Regulators and intermediaries are in discussions to put in place a mechanism for real-time exchange of data on foreign ownership limit in companies to prevent future instances of breaches as was seen in the case of HDFC Bank on February 17.
According to sources, the Securities and Exchange of India (Sebi) and the Reserve Bank of India (RBI) met last week to discuss the breach of FPI cap in HDFC Bank. The regulators discussed whether new systems can be put in place for monitoring of shareholdings to avoid breach of FPI limits in future.
At present, RBI monitors the ceilings on FPI investments in Indian companies daily. For effective monitoring of foreign investment ceiling limits, the RBI has fixed cut-off points that are two percentage points (200 basis points) lower than the actual ceilings. However, this monitoring is done on an end-of-day basis and not intraday.
"There is a need for real-time data integration between depositories, custodians and the stock exchanges. If the stock exchange has a mechanism to automatically block trades if 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, a law firm.
Market experts say stocks with very high foreign portfolio investor (FPI) interests need better monitoring to avoid an encore of HDFC Bank-like scenario.
"There is a need to actively monitor the top 50 or top 100 stocks where FPI demand is the highest. The data on ownership limits need to be provided to the regulators or the brokers who can then block trades in these companies on a real-time basis," said a person from a foreign brokerage, who did not want to be named.
According to him, depositories are the best entities to collate the data and disseminate it to other intermediaries, however, they may not able to do much when it comes to monitoring intra-day trade.
"An ownership limit could be breached at 10 am in the morning and then fall below the threshold after two hours. How do you deal with these fluctuations will be a key area of challenge," said an industry official.
Debate over trade annulment
The regulatory officials, at last week's meeting, also discussed whether trades after a cut-off time could be annulled, and should brokers be held liable for the breach, according to sources.
Chitlangi believes that annulment of trades should be the measure of last resort and used only in extreme cases where there is a technical or human error involved: "Why should there be an annulment if it is not the trader's mistake?"
"There are not too many instances of this (breach of FPI limits) happening before and the current norms with regard to annulment of trades are adequate. So there is no point adding to the rules as that will make things more confusing and impact FPI trading," said Prashant Gupta, partner, Shardul Amarchand Mangaldas.
Annulment refers to cancellation of trades by stock exchanges. As per a Sebi circular in 2015, exchanges 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 not later than 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 the 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 FPIs. Shares of HDFC Bank had soared as much as 9.5 per cent on the back of the huge demand from FPIs. However, most of these gains were eroded after the RBI reimposed the foreign shareholding ban, with the stock closing only 3.75 per cent higher, at Rs 1,377.