The Securities and Exchange Board of India (SEBI) has initiated a review of the regulations governing block deals in the stock market. Block deals are primarily executed by large institutional investors such as mutual funds, insurance companies, and other significant investors. These deals involve the trading of large quantities of shares based on pre-negotiated agreements between both parties. A specific time window is designated by the exchange for this process, and stringent regulations are enforced to prevent market price manipulation.
SEBI's Working Group and Key Issues
SEBI has constituted a working group to review the block deal regulations. This group comprises representatives from mutual funds, brokers, investment bankers, and other market participants. The group has been tasked with considering five key issues:
1. Modification of Minimum Block Deal Size
Currently, the minimum size for a block deal is set at ₹10 crore or 500,000 shares, a threshold established in 2017. Given the market's current depth and increased size, a revision of this limit is under consideration.
2. Increased Flexibility in the Price Band
Currently, the price band for block deals is limited to ±1% of the reference price. SEBI is considering expanding this to ±2%, particularly for mid and small-cap stocks, to facilitate greater share availability and smoother trading.
3. Extension of the VWAP Time Window
The reference price is currently calculated based on the Volume Weighted Average Price (VWAP) over a 15-minute period (1:45 PM to 2:00 PM) during the afternoon session. The block deal price is determined using the VWAP from 2:00 PM to 2:05 PM. Extending this time window to 30 minutes is being considered to improve price stability and reduce volatility.
4. Separate Price Bands for Morning and Afternoon Sessions
Currently, the same price band (±1%) applies to both sessions. However, market participants are advocating for separate price bands for the morning and afternoon sessions to enhance trading flexibility.
5. Review of the Block Deal Window
Currently, two time windows are allocated for block deals: 8:45 AM to 9:00 AM and 2:05 PM to 2:20 PM. SEBI is reviewing the appropriateness of these time periods. Additionally, a proposal has been made to add a third, larger deal window between 3:30 PM and 3:45 PM during the closing auction session (CAS).
Implications for Investors
These proposed regulatory changes by SEBI aim to make block deals more transparent and flexible. For large investors, these changes will streamline and balance trading practices. These modifications could be particularly beneficial for trading in mid and small-cap stocks.
If you are an active investor in the stock market or involved in block deals, monitoring these changes will be crucial. This will enable you to make better investment decisions and understand potential market risks.
