Markets open, banks shut: Investors suffered after RBI holiday on Feb 7

The Maharashtra government declared a public holiday on February 7 to mourn the demise of legendary singer Lata Mangeshkar. Following the announcement, the Reserve Bank of India (RBI) announced it would be a holiday for the banks. However, the stock market continued to function.

It appears that this has resulted in issues with payments and settlements for stock market participants such as mutual funds (MFs), brokers and foreign portfolio investors (FPIs).

According to a report in the Economic Times, 6 foreign banks have written to NSE Clearing—the clearing and settlement arm of the National Stock Exchange (NSE)—highlighting the difficulties faced by them on February 7 and precautions need to be taken in case of a similar event in future.

According to the report, brokers faced difficulties arranging for funds and MFs faced a regulatory dilemma. Meanwhile, the trades executed by FPIs during the preceding trading session could not be confirmed.

“Many MF schemes could not arrange funds in absence of non-availability of settlement on money markets and had to reach out to Sebi's MF division to understand whether borrowing would be construed a market violation as they are not allowed to borrow for investment purpose. While some MFs were in a net positive situation on cash, they had schemes with negative cash balance at the end of the day and an associated regulatory risk," the ET report quotes from the letter written by the six banks.

Markets remaining open during bank holidays isn’t uncommon. However, such days are known well in advance. The sudden announcement around February 7 caught several market participants on the wrong foot.

The six banks have suggested in future both banks and the stock market should be kept closed if the government announces sudden holidays.