SEBI Raises Minimum Block Deal Size to ₹25 Crore

The Securities and Exchange board of India (SEBI) is taking strides to bolster securities market transparency and integrity - announcing a major framework overhaul for block deals. Following its board meeting on Wednesday, the capital markets regulator increased the minimum transaction size for a single block deal from the existing ₹10 crore to ₹25 crore (PTI).

Furthermore, in a crucial change, SEBI has mandated that all block deals must be settled on a 100% delivery basis, effectively prohibiting the squaring-off of these trades intra-day. These new regulations are set to come into effect in the coming weeks. With the regulator tightening the screws on large trade, traders might be overwhelmed with this question: how can these refined rules impact institutional trading strategies and the overall liquidity in the market?

Why Has SEBI Moved the Goalposts for Block Deals?

The securities markets regulator’s move seems to be defined by a single objective of ensuring that the intended purpose is served by the block deal window. SEBI is aiming at facilitating large, genuine investment and divestment decisions without causing significant price volatility in the open market.

SEBI has observed that in some instances, the facility was being misused, with large trades executed in the block window being reversed later in the day in the normal market. This practice raised concerns about potential price manipulation and defeated the spirit of the mechanism.

This is not the first time SEBI has raised the threshold. First introduced in 2005, the block deal window - providing a separate space for large trades, had started with a minimum ticket size of just ₹5 crore (SEBI Sept 2, 2005 docfile). It was later revised to ₹10 crore (Livemint) to keep pace with growing market capitalisation.

This latest hike to ₹25 crore is a continuation of the similar trend. It can ensure the window remains exclusive for high-conviction, large-scale institutional players. Furthermore, SEBI is aiming to bring more seriousness and conviction to these high-value transactions by ensuring that every block trade now results in an actual change of ownership. But could this mandatory delivery clause inadvertently reduce the volume of block deals by eliminating arbitrage opportunities?

Block vs. Bulk Deals: What’s the Difference?

The distinction between block and bulk deals might seem confusing. For many market participants, the introduction of new rules have necessitated the understanding of this difference. To begin with, the two deals involve large transactions. However, they operate under entirely different mechanics.

Here is more on the different deal mechanisms between a bulk and a block deal:

• Mechanism of Trading: Execution of a block deal can happen in a separate, dedicated trading window that is open for a short duration (two sessions of 15 minutes each). In contrast, a bulk deal is a trade executed during normal trading hours on the stock exchange like any other trade.
  
• Price Specification: The share price is specifically range-bound in +/- 3% (as per the current rules) of the prevailing market price in a block deal. However, a bulk deal can only happen at the ongoing market price.
  
• Transaction Size: The new minimum for a block deal is a single trade worth ₹25 crore. A bulk deal is defined as any transaction with the total quantity of shares bought or sold as >0.5% of the company's total number of equity shares.
  
• Disclosure and Anonymity: Block deal details, including the scrip and quantity, are disseminated to the public as they happen. Bulk deals are disclosed by the broker to the stock exchange after the market closes.
  

What is the Market Impact for Traders and Institutions?

These regulatory changes are set to have a multi-faceted impact on different segments of the market. The most direct effect will be felt by the large institutional players - foreign portfolio investors (FPIs), mutual funds, and insurance companies - who are the primary users of the block deal window.

The extended threshold of ₹25 crore can filter out smaller institutional players and High Net Worth (HNI) individuals effectively. This can reserve the block deal facility for the most considerable transactions, only. With this exclusivity, the trade seriousness and quality can be enhanced for the trades executed through this window. This mandatory delivery-based settlement might force these institutions to have a high degree of conviction in their trades. Also, they can no longer use the block window for short-term arbitrage.

For retail investors, the move is a net positive. It significantly improves transparency and reduces the likelihood of market manipulation driven by large, non-genuine trades. It can ensure that when a large block of shares is reported to have been bought or sold, it reflects a genuine change in holding by a major investor, providing a clearer signal to the broader market. The main debate would now revolve around liquidity. While the number of trades in the block window may decrease, the new rules could push more institutional volume into the open market (as bulk deals), potentially improving overall price discovery and liquidity for all participants.

Source:

PTI
SEBI Sept 2, 2005 docfile
Livemint
Economic Times
The Hindu Business Line
GoodReturns
CNBC TV18
Moneycontrol
Business Standard