‘Block Deals fire up D-Street’” or ‘GNFC stock jumps on block deals’ or, more famously, the Warburg Pincus sale of a 6% stake in Bharti Telecom for $561 million in March. These and other block deals have regularly hit the headlines in the past year.
Scores of block deals take place every day. Yet, on July 20, stock exchanges warned “trading members to ensure compliance in large transactions that are in the form of block deals,” and threatened “strict action” against those negotiating deals in advance and executing synchronised trades.
The warning is a little ridiculous, because every single bulk deal requires such negotiation and synchronisation until it has become an “accepted market practice.” Synchronisation requires the two sides to enter the price on their computers and then telephone one another, so that both can dubiously hit the execution key at the exact same moment.
This sort of confusion harks back to the Harshad Mehta scam of 1992, when the Reserve Bank was unaware that debt market transactions cheques of several hundred crore rupees each, issued in favour of banks, were being routinely credited into brokers’ bank accounts. ANZ Grindlays Bank, questioned for depositing Rs 500 crore from National Housing Bank into Mehta’s account without even a covering note, took the plea that this was an “accepted market transaction.” It was an accepted practice in 1991-92, but unlike those transactions, the media and the bourses now openly report bulk deals.
I drew a blank on trying to find out the reason for Sebi’s sudden agitation. I learn that it is studying block deals and has found the synchronisation mechanism is not foolproof and small parts of the deal leak to other investors in the electronic system. In fact, small parts of the deal are often deliberately leaked, so that the regulator cannot establish “synchronised trading,” given the exacting standard of proof demanded by the Securities Appellate Tribunal.
Is Sebi worried that bulk deals are distorting fair price discovery? It doesn’t say so. On the contrary, traders correctly argue that large transactions are more likely to distort prices, or foment rumour-mongering, if they were put through the exchange mechanism.
Sebi officials say the secondary market advisory committee has discussed the issue, but made no recommendation to either legitimise or ban the deals. Sebi covered its back by issuing a vague warning on July 14 that implies—‘Be warned. We are not saying block deals are bad, but we may say so anytime in future.’
Interestingly, in December 2004, M/s Ramkishan Chiripal had sought “informal guidance” from the regulator on block deals. The firms says that although a 1999 Sebi circular banned negotiated deals, it wanted clarity on block deals. Its query said: “We have also been told that synchronised order placement per se is not illegal, as has been stated by Sebi before the Joint Parliamentary Committee in the year 2001, implying that they are legal unless proved illegal by Sebi. That is how ‘Block Deals’, which also fall in the category of ‘Negotiated Deals’ and are a frequent phenomenon, are allowed to be executed on the screens of the exchanges, as we understand...”
Sebi replied: Synchronised order placements/transactions as mentioned by you are not per se illegal or a violation of the aforesaid Sebi circular. How-ever, any such transaction can be examined by stock ex-changes/Sebi in light of all circumstances, including other transactions of the parties, for motive/intent behind the same or its manipulative effect and compliance with other parts of the Sebi Act.
Something is drastically wrong with such a situation. Large block deals have been openly reported for over a year. This ought to have been time enough for the regulator to establish whether they affect price discovery, distort market liquidity and facilitate the ramping of prices. But since there is little evidence of this, at least in the larger deals by big institutional investors, perhaps the solution is to allow more sunshine on such transactions and eliminate the dubious synchronisation of trades (involving fancy keyboard stunts, says a fund manager) forced on all investors.
Instead, Sebi needs to permit negotiated trades, so long as they are within a prescribed price band of the day’s market price and are reported to the exchange minutes after the deal is struck.