Sebi, RBI engage in turf war over stock trading of HDFC Bank

MUMBAI: The Securities and Exchange Board of India has expressed displeasure over the Reserve Bank of India’s intervention in the trading of HDFC Bank shares after the overseas holding was breached on February 17. Sebi is said to have lodged a protest in a strongly worded letter to RBI.

“Market sanctity is important to Sebi. Even Sebi doesn’t intervene during market hours. RBI can’t do anything like this without consulting with Sebi,” said a regulatory official aware of the letter. “This is backseat driving.” Sebi has said that to ensure such a situation doesn’t recur a solution needs to be worked out by both regulators.

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“Today the problem is we don’t have a system to flag the limit has been breached. It is possible to work out a solution and we will create a system to monitor sectoral limits,” the official said.

Following the letter, RBI and Sebi officials met to discuss the matter last week, the official said. Queries to RBI and Sebi went unanswered.

Some experts said Sebi was right in writing such a letter. “In an anonymous ordermatching system, the sanctity of trades is critical because millions of investors, whether trading in the stock or not, are impacted by any unnatural intervention,” said Sandeep Parekh, founder, Finsec Law Advisors.

“In the recent example, when foreign investors were asked not to complete executed trades, their counterparts would be innocent investors who are hurt in the process. Even otherwise, there is nothing critical or even important in breaching these limits. These can easily be corrected the next business day by issuing a direction disallowing further purchases till the position is restored,” said Finsec’s Parekh, a former executive director of Sebi.

Typically, foreign investment limits are monitored at the end of the day. But on February 17, when the window was opened for fresh purchases in HDFC Bank stock, RBI started collecting the data from stock exchanges, custodians and market participants at frequent intervals.

Frenzied buying by foreign portfolio investors in the HDFC Bank stock led to the statutory limit being crossed within a few hours and midway through the trading day, RBI clamped down on them. By then, many trades had already been executed, prompting the central bank to ask all custodians not to settle trades in HDFC Bank made after 1:39 pm on February 17 in which foreigners were buyers.

Trades that were not confirmed by the custodians have devolved on the stock brokers that executed the transactions on behalf of foreign clients.

“From an RBI perspective, it was a damage-control exercise since a delayed notification post the close of market hours would have resulted in more brokers punching in the trades, which later they would have had to take in their own proprietary books,” said Tejesh Chitlangi, partner, IC Legal. “Also, not to forget that a regulator would be inclined to immediately stop breach of its regulations, once it gets established.”