Block Deal Meaning Explained: What It Is & How It Works in the Stock Market
Every day, thousands of stock market transactions take place across Indian exchanges. Most of these involve small to moderate volumes of shares traded between retail investors. However, when an investor wants to buy or sell a large number of shares in a single transaction, they may use a mechanism known as a block deal.
A block deal allows two parties to execute a high-value share transaction directly, without significantly affecting the market price. These trades are carried out through a separate trading window during specific time slots on the stock exchange.
This article explores the block deal meaning, explains how the process works, and outlines what it means for institutional and retail participants in the equity market.
What is block deal?
A block deal refers to the buying and selling of a large quantity of shares of a publicly listed company through a single stock market transaction. Such transactions are pre-arranged and executed through a dedicated platform or window provided by the stock exchange. Institutional traders and investors, such as mutual funds, high-net-worth individuals (HNI) portfolio managers, and foreign institutional investors (FIIs), generally use the block deal route.
Retail investors often confuse block deals with bulk deals. However, they are not the same. Bulk deals refer to a single transaction of shares exceeding 0.5% of a publicly listed company’s total listed equity shares. In comparison, block deals involve individual transactions exceeding 5 lakh shares or ₹10 crore in value. A block deal may or may not qualify as a bulk deal.
Scenario of a block deal:
Promoters of publicly listed company ABC Ltd. want to raise funds for business expansion. After consulting the board of directors, they decided to sell 2% of the promoters’ stake in the company for ₹10 crore. An institutional investor agrees to purchase the shares from the promoters on the secondary market. The transaction can be executed through a block deal.
The difference between a block deal and a bulk deal
Along with learning the block deal meaning, it is important to know how to differentiate between block and bulk deals. They have different implications for prices.
| Block deal | Bulk deal |
|---|---|
The minimum transaction size is 5 lakh shares or ₹10 crore in value. | Any transaction exceeding 0.5% of a publicly limited company’s listed shares. |
Conducted through a specialised window at a specific time of the trading day. | Conducted on the main market throughout the regular trading hours. |
Price range is limited to +/-1% of last day’s closing price or LTP (last traded price). | The prevailing market price at the time of the transaction. |
Publicly disclosed immediately after the transaction. | Publicly disclosed at the end of the regular trading hours. |
Pre-arranged and pre-negotiated. | It may or may not be pre-arranged and pre-negotiated. |
Does not affect the ongoing market price. | Causes a sharp increase in trading volume and may result in sudden and sharp price fluctuations if not efficiently managed. |
Why do block deals happen?
Block deals are not just significantly large; institutions do not perform such deals randomly. Each block deal serves a set of specific purposes for institutional investors and involves significant compliance and disclosure requirements.
Some of these purposes can be:
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Portfolio rebalancing: Institutional investors actively manage their portfolios, making adjustments based on both fundamental and technical considerations. Selling in or buying from the market in large volumes can destabilise and unintentionally influence prevailing prices. Block deals help avoid such unwanted repercussions.
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Promoters’ stake sales: Companies’ promoters often sell their shares through block deals to raise funds, comply with regulations, and diversify their portfolios.
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Institutional investors’ transactions: Angel investors, private equity funds, and venture capitalists often buy and sell shares in a publicly listed company through block deals to achieve price efficiency. Such deals are pre-negotiated with two parties and offer certainties in terms of volume and costs.
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Strategic acquisition and disinvestment: Sometimes, parent companies acquire shares of their subsidiaries or sister companies through block deals as part of strategic acquisitions or disinvestments.
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Arbitrage trading: Institutional investors, such as hedge funds, often attempt to exploit price inefficiencies across multiple markets. They prefer block deals to minimise price fluctuations in the open markets.
How do block deals happen in India?
The Securities and Exchange Board of India (SEBI) has specific and detailed guidelines on block deals. The objective is to maintain transparency, prevent insider trading, and minimise the impact on prices in the broader markets.
- Platform: Dedicated online block trading window on National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
- Timing: The morning window is from 9:15 am to 9:50 am, and the afternoon window is from 2:05 pm to 2:20 pm.
- Threshold order size: A single transaction of a minimum of 5 lakh shares or ₹10 lakh in value (whichever is lower).
- Price range: Previous day’s closing price or last traded price (LTP) +/-1%.
- Disclosure rule: Immediately after the block trading window closes.
Impact of block deals on markets and retail investors
Block deals are transacted through specialised online trading windows. However, they can have several implications for retail investors trading in regular markets.
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Price volatility: SEBI allows a variation of +/-1% in prices from the previous day’s closing. For example, if the LTP of a company’s stock is ₹1,000, block deals can be executed within a price range of ₹990 and ₹1,010. Choosing prices at the extremes of this range may signal either a positive or negative sentiment.
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Market liquidity: Block deals in a publicly listed company indicate strong institutional interest and liquidity in the company’s shares.
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Fundamental valuation: A large number of block deal purchases by institutional investors and FIIs may indicate a positive future outlook for the company.
Conclusion
For retail investors, monitoring block deals may provide key insights into the future outlook of specialist investors on the market and a company’s performance. Understanding the block deal meaning can help in a closer examination of such market data. However, this information should be supplemented with other technical and fundamental parameters for effective analysis.
Sources
This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in securities market are subject to market risks, read all the related documents carefully before investing. Brokerage will not exceed SEBI prescribed limit. The securities are quoted as an example and not as a recommendation. SEBI Registration No-INZ000200137 Member Id NSE-08081; BSE-673; MSE-1024, MCX-56285, NCDEX-1262.
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