Sebi, RBI discuss monitoring foreign investors in real time after foreign shareholding cap breach in HDFC Bank on February 17.
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) recently met 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 another 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.
"An 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 that 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 stock 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.
On February 17, shares worth Rs 15,000 crore were traded in HDFC Bank, of which 66 per cent or close to Rs 10,000 crore were delivery-based trades, mostly from foreign investors.
Shares of HDFC Bank had soared as much as 9.5 per cent on huge demand from foreigners. However, most gains were eroded after the central bank reimposed foreign shareholding ban, with the stock closing only 3.75 per cent higher at Rs 1,377.
Photograph: Shailesh Andrade/Reuters.
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