather than the last traded price. Therefore, in a bearish market, the probability of buy quotes being revised lower is higher after every trade. This, according to Pushpangadan, imparts the index a built-in bias.

To illustrate, when the BSE Sensex went up 113.98 per cent between July 23, 1993 and September 12, 1994, the OTC Composite Index was up higher by 285 per cent (till October 27, 1994). And when the Sensex declined from its 1994 peak to September 30, 1996 by 30 per cent, the OTC index crashed steeper by 72 per cent.

In an already dormant and downbeat market, hypersensitivity can only bring more bad news. So far, none of its 1,000 members or investors have made any significant gains. Issuers have found that marketing their issues on OTCEI is not easy. Nor does listing on the exchange give them any publicity. Some listed companies have inflated their stock and sought listing on a regular stock exchange. 

Says Chetan Mehra, managing director, Weizmann Ltd, one of the sponsor members of OTCEI: "It started off with tremendous promise but failed to be in tune with the market dynamics." From day one, when settlements on the BSE were a matter of chance and the NSE was still on paper, the OTCEI had a T+3 system (settlement had to be over in three days after the transaction) and fully automated trading, linked to an on-line depository facility. During the initial purchase, investors were registered and issued counter receipts (CRs) against which details of trades were recorded directly.

Four years down the line, its competitive edge has vanished with the BSE going online and the NSE redefining computerised trading. The only way it could retain an edge was by changing its settlement system in tune with the market. Says M.R. Mayya, former BSE executive director: "Liquidity is the sine qua non of a successful exchange. The attempt to create a model exchange with delivery-based transactions and without short sales should be given up."

 Absence of speculation on the OTCEI has led to pathetic volumes. The total turnover in August 1996 was a mere Rs 16.42 crore against Rs 18,091 crore on the NSE and Rs 7,609 crore on the BSE. For 1995-96, OTCEI’s turnover of Rs 226.58 crore lags behind the daily average of Rs 700 crore on the NSE and Rs 350 crore on the BSE. Little wonder then that members are clutching at the straw of modernisation. Says Mehra: "I’m positive that once SEBI ratifies the Dave report, most of the problems will go. Even if equity is down and out, the debt instruments will really give it a boost." 

The only dissenting note is struck by Mayya who says: "The focus of the recommendations is to somehow ensure the survival of the OTCEI. The real issue is that of achieving its original purpose—to help small and mid-sized companies raise resources. When the recommendations are implemented, it could well be that the exchange booms, but the primary objective is lost." 

The main obstacle is the rollover transaction system, which also inhibits speculation. Argues a member: "Until the banking system gears up fully, it won’t be easy to operate on a rolling settlement. And if the NSE and the BSE are enjoying the benefits of speculation for longer intervals, why not the OTCEI?" At these two exchanges, trading volumes are nine times the actual delivery. Replacing quote-driven trading to order-driven will naturally bring speculation. All eyes then on the next scheduled SEBI meeting where OTCEI revamp is expected to be on the top of the agenda. 

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