Block, stock, and trades: Block trades gather steam and what this suggests

Block deal activity has gained considerable momentum in recent weeks, thanks to a sharp rebound in stock prices from their 2022 lows. Stemming of outflows from overseas investors and supportive domestic institutional investors have given investment bankers the confidence to launch large block trades.

Block transactions are privately negotiated deals carried out under a special trading window provided by stock exchanges. Such deals are typically done at a discount to the market price. Block deals help a large shareholder divest a huge chunk of shares to heavyweight institutional buyers. Such deals were a common occurrence in the immediate aftermath of the Covid-19 sell-off in 2020.

Investment bankers say successful execution of large block trades is a healthy sign and could pave the way for large initial public offerings (IPOs) and additional fund-raising by listed companies.

“The risk appetite is returning. Typically, it starts with quality listed players, then qualified institutional placements, and later IPOs. The overall geopolitical situation, oil prices, and Life Insurance Corporation of India’s (LIC’s) IPO will be key events,” says Ajay Saraf, executive director and head of investment banking, ICICI Securities.

Some large block deals executed in recent weeks include Canada Pension Plan Investment Board’s 2 per cent stake sale in Kotak Mahindra Bank for Rs 6,800 crore, private equity major KKR’s affiliate firm Kayak Investments’ 10 per cent stake sale in Max Healthcare for Rs 3,297 crore, and Carlyle Group’s 2.78 per cent stake sale in SBI Cards for Rs 2,229 crore. Besides, a large portion of shareholding has been successfully divested in companies such as Coforge, SBI Life, and MTAR Technologies.

Investment bankers say more deals are lined up in the days and weeks to come.

“Some of these block deals could have happened because of regulatory requirements. In some cases, the selling parties would have wanted to unwind their positions. But the good thing is there was demand, and that’s why these block deals could get done,” says Amishi Kapadia, group president and global head-merchant banking, YES Securities (India).

The pick-up in activity has resumed after a period of lull. The Sensex came off 13 per cent from 2022 highs in early March amid sustained pull-back by foreign portfolio investors (FPIs) due to the US Federal Reserve’s hawkish turn and the commodity shock brought on by Russia’s attack on Ukraine.

FPIs pulled out as much as Rs 1 trillion from stocks this year. However, the sharp selling seems to have eased and on some occasions, FPIs turned net buyers. Also, the market has recouped all losses seen this year.

Market experts say the successful execution of block deals will encourage some large companies to launch their IPOs. However, bankers are awaiting more signs of stability. “How the LIC IPO pans out will determine the fortitude of the primary markets in the future. Valuation is a crucial factor. If valuations are reasonable, investors will still participate in the primary market. The second factor will be market stability. Volatility is high now, so everyone is in wait-and-watch mode. But when things become stable, IPOs will come back, irrespective of Sensex levels. Primary markets will eventually turn robust, given the strong pipeline,” adds Kapadia.