HDFC Stock Trading at the Centre of SEBI-RBI Tug-of-War

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In a strongly worded letter to the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI) has registered its displeasure over RBI’s interference in the trading of HDFC Bank shares . The overseas holding of HDFC Bank was breached on February 17 this year.

SEBI-vs-RBI

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

This led to frenzied buying by foreign portfolio investors in the HDFC Bank. As a result, the statutory limit for foreign investment got crossed within a few hours. The RBI had to intervene by clamping down on foreign investment midway through the trading day.

Many trades had already been executed by then. The RBI then asked all custodians not to settle trades of foreigners buyers in HDFC Bank made after 1:39 pm on that date. Trades that were not confirmed by the custodians devolved on the stock brokers that executed the transactions on behalf of foreign clients.

Accusing the central bank of  backseat driving, SEBI declared that market sanctity is very crucial to them. SEBI doesn’t interfere during market hours to ensure that this sanctity is maintained. They maintained that the RBI shouldn’t have interfered without consulting with SEBI.

To ensure such a situation doesn’t occur again, both the regulators need to come up with a solution. Currently, there is no system in place to flag the limit when it has been breached. SEBI intends to work out a possible solution and also create a system to monitor sectoral limits.

RBI and Sebi officials have already met to discuss the matter following the letter being sent last week.

A few experts supported SEBI’s decision to write the letter. Sandeep Parekh, founder of Finsec Law Advisors opined, “In an anonymous order matching system, the sanctity of trades is critical because millions of investors, whether trading in the stock or not, are impacted by any unnatural intervention”.

In this recent fiasco, when foreign investors were asked not to complete executed trades, innocent investors who were their counterparts were hurt in the process. But these breaches can be easily corrected on the next business day by issuing a direction disallowing further purchases till the position is restored.

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