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Big-ticket foreign portfolio investors (FPI) are reportedly miffed with underhand ‘block-deals’ on India bourses, and have been filing complaints with markets regulator Sebi. The allegation is that domestic brokerages, and also institutional investors in the know, are capitalising on prior information to make quick profits. They trade ahead of the impending block deal orders, and use the normal anonymous order-matching mechanism for quick profit-booking.
We need to boost transparency in the capital market, and Sebi must clamp down on all shades of insider trading. True, investors intending to buy and sell large chunks of shares are allowed to opt for block deals, as per Sebi norms of 2005, updated in 2017. The deals are supposed to take place through a separate trading window, in a specific time slot, with the shares priced within 1% of market prices. Surely, it is now time to further revise block deal rules, to bring them on par with those in mature capital markets. After all, block deals on the bourses have significant advantages, make possible as they do clear transfer of large blocks of securities without distorting or destabilising prices. However, block deals can sometimes be misused, and we do need to tighten the rules to deter underhand practices that can well discourage big-bulge FPIs from gainfully putting faith in the India growth story going forward. And forward-looking regulation is key.
Note that back in 1999, Sebi did questionably choose to ban all negotiated deals by way of regulatory fiat. It led to much confusion and almost certainly encouraged manipulation such as synchronised trade execution. The bottom line is that transparency in the capital market would lead to better allocation of resources economy-wide
This piece appeared as an editorial opinion in the print edition of The Economic Times.