SEBI meet today to discuss 74% FII limit breach in HDFC Bank

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Tarun SharmaMoneycontrol

The Securities and Exchange Board of India will meet today to discuss the issue of foreign institutional investor holding in HDFC Bank overshooting the 74 percent limit, sources familiar with the development told Moneycontrol.

Frenzied buying by FIIs in the HDFC Bank stock Friday led to the statutory limit being crossed. The stock exchanges have already told the custodians of the FIIs that purchases made after 1:40 pm that day—when the RBI notification about the breach of the limit was flashed on stock exchange terminals—will not be settled. This is learned to have been done at the instruction of the RBI, said sources.

It is not clear if the FII trades done in the stock after 1:40 will be reversed or if they will become the liability of the broker who bought the shares on the behalf of the FIIs.

Reversal of trades can pose legal issues if the sellers of the shares decide to challenge the ruling. Holding the brokers liable too can lead to legal challenges, especially if brokers can make a case that they did not have adequate time to withdraw their orders. It is learnt that some pending orders in the trading system got executed after 1:40, before they could be withdrawn

There is no clarity on how much the 74% limit has been overshot by. A little over 7 crore shares—around 3.5 percent of the equity base-- resulted in delivery on both exchanges combined. Market sources say a substantial chunk of the shares would have been bought by FIIs.

This is the first time that the RBI had to issue a notification banning purchases by FIIs in the middle of the trading session. Usually such announcements are made after trading hours when custodians submit the details of their purchases to the RBI.

On Thursday evening, the RBI permitted open market purchases by FIIs as the foreign holding had “gone below the prescribed limit stipulated under the extant FDI Policy.”  

The RBI usually raises a red flag when the FII holding in a stock is 2 percent away from either the statutory limit for a sector or a company board-approved limit, which varies across firms.

Every FII purchase in the stock after that has to be approved by the RBI so that the statutory/board approved limit is not violated.

In the case of HDFC Bank, the RBI was wrong-footed by the massive demand for the stock from FIIs.

Market sources say FIIs instructed their custodians to buy as many shares as they could and inform the RBI as soon as their trade was confirmed, instead of waiting till the end of the day. That is how the RBI got to know that the limit was breached.

The HDFC Bank incident could most likely lead to an overhaul of the system for reporting FII limits, to prevent a repeat.