The Indian stock market has witnessed considerable growth over the past few decades. Various factors, including investor participation, influence the stock markets. Investor participation in the stock market is of two kinds: (i) retail investors and (ii) institutional investors. Retail investors are individuals, while institutional investors include large entities such as mutual funds, high net-worth individuals (HNIs), insurance companies, banks, etc. One of the mechanisms actively adopted by institutional investors is 'block trade', also known as 'block deal'. Let's delve deeper to understand the concept of the ‘block deal’.

The Securities and Exchange Board of India (“SEBI”) regulates the Indian stock market and its participants. SEBI issued the ‘Guidelines for the Execution of Block Deals on the Stock Exchanges’ via circular MRD/DoP/SE/Cir-19/05 dated 2nd September 2005 (“2005 Circular”), defining a ‘block deal’ as a single transaction of sale or purchase of a large number of securities conducted on a separate trading window. Trade participants using the block trade mechanism to purchase or sell securities must comply with SEBI's framework.

This article explores the concept of block deals, the regulatory framework governing them, and their market implications by analyzing recent deals undertaken through the block deal mechanism to provide a comprehensive understanding.

REGULATORY FRAMEWORK

The framework for ‘block deals’ was introduced by SEBI via the 2005 Circular. On 26th October 2017, SEBI issued Circular CIR/MRD/DP/118/2017, withdrawing the 2005 Circular and establishing a revised block deal mechanism (“2017 Circular”). Key provisions of the 2017 Circular include:

Separate Trading Window

Block deals involve the sale or purchase of securities listed on the stock market. To prevent such large transactions from influencing market dynamics or security prices, SEBI permits stock exchanges like the Bombay Stock Exchange and the National Stock Exchange to provide a separate trading window for block deals. Two block windows are provided: Morning Window: Operates between 08:45 AM to 09:00 AM. Afternoon Window: Operates between 02:05 PM to 02:20 PM. Block Reference Price

The 2017 Circular prescribes the mechanism to calculate the trade price of securities. For the Morning Window, the trade price is based on the previous day’s closing price of securities. For the Afternoon Window, it is based on the average market price of the securities between 01:45 PM to 02:00 PM on the trade transaction day.

Trade Price

The trade price of the securities can be either +1% or -1% of the block reference price on the trade windows.

Minimum Trade Size

To qualify as a block deal, the order must be at least INR 10 crore.

Order Matching

The order for purchase and the offer for sale must be identical for the successful closing of the block deal.

Mandatory Delivery

Transactions undertaken on the trading window must conclude with the delivery of securities, i.e., transfer of securities in favor of the purchaser. Such transactions should not be reversed.

Disclosure Requirements

Stock exchanges must disclose block deal details to the public on the transaction day after market hours, including the scrip name, client name, quantity of shares bought/sold, and traded price.

Observance of Trading and Settlement Practices

Stock exchanges must comply with trading and settlement practices, surveillance, and risk containment measures as per the 2017 Circular.

Annual System Audit

Stock exchanges must include compliance with the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018, in their annual system audits to ensure proper system functioning and regulatory compliance.

Half-Yearly Reports

Stock exchanges must review the effectiveness of the block deal scheme every six months and submit half-yearly reports to SEBI to ensure the scheme functions correctly and addresses any issues promptly.

Traders undertaking block deals must comply with SEBI requirements, and SEBI has the authority to impose penalties for non-compliance or breaches.

PROCESS OF EXECUTING A BLOCK DEAL

While there is no set procedure for block deals in India, the generally followed process includes:

Pre-Trade Negotiation

Since the order and sale of securities must be identical for the conclusion of the block deal, buyers and sellers typically privately negotiate the transaction terms (including the number of shares and the price) beforehand.

Order Placement

After finalizing the transaction terms, orders are placed through brokers in the trading window in compliance with the 2017 Circular.

Matching and Execution

Upon receiving the orders, the stock exchange examines and executes orders based on price and time priority.

Reporting and Disclosure

Transaction details are reported to the stock exchange and disclosed to the public.

IMPACT OF BLOCK DEALS ON THE MARKET

Market Influence

Like other trading activities, block deals can influence the market. The volume of securities involved can affect the stock’s price and market sentiment. However, the special trading window helps minimize these impacts. Trading significant securities may give various impressions. For instance, selling a large number of shares can signal confidence in the company’s prospects, positively impacting market performance even among retail investors.

Recent Block Deal Analysis

Kotak Mahindra Bank

Details: Promoter Uday Kotak sold a 2.83% stake through a block deal. Statistics: Shares Sold: 56 million Transaction Value: INR 6,914 crore Stock Price Impact: Stock price remained stable, with a slight increase of 0.5% post-transaction, reflecting positive investor sentiment. Bharti Airtel

Details: Singapore Telecommunications Limited (Singtel) sold a 1.76% stake through a block deal. Statistics: Shares Sold: 9,62,34,427 Transaction Value: Approx INR 7,128 crore Stock Price Impact: Stock price saw a temporary dip of 2% on the deal day but recovered within a week, highlighting market confidence in Bharti Airtel.

These deals illustrate that block deals are preferred for large transactions involving institutional investors/promoters. The relatively stable stock prices post-transaction indicate the market absorbs these large trades without significant disruptions, thanks to the special trading window.

SECTOR-WISE ANALYSIS OF BLOCK DEALS

According to the Economic Times, the following sectors have seen a surge in block deals, indicating a preferred mechanism for voluminous securities purchases on the stock market:

2024:

These sectors have seen significant block deal activity, indicating high trading activity and portfolio adjustments by large institutional investors and promoters.

CONCLUSION

Block deals are a vital mechanism in the stock market, facilitating large transactions while maintaining market stability. Governed by SEBI’s robust regulatory framework, these deals offer transparency and efficiency, benefiting institutional investors and the broader market. The recent block deals in HDFC Asset Management Company, Kotak Mahindra Bank, and Bharti Airtel highlight their significance and impact. By understanding the provisions, processes, and implications of block deals, market participants can navigate these large transactions effectively. As the Indian stock market evolves, block deals will remain an essential tool for managing substantial trades and ensuring liquidity. Staying informed about the nuances of block deals is crucial for investors, traders, and financial professionals aiming to leverage these opportunities in the dynamic market landscape.