Sebi turns scrutiny on block deals
PremiumSebi has stepped up scrutiny of front-running and other market manipulation cases following rising complaints
MUMBAI : Suspicious trading activity before so-called block deals, in which a large number of shares change hands in a pre-negotiated transaction, has now become part of a Securities and Exchange Board of India (Sebi) probe.
“Large-scale buy orders ahead of big deals are typically red flags. We have observed a number of cases where patterns are visible. In many cases, these buy orders do not come from a single buyer but from multiple buyers who are buying in a coordinated manner in smaller quantities through several accounts to avoid detection. Sebi systems have evolved to detect those," a person familiar with the regulator’s thinking said, requesting anonymity. These accounts are referred to as mule accounts.
An email to a spokesperson for the regulator remained unanswered.
The regulator has stepped up scrutiny of front-running and other market manipulation cases this year following rising complaints. The increased scrutiny is a departure from the previous year when Sebi took up just one case of front-running for investigation in FY21, and only two were completed, according to the regulator’s annual report.
An examination of the trading patterns ahead of at least five bulk deals indicates confidential details about the orders might have been leaked, allowing some to profit from the information illegally. The scrutiny of the deals transacted in 2021 and 2022 shows that the stocks moved in unusual ways before the block deals. The suspicious trades were also often found to have been squared off on the same day.
A bulk deal is a mechanism through which promoters and institutional investors buy or sell shares on the exchanges. These are pre-negotiated transactions where the buyer, seller and price are already set. Ideally, they should happen between only the intended parties—the buyer and the seller—but it appears that third parties often use the information to profit from the price swings caused by the large order, a practice called front-running. Moreover, since the transaction happens through regular order-matching mechanisms of exchanges, other buyers can potentially interfere in the transaction if their bids are identical to those fixed for the bulk deal.
Mint analyzed five such deals of ICICI Lombard, SBI Cards, Sona BLW Forgings Ltd (Sona Comstar), IIFL Finance and Dabur, and in each of these trades, large quantities of buy orders were placed in pre-opening hours before retail investors are allowed to trade.
For instance, on 18 August, a Blackstone entity, Singapore VII Topco III Pte Ltd, sold 79.5 million shares in Sona Comstar to raise about ₹4,000 crore. However, third parties already lined up buy orders of as many as 29.5 million shares in the pre-opening trading session.
According to disclosures on Trendlyne, two brokerages—Marwadi Shares and Finance Ltd and Mansi Shares and Stock Advisors—purchased and sold shares in bulk the same day. In addition, another party not involved in the block deal, Sanghvi Associates, also bought and sold the shares the same day.
Rajkot-based Marwadi Shares bought 4.1 million shares and sold 4.1 million shares. A relatively little-known firm situated in the Borivali suburb of Mumbai, Mansi Shares, purchased 850,000 shares and sold 3.14 million shares the same day. Sanghvi Associates also bought and sold the same quantity of shares, 2.92 million.
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Mint reached out to Marwadi Shares and Mansi Shares for comments on their trading but did not receive a response till press time. Mint could not ascertain the identity of Sanghvi Associates.
It is not possible to establish who placed buy orders in pre-opening sessions based on public disclosures.
“It seems some participants are capitalizing on confidential information ahead of bulk orders. This puts market integrity into question around these large deals," said the equity head of an institutional buyer, requesting anonymity.
In another recent bulk deal in which CDC Group Plc offloaded 13.5 million shares of IIFL Finance on 19 August, it was found that buy orders totalling 20.9 million shares from third parties were lined up before the negotiated sale could be transacted. In the case of SBI Cards, on 17 March 2021, CA Rover Holdings, a Carlyle group entity, sold 40 million shares, and 7.1 million shares buy orders were already lined up in the pre-opening session from parties not involved in the transaction. Similar patterns were seen when 10 million shares of Dabur changed hands via block deals on 19 February 2021.
Last year, foreign portfolio investors’ lobby bodies Asia Securities Industry and Financial Markets and Asia trade forum wrote to Sebi highlighting eight other deals where similar trade patterns occurred.
The investors alleged that beneficiaries of these buy orders were sophisticated and informed participants and requested a probe by Sebi. Mint has reviewed excerpts of the letter.
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