An Over‑the‑Counter (OTC) market in India is a decentralized trading environment where financial instruments that are not listed on formal exchanges (NSE/BSE) are bilaterally negotiated and executed through a network of registered broker‑dealers rather than via a centralized order book.
⚙️ Financial Instruments Traded In OTC Market
- Unlisted Equity(OTC Stocks):
- Traded via registered brokers/dealers (not standard platforms like Zerodha/Groww)
- Price and terms are negotiated directly, leading to lower transparency and liquidity.
- Corporate Debt(OTC Bonds & Securities):
- Non‑convertible debentures and private placement bonds, which must be reported within 15 minutes of trade execution on stock‑exchange platforms under SEBI guidelines.
- Derivatives(OTC Derivatives):
- Customized contracts in FX, interest rates, credit, and commodities. Trades are cleared or reported via the Clearing Corporation of India Limited (CCIL), which also acts as the trade repository for OTC derivatives
⚙️ How OTC Trading Works
- Bilateral Negotiation:
- Buyers and sellers (or their broker‑dealers) agree on price, volume, settlement terms—often by phone or electronic communication—since there is no central exchange floor
- Reporting & Clearing:
- Corporate bonds: Must be reported to NSE/BSE/MCX‑SX within 15 minutes of execution.
- OTC derivatives: Reported and, where applicable, cleared by CCIL to mitigate counterparty risk. In the IFSC, all OTC FX, IR, and credit derivative trades are reported to CCIL’s platform (effective June 1, 2020)
- Regulatory Oversight:
- SEBI sets reporting norms for equity and debt.
- RBI mandates one counterparty be a regulated entity and oversees derivative novation rules.
- CCIL ensures clearing and settlement guarantees for OTC derivatives.
- Transparency & Oversight:
- OTC markets generally exhibit lower transparency and lighter regulation than exchange‑traded venues
- Volatility & Fraud Potential:
- Thin liquidity can lead to sudden price swings, and the lack of strict listing norms attracts pump‑and‑dump schemes.
🏛️ Regulatory Oversight
- SEBI governs OTC equity and bond trades:
- Mandatory reporting formats for non-convertible securities (effective Jan 2023).
- Reporting for corporate bond trades within 15 minutes on stock-exchange platforms.
- RBI regulates OTC derivatives:
- Requires one party to be a regulated institution.
- Relies on CCIL for clearing and margining.
- Introducing novation rules to streamline OTC derivative transfers, enhancing system efficiency
- Recent Moves:
- SEBI is ramping up surveillance amid derivative market concerns, especially after the Jane Street case
- Jane Street was banned and penalized in India for alleged manipulation of cash & derivatives linked to the Bank Nifty index
🔍 Key Insights & Recent Developments
- OTC derivatives volume in India surged to over $9 trillion in notional value (2022)—making India a top-20 global market in this space .
- CCIL’s role is central to the market infrastructure, ensuring trade processing and setting margins.
- RBI’s novation draft guidelines aim to improve standardization and reduce risk in OTC derivatives .
- SEBI’s increased vigilance, including reporting protocols and real-time surveillance, highlights proactive steps post Jane Street’s exit
🧭 Takeaways for Indian Investors
- Choose SEBI‑registered OTC brokers with established reporting and clearing links to CCIL.
- Perform rigorous due diligence—OTC issuers disclose less, so seek audited financials or credible third‑party research.
- Understand clearing/reporting timelines (e.g., 15‑minute bond reporting) to track positions accurately.
- Be risk‑aware: allocate only a small portion of your portfolio to OTC instruments given their higher illiquidity and counterparty exposure.
🏦 Some SEBI‑Registered Brokers for OTC Trading
These brokers are registered stock brokers across various segments—equity, derivatives, debt—meaning they are authorized by SEBI and typically have access to CCIL for OTC bond/derivative clearing and stock trading venues.
From the NSE member directory:
- Centrum Broking Ltd (INZ000… )
- 5paisa Capital Ltd (INZ000010231)
- Alice Blue Financial Services (INZ000155928)
- Anand Rathi Share & Stock Brokers (INZ000170832)
- A C Agarwal Share Brokers, Aditya Birla Money, Aasmaa Securities, Amrapali Capital, among many others.
✅ Advantages & ⚠️ Risks
| Feature | Advantages | Risks |
|---|---|---|
| Access | Enables small/emerging firms and niche instruments | High risk if issuers are opaque |
| Flexibility | Terms, volumes, settlements are negotiable | Lack of standardization can cause pricing opacity |
| Cost | Lower listing and trading fees | Fewer disclosures—higher fraud potential |
| Liquidity | Offers unique investment opportunities | Thin markets → wide bid-ask spreads, harder exits |
| Dual-layer oversight | SEBI, RBI + CCIL clearing for derivatives | Transparency and volume still limited for some instruments |
🧭 Summary
The OTC market in India plays a significant role in enabling access to unlisted equities, corporate debt, and tailored derivative contracts. It’s regulated, but inherently more flexible—and riskier—than exchange-based markets. Oversight from SEBI, RBI, and CCIL mitigates risks, yet investors must still exercise caution due to lesser transparency and liquidity.
If you’re considering trading OTC in India:
- Choose reliable, SEBI-registered brokers
- Understand reporting and clearance mechanisms
- Remain vigilant about counterparty and liquidity risks
