Three years later, the exchange may be about to shut down. Its technological edge over other stock exchanges has disappeared ever since the NSE has commenced its equity operations with its NEAT screen-based trading system and the BSE introduced its BOLT system soon after. The only way it could have retained its competitive edge was by changing its settlement system in tune with market reality, enhancing its technological infrastructure and increasing the depth of the products it offered to its member-dealers, investors and issuers. As it is, the odds today are stacked against it and many market players are predicting sooner rather than later the exchange will have to shut down.
A sad saga
There is no doubt that the very existence of the OTCEI is under threat. Its 1,000-odd dealer-members (including sponsor-members) are closely watching the developments, or rather the lack of it, on their exchange. A few have decided to opt out of active participation while many are hoping that they had the power to have a say in matters and put the exchange back on a fast track to recovery.
That a crisis situation exists has been well known for over a year. Exchange authorities also realise the causes which led to the downfall of the exchange but little or no action has been taken by the exchange's top management including the the managing director and the board of directors. This inactivity by the management has co-mingled with constant interference from the Securities and Exchange Board of India (Sebi) who, according to members and dealers alike, has been putting hurdles in the operational freedom of the OTCEI: something that exchange management has been meekly accepting.
For instance, the regulator delayed increasing the listing threshold on other exchanges to Rs 10 crore depriving the OTCEI a chance to carve out a niche in a very competitive business. Instead, Sebi blessed moves to increase the amount on permitted securities in the exchange much to the chagrin of many dealers. After all, why would anyone invest in a exchange with a rolling settlement when the same scrips could be speculated upon on two larger bourses.
The malaise in the exchange can be detected from the pathetic volumes on the OTCEI. While the general trend on other SEs has been upwards, the volumes on the OTCEI continue to be at very low levels. The table given alongside shows that the turnover in the listed equities has fallen over the last couple of months. While the volume in debt has gone up substantially, the total turnover on the exchange is still low.
Take, for instance, the total monthly turnover on the OTCEI in August 1996, which at Rs 16.42 crore is a negligible 0.09 per cent of NSE's August turnover of Rs 18,091 crore and 0.22 per cent of BSE's Rs 7,609 crore turnover for that month. The annual numbers put the problem of low volumes in an even starker perspective: OTCEI's total turnover of Rs 226.58 crore for the year 1995-96 is considerably lower than the current average daily turnover of Rs 700 crore at NSE and Rs 300 crore at BSE.
The OTC exchange started off with 350 member-dealers and last year added 650 more, taking the total membership to 1,000. The numbers in themselves are not surprising as a dealership on the OTCEI costs only aggregate amount of around Rs 11 lakh. But all this begs the question: How can such a large universe of members exist on the pathetically low volumes, especially when the number of listed companies on it stands at 106 firms.
On the whole, the scene is such that the exchange is not even close to being a viable business proposition for its member-dealers. Says Nipun Mehta, an active dealer on the OTCEI from day one, Its like having marketing agents who do not have sufficient products to sell. There has to be a large-enough market to sell before appointing a big sales force.
The last two years has seen an all-round slump in stock prices, a crucial side-effect of which has been a virtual disappearance of the retail investor from the equity markets. This nearly crippled the listed equities on the OTCEI where the trading is 100 per cent delivery-based. Further, the advent of the NSE and its sophisticated automated trading and settlement systems, led to a shakeout in the broking industry. Says Ajeet Prasad, managing director, OTCEI, Our exchange targets the retail investor who is presently shying away from the capital markets. We are bearing the brunt of the sluggishness in the capital markets.
Management Failure
Although the capital markets were sluggish, nothing prevented the management of OTCEI from being innovative in fine-tuning existing systems and developing new products, says a market observer. There is no denying that despite being aware of the fast-changing scenario the OTCEI management has been in a state of inertia for two years now. This state of inertia can be seen on many fronts.
A stock exchange may have the primary objective of serving the investors but that objective can be achieved only through its members. If the SE's members do not participate, as is happening on the OTCEI, the investors can not bereached at all. Sponsor-members point out that there is hardly any interaction between the management and the dealer-members. The new dealers (over 650) would surely like to hear from the exchange management about the exchange's strategies and business plans for the future. But such a basic communication to its members has not been made by the OTCEI management.
Not just with member-dealers, but the management of OTCEI has failed to communicate adequately with its own staff. There is a large amount of centralised management on the OTCEI. The results are seen in the high turnover of staff (including senior-level) seen on the exchange. Some employees even complain that the exchange's managing director, Ajeet Prasad, involves himself more in micro-management affairs rather than taking macro level decisions in tune with market realities.
Easy systemic improvements, like upgrading the trading software to higher standards, did not take place on the OTCEI. The OTCEI trading software still does not provide certain basic user-friendly features like good-till-canceled or good-till-day quote-entry facilities. Says Bharat Shah of Dalal & Broacha, an active OTCEI dealer, The exchange's trading software does not provide for any price band facility that makes it possible for one to enter wild quotes as well as makes it dangerous to commit an error by entering a wrong quote.
A latest example is that of the total lack of action on the depository front. The SEBI (Depositories and Participants) Regulations, 1996, were issued in June. But so far, the OTCEI, for whom commencing scripless trading is easy since it has already has a depository module, has not even prepared a business plan to move in that direction.
Promoters' apathy
The OTCEI is owned by eight public financial institutions. It's Rs 10 crore equity capital is owned by the UTI (with a 20 per cent stake); IDBI, ICICI and IFCI (16 per cent each); and LIC, GIC and SBI Capital Markets (8 per cent each). If the management of the exchange was not being dynamic enough t . The only people affected would be its 1000-odd dealers and 75 staff.
