Sebi shuts FII-to-FII trades; huge demand seen for HDFC Bank stock on Jun 1

Facility was extensively used in case of stocks such as HDFC Bank, where FII investment limits are often fully utilized

Market regulator the Securities and Exchange board of India (Sebi) has scrapped the special window meant for inter-se trading between foreign institutional investors (FIIs).

The move would hurt foreign institutional investors (FIIs) who used to avail this window to deal in stocks such as HDFC Bank, where FII investment limits are often fully utilized.

Also known as ‘6 lac series’, the facility allowed shares change hands among FIIs. In some cases, this window generated more volumes than the main trading window. For instance, in the past three months the trading volumes in ‘6 lac series’ of HDFC Bank is 42 per cent that of overall volume in the stock.

The decision to scrap the special trading platform has come just two days before window of trading for FIIs is to open in HDFC Bank.

The allotment of employee stock options (ESOPs) has created 143 basis points (bps) headroom for FIIs in HDFC Bank. This has created a last minute rush among FIIs wanting to buy HDFC Bank shares.

Market participants are expecting huge demand for HDFC Bank stock on June 1, when the window opens for FII buying. Brokerage firm Macquarie estimates a volume of $1 billion in the stock, when the window opens on June 1. Such volumes could disrupt the stock movement, say experts.

“Now that, this will be last opportunity for FIIs to buy HDFC Bank, we think scrapping of special FII window will increase the quantum of buying that will come on June 1,” said Macquarie in a note to its investors.  

The reason for such unusual rush is the fact that the FIIs who fail to buy the stock during the window will have to wait until the next window opens.

Until now, FIIs were able to buy and sell HDFC Bank within themselves through ‘6 lac series’. The only other alternative left for FIIs who wish to pick up the stock will have to do it through depository receipts (DRs). However, the float of HDFC Bank in form of DRs is minimal. According to the latest shareholding pattern, 18 per cent of the HDFC Bank’s shares are listed as ADRs.

Last time when such a trading window opened for HDFC Bank shares was in February 2017. There was so much demand from FIIs for the stock that the headroom created was breached within few hours. Reserve Bank of India (RBI) had to intervene in the mid-market hours and stop further trading of the stock for FIIs. Several orders placed by FIIs were in breach of the 74 per cent cap applicable. This had prompted Sebi to review its limit monitoring norms.

Last month, Sebi came out with a circular asking depository participants (DPs) to monitor the FII limits on a daily basis. The circular also stated that whenever the end of the day report of depositories shows further headroom for FII buying, the stock could be opened for their trading. It also specified the mechanism through which any trades in breach of the limit would be dealt with. This new mechanism could have prompted scrapping of the ‘6 lac series’ window, industry players say.