Market regulator scraps FII-to-FII trading window

Facility was extensively used to deal in HDFC Bank stocks

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

The move will hurt FIIs that used to avail this window to deal in stocks such as HDFC Bank, where FII investment limits are often fully utilised.

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

The decision to scrap the special trading platform comes just two days before the window of trading for FIIs opens 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 a huge demand for the 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’s movement, said experts.

“Now that this will be last opportunity for FIIs to buy HDFC Bank, we think scrapping the 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 because 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 shares within themselves through the ‘6 lac series’. The only other alternative left for FIIs that wish to pick up the stock is to do it through the depository receipts (DRs). However, the float of HDFC Bank in the form of DRs is minimal. According to the latest shareholding pattern, 18 per cent of HDFC Bank’s shares are listed as ADRs.

The last time when such a trading window opened for HDFC Bank shares was in February 2017.

There was much demand from FIIs for the stock since the headroom created was breached within a few hours. The Reserve Bank of India (RBI) had to intervene during mid-market hours and stop further trading in the stock for FIIs. Several orders placed by FIIs were in breach of the 74 per cent cap applicable. This 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 end of the day report of depositories shows further headroom for FII buying, the stock could be opened for trading.