The Hindu Business Line : Is OTC market needed?

There is no way anybody can stop a party from finding his own counterparty which Over the Counter (OTC) trading is all about. The existence of an exchange doesn’t bar OTC trading. If anything, certain disincentives can be built into the system.

For example, under the income-tax law, only long-term capital gains earned from recognised stock exchanges in India are tax-free which obviously provides gravitas to exchange traded transactions as opposed to OTC deals but then quite often OTC deals become unavoidable in view of the fact that stock exchange transactions are structured and do not lend themselves to customising.

The Ranbaxy promoters tried their best to dispose of their holdings to the Japanese company Daiichi Sankyo through bourses but in vain because the negotiated price was far higher than the prevailing stock exchange prices.

Similarly, the standard size of currency futures contract in India is $1,000 which renders contracts involving huge foreign exchange exposures impossible to be hedged through futures (exchange traded product) necessitating thus a forward contract (OTC) if currency swap, the other alternative, is not preferred.

S. MURLIDHARAN

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