What is OTC in Share Market? Explained Simply
When people think of the stock market, they usually imagine trading on well-known platforms like the NSE or BSE. But there’s another part of the market that functions beyond these formal exchanges — it’s called the OTC market, or Over-the-Counter market.
This guide will help you understand what OTC means, how it works, the types of securities traded there, and the pros and cons of OTC trading — especially for Indian investors.
What is OTC (Over-the-Counter) Trading?
OTC trading refers to buying and selling of financial instruments outside formal stock exchanges. Instead of routing trades through centralized platforms, OTC deals are done directly between two parties, often via brokers or electronic networks.
These trades typically involve:
- Unlisted company shares
- Corporate bonds and debentures
- Custom derivatives
- Low-volume penny stocks
Key Features of OTC Trading:
- No Central Exchange: Trades are done privately through brokers or platforms.
- Decentralized: Prices and terms are negotiated directly.
- Less Regulated: Compared to exchange trading, OTC markets have fewer rules (though still governed by SEBI in India).
- Custom Agreements: Especially in the case of derivatives or debt.
- Low Visibility: Prices and trade volumes are often not publicly available.
What Can You Trade in the OTC Market?
- Unlisted Shares(e.g., startups, pre-IPO companies)
- Corporate Bonds and Debentures
- Custom Derivatives(e.g., forward contracts)
- Penny Stocks(low-priced and speculative)
- Foreign Stocks(not listed on Indian exchanges)
How Does OTC Trading Work?
- Negotiation: Buyer and seller agree on price and quantity.
- Execution: Deal is finalized and recorded through an intermediary.
- Settlement: Transfer of money and shares as per the terms.
- Regulatory Reporting: In some cases, trades must be reported to SEBI.
Benefits of OTC Trading:
- Access to Unlisted Companies: Get early exposure to startups and pre-IPO companies.
- Customized Deals: Especially useful for bonds and derivatives.
- Liquidity for Private Shareholders: Allows them to sell equity even before a public listing.
- Less Competition: Fewer investors can mean hidden gems.
Risks and Challenges:
- Low Transparency: Limited access to real-time data.
- Counterparty Risk: One party may default on the agreement.
- Low Liquidity: Finding a buyer or seller isn’t always easy.
- Higher Price Manipulation Risk: Especially with penny stocks.
- Limited Protection: Investors are more exposed to fraud and misinformation.
OTC Trading in India:
While India doesn’t have a separate OTC exchange like in the U.S., OTC trades are active through SEBI-regulated brokers who deal in:
- Unlisted shares
- Bonds
- Pre-IPO placements
Platforms and brokers provide access to these deals, but due diligence is critical.
OTC vs Exchange Trading: A Quick Comparison
How to Trade in the OTC Market (India)?
- Choose a SEBI-registered broker dealing in unlisted shares.
- Research the company thoroughly (no public data available).
- Negotiate terms (price, volume, timeline).
- Sign legal documents (like share transfer forms).
- Complete the deal (via bank transfer or other approved channels).
Popular Unlisted Companies Traded OTC in India:
Before going public, these companies saw active OTC interest:
- HDFC Securities
- Reliance Retail
- Studds Accessories
- Chennai Super Kings (CSK)
- Tata Technologies
Investors who entered early in these companies often saw high returns post-IPO.
Who Should Consider OTC Trading?
OTC trading may be suitable for:
- HNIs and Private Equity Investors
- Long-term investors with higher risk tolerance
- Venture capitalists seeking early-stage opportunities
- Informed traders with access to insider research
Conclusion:
OTC trading opens the door to unique investment opportunities — like unlisted shares and early-stage companies — that aren’t available on regular exchanges. However, it also carries greater risks, including low liquidity, lack of transparency, and limited regulation.
If you’re planning to explore the OTC space, do so with trusted brokers, thorough research, and a clear understanding of the risks involved. While not suitable for everyone, the OTC market can offer significant rewards to informed and careful investors.
FAQs on OTC Trading:
Yes. It is legal and monitored by SEBI.
Yes, through SEBI-registered brokers that deal in OTC securities.
Yes. Risk is higher due to lack of liquidity, data, and formal safeguards.
Yes, but finding buyers may take time.
Yes. Capital gains tax applies as per the Income Tax Act, just like listed shares.
