Business Standard

Sebi, RBI discuss monitoring of foreign investors in real time

Talks held after recent breach of foreign shareholdi­ng cap in HDFC Bank

- ASHLEY COUTINHO

Spooked by a recent breach of foreign ownership limit at HDFC Bank, regulators and intermedia­ries are grappling with the question of monitoring foreign investors in real time.

Both held talks on exchange of data to track real-time behaviour of foreign investors. According to sources, the Securities and Exchange of India (Sebi) and the Reserve Bank of India (RBI) met last week to discuss the February 17 breach at HDFC Bank. They also discussed whether new systems can be installed to observe foreign shareholdi­ngs and prevent breaches of investment limits.

At present, only the RBI monitors foreign investment­s daily. Its alarm goes off each time foreign ownership in a company breaches a certain limit, which is typically lower than the actual ceiling. However, that alarm goes off after market hours only; intraday, it never rings.

Hence, the need for real-time monitoring.

"There is a need for real-time data integratio­n between depositori­es, custodians, and stock exchanges. If the stock exchange has a mechanism to automatica­lly block trades in case the limit is reached, then the problem will be taken care of and there will be no need for the regulator to step in," said Tejesh Chitlangi, partner, IC Legal.

Experts say stocks with high foreign investment need better monitoring to avoid HDFC Bank-like breach.

"There is a need to actively monitor the top 50 or top 100 stocks, for which foreign demand is highest. Data on ownership limits need to be provided to regulators or brokers, which can then block trades in real time," said a person at a foreign brokerage, who did not wish to be named.

According to him, depositori­es are best-poised to collate data and disseminat­e it to other intermedia­ries. However, they will not be able to do much on intra-day monitoring.

"Ownership limit could be breached at 10 am and then fall below the threshold after two hours. How do you deal with these fluctuatio­ns will be a key challenge," said an industry official.

Debate over trade annulment

In last week's meeting, officials also discussed whether trades, after a cut-off time, could be annulled, and if brokers be held liable for the breach, according to sources. Chitlangi believes annulment of trades should be last-resort measure, to be used only in extreme cases of technical or human error: "Why annul trade if it is not the trader's mistake?" "There are not too many instances of this (breach of foreign investment limit) and the current norms on annulment of trades are adequate. So no point adding to the rules as that will make things more confusing and impact foreign trading," said Prashant Gupta, partner, Shardul Amarchand Mangaldas. Annulment refers to cancellati­on of trades by exchanges, which can consider a trade for annulment on their own or on a request by a stockbroke­r. Stock exchanges have to examine the requests by brokers before the start of the next trading day. The exchanges may also choose to reset the price of the trade instead of annulling it to minimise impact on other brokers and investors.

 ?? ILLUSTRATI­ON: AJAY MOHANTY ??
ILLUSTRATI­ON: AJAY MOHANTY

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