Block deals: FPIs to seek review in the wake of the Archegos debacle

Foreign portfolio investors (FPIs) are likely to make a fresh representation to market regulator Securities and Exchange Board of India (Sebi) seeking relaxations of norms on block transactions — privately negotiated deals carried out under a special trading window.

According to sources, top foreign investors are planning to connect with regulatory officials explaining the need to relax block trading rules by citing the recent collapse of Archegos Capital Management in the US.

Late last month, global banks, including Goldman Sachs, Morgan Stanley, Nomura, and Credit Suisse, were forced to sell more than $20 billion worth of shares through a series of block deals to cover up for the losses incurred by their client Archegos, an investment firm of former hedge-fund manager Bill Hwang.

The block trades, though executed at a discount, helped banks mitigate their losses and prevent a severe dislocation in the secondary market.

“The US market has a far more relaxed framework for block deals, which helped large banks execute those trades. If an Archegos-like incident occurs in India, lenders will be forced to sell in the secondary market, which could distort prices. Therefore, it is necessary that Sebi rethinks its stance,” said an official with a custodian that handles FPI trades.

At present, Sebi allows two special 15-minute sessions to carry out block trades. Under this, trades can be carried out in a price band of one per cent (plus or minus) over previous day’s close.

FPIs’ main beef is that the price band is too restrictive. Many other countries don’t have such a stringent restriction. Also, the rules mandate disclosure of buyer’s name at the end of the day, which leads to client confidentiality issues for certain FPIs.

Often, large block transactions are, therefore, conducted on the main exchange platform during live market hours. This leads to “slippages”, where the intended buyer fails to acquire adequate quantity of shares at the desired price.

“We don’t have any comment,” said a spokesperson of the Asia Securities Industry and Financial Markets Association (Asifma), when asked if they intend to make a fresh representation to Sebi on the issue.

“Asifma wants to see first and foremost the price band in the block trade window expanded from its current +/- 1 per cent of the previous day’s price to +/- 7 per cent as the former is way too low and forces large block trades to be done in the market,” the spokesperson added.

Sebi has so far taken a cautious view on concerns that lenient pricing norms will provide an unfair advantage to large investors. Markets like Singapore and Australia virtually have no price restrictions.

Some believe there is merit in the demand for relaxing norms. “Block deals are a part of the toolkit for institutions. In the end, institutional investors need to sell for various reasons, and we must allow price discovery for large orders. If it’s a high quality stock in low supply, the discount may be lower, and vice versa. Regulatory price bands can be a back-stop but not the limiting factor,” said Sivananth Ramachandran, director of capital markets policy (India), CFA Institute.

ViacomCBS, Discovery, Shopify, Baidu, and Tencent Music were some companies to see fire sales under the block window following the Archegos meltdown.

In the past, shares of large companies such as YES Bank, Zee, and DHFL have seen an unprecedented slide following a negative news trigger. Experts say if the rules around block trades are relaxed we could see a more orderly price discovery.