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This post is authored by Manisha Soni, third-year student at Gujarat National Law University, Gandhinagar.
1. INTRODUCTION
The month of September observed numerous divestments via block deals in large-cap companies. For instance, the divestment of 2.72 million shares by Raja Ganesan Chandramogan in Syngene International, the research arm of Biocon, Singapore telecommunication lowering its stake in Airtel to 30% from 31.4%, 7.7% stake offloaded by investors in PVR, and 2.8% divestment by Rakesh Gangwal in Interglobe Aviation. All of these divestments occurred via block deals. Among all these, the Indigo block deal left the major investors lined up by banks and institutional investors such as Goldman Sachs, JP Morgan Chase, and Morgan Stanley empty-handed and anguished due to the occurrence of “Slippage”, a situation due to which the orders are not executed due to presence of higher bidding price, which is not in accordance with SEBI’s rules on block trade. Overregulation of Block trading in India has been the scrouge of Investors with deep pockets. Global Investors and Fund managers have requested SEBI to adopt a laissez-faire approach toward rules governing block trade in India.
2. WHAT IS BLOCK TRADE/DEAL?
A block trade is a huge privately negotiated exchange of a fixed number of securities between two large investors through a single transaction at a special trading platform called a “block deal window” in which shares more than 5,00,000 in quantity or more than 10 crores in value are traded without putting the buyer or seller at a disadvantage. It is a part of the secondary capital market. In accordance with revised rules issued on dated 26 October 2017 by the Security Exchange Board of India, to constitute a block trade, a single transaction must contain shares valued at a minimum of 10 crores. Such transactions should be executed through a separate trading platform at stock exchanges, also called the “upstairs market” for a trade of large orders, not visible to regular retail participants at the main market, i.e. “downstairs market”. The said window will be kept open for block deals for a limited period of 30 minutes, divided into two sessions of 15 minutes, from 8:45 AM to 9:00 AM and from 2:05 PM to 2:20 PM from the beginning of trading hours. The current market price of a share ordered at the window must be priced at a discount or premium within 1% of the previous day's closing price, as the case may be. Every transaction has to result in delivery, and “Block Deal” orders cannot be squared off or reversed. As soon as the successful transaction of block trade takes place, the exchange needs to publish the names and other information of the investors involved in the deal on the same day.
3. WHAT IS SLIPPAGE IN BLOCK DEALS?
Slippage is a phenomenon that occurs when orders are not filled due to market participants receiving a different bidding price than the intended price, which is at a premium of more than 1% or a discount wider than 1% of the previous closing price. In such an event, the transaction cannot take place at the upstairs market, and it has to be executed through the downstairs market. Where the order might as well edge out by uncalled buyers, which results in Investors getting a lower number of shares due to increased participation of investors. For example, if the previous closing stock price of a share is 1000, then to avoid Slippage and for a successful transaction of a block deal, the bid/ask price per share must range between 990-1010, and in case it is available at 5% discount, i.e. at 950, the stocks will be displayed at the main market screen. Once the stock hits the downstairs market, anyone can put in a rate and fetch the order, due to which investors who were part of the block deal intending to buy 5 lakh shares will get shares far less in numbers than five lakh. In the case of IndiGo, the Slippage occurred due to the shares being available at a 4.2% discount to the previous closing price, which led the order to screen on the downstairs market where retail investors and other uncalled investors lay hold of the shares at bid price higher than the quoted price for participating institutional investors. Thus, leaving them empty-handed.
4. THE ISSUE WITH LAWS GOVERNING BLOCK TRADING IN INDIA AND HOW THAT CAN BE IMPROVED
SEBI issued a revised framework in 2017 on the recommendations of the Secondary Markets Advisory Committee which came into effect on 1 October 2018. Even after four years of the implementation of the revised framework the investors are complaining about the restrictive and interventionist nature of the rules for Block trade.
The SEBI’s rules do not allow the trade to be directly crossed on the exchange, the regulator has also not mandated that only predefined investors get shares in Block trade. The range of ± 1% have proved to be insufficient and does not allow big institutional investors to negotiate discount or premium to make the Block deal worth their while. This explains why the predefined investors by Goldman Sachs Group, JPMorgan Chase, and Morgan Stanley in the IndiGo Block deal returned empty-handed. The instances of front running as well as lack of flexibility in the block trading window makes the transaction of block deals vulnerable to slippages adding a cost to institutional investors to trade in Indian markets. While some instances of Slippage are expected to happen but the situation with the IndiGo block deal where none of the institutional investors got any share due to Slippage is rare and is a cause for frustration among investors. The fund managers since forever been asking the SEBI to relax its block trading rules, but they have been getting a cold shoulder from the regulator till now. Lyndon Chao, MD of the leading foreign fund group Asian Securities Industry and Financial Markets Association (“ASIFMA”) propounded the SEBI to change the restrictive band of ± 1% to ± 7% as in Japan, expand the Block trade window to incorporate the entire trading day, rather than just the existing two sessions of 15 minutes, and maintain the confidentiality of investors by not publishing the name on the exchange website. Addressing these aspects will improve the ease of doing business for global investors. ASIFMA, along with other foreign funds, have last year complained about incidences of front running right ahead of block deals. However, SEBI showed reluctance to investigate those allegations. It is believed that the reason behind the reluctance of SEBI to take a laissez-faire approach and amend its block trading rules is the fear of putting the downstairs market in a disadvantageous position, creating a drop in liquidity in the market. Even though it is established by a study that having an upstairs market does not harm the volatility of the downstairs market. The SEBI suspect that promoters might manipulate their own stock by establishing a hard-to-track investment entity in foreign tax havens, hence the continuation of restrictive laws.
Although SEBI has promised to step up the scrutiny of market manipulation and front-running cases this year but refused the need for necessary amendments to ensure only predefined buyers get the deal.
5. WAY FORWARD
India's policy on the governance of Block trade is the most restrictive among Asia Pacific Countries. Australia has no such restrictions governing share price in a block trade, South Korea allows a whopping 30% relaxation in terms of price range to the previous closing price, while China allows 10% as compared to India, which allows relaxation of only 1%, making India a comparatively less investor-friendly in terms of Block trade.
India needs to take a more relaxed approach to govern its Block trading rules at par with global standards so that the investors get, a bit of certainty as they get in other major countries in Asia, and have no scope for legal lacunae. While the SEBI’s concern over liquidity in the downstairs market and promoters manipulating the stock through pseudo-investment entities is justified, however, surveillance and scrutiny should not be substituted by overregulation. Specifically, looking at the boom, India discerned that foreign investments in the capital market after Covid-19 is one more reason to relax the regulations to make business less difficult for significant investors.