Clean Science Trade Fiasco: Is India’s Block Deal System Flawed?
Last week’s big trading blunder, one of India’s worst in years, is exposing a potential weakness in the country’s system for buying and selling large blocks of shares. In the opening minutes of trading on Thursday, a unit of Avendus Capital Pvt. was seeking to carry out an order to sell as much as 24% of Clean Science & Technology Ltd. for about $300 million but traders thought their initial attempt didn’t go through, prompting them to try again, people familiar with the matter have said. Later, they learned both transactions had been executed, according to the people.
The Block Deal System: How Does it Work?
In India, the block deal system is designed to facilitate the buying and selling of large blocks of shares. The system has two 15-minute windows dedicated to block sales, which are open briefly at 8:45 a.m. and then at 2:05 p.m. However, the rules require such deals to offer discounts no bigger than 1%, making it difficult for some sellers to unload big chunks of stock.
The Clean Science Debacle: What Went Wrong?
Accidentally placed duplicate trades, also known as ghost orders, can be avoided if carried out in one of India’s two 15-minute windows dedicated to block sales. However, in the Clean Science deal, the shares were offered at a discount of as much as 13%, which is well above the allowed limit. This has raised concerns about the tight discount band and the need for reforms in the block deal system.
Reforms on the Horizon: What Does it Mean for Investors?
The Securities and Exchange Board of India (SEBI) has proposed some changes to the block deal system, including tripling the discount limit to 3% on some stocks. This move is expected to have far-ranging implications for investors, as block deals have become a popular way for founders, private equity funds, and other large investors to pare their holdings. The proposed reforms also include raising the minimum size of trades to 250 million rupees ($2.9 million) from 100 million rupees, and requiring block deals to be settled by delivery of shares.
Expert Insights: What Do Market Participants Think?
Market participants, such as Vaibbhav Sud, founding partner at Kkerdos Creators LLP, believe that widening the discount limit to 3% is a step in the right direction. However, Sud also emphasizes the need for further incentives for companies to use the safe spaces aside for blocks to avoid a recurrence of mishaps such as the Clean Science one. Indian stock market experts also agree that the block deal system needs to be more efficient and transparent to attract more investors.
Conclusion: What’s Next for India’s Block Deal System?
The Clean Science trade fiasco has exposed a potential weakness in India’s block deal system, and the proposed reforms by SEBI are a step towards addressing these concerns. However, market participants believe that more needs to be done to make the system more efficient and transparent. As the Indian stock market continues to evolve, it’s essential to have a robust and reliable block deal system in place to facilitate the buying and selling of large blocks of shares.
