Clean Science Trade Fiasco Seen As Showing Weakness Of India’s Block Deal System

Last week’s big trading blunder, one of India’s worst in years, is exposing a potential weakness in the country’s system for buying and selling large blocks of shares.

In the opening minutes of trading on Thursday, a unit of Avendus Capital Pvt. was seeking to carry out an order to sell as much as 24% of Clean Science & Technology Ltd. for about $300 million but traders thought their initial attempt didn’t go through, prompting them to try again, people familiar with the matter have said. Later, they learned both transactions had been executed, according to the people.

“It was incredible that this happened and honestly, shouldn’t have happened in the first place,” said Vaibbhav Sud, founding partner at Kkerdos Creators LLP, a New Delhi-based financial-services firm. “Imagine having 24% of your company being floated as a deal in a live market. The chances and scope of spillage is a lot.”

Accidentally placed duplicate trades, also known as a ghost orders, can be avoided if carried out in one of India’s two 15-minute windows dedicated to block sales. Problem is, the rules require such deals to offer discounts no bigger than 1% — making it difficult for some sellers to unload big chunks of stock. In the Clean Science deal, the shares were offered at a discount of as much as 13%.

Concerns about the tight discount band is one of the reasons why the Securities and Exchange Board of India on Friday proposed some changes, including tripling the discount limit to 3% on some stocks. Any adjustments could have far-ranging implications as block deals have exploded in popularity over the past few years in India, overtaking initial public offerings as a faster way for founders, private equity funds and other large investors to pare their holdings, according to data compiled by Bloomberg.

Kkerdos’s Sud said widening the discount limit to 3% is a “step in the right direction.”

The window for blocks — open briefly at 8:45 a.m. and then at 2:05 p.m. — is still used for big deals such as Reliance Industries Ltd.’s recent sale of a $900 million stake in Asian Paints Ltd.

And the system has its supporters.

“India’s block deal setup has been in place from years and is quite efficient,” said Kranthi Bathini, a strategist at WealthMills Securities Pvt. “One error cannot be used to paintbrush the system. We have rarely had any such errors.”

Yet the local market regulator is proposing changes to block trading that also include raising the minimum size of trades to 250 million rupees ($2.9 million) from 100 million rupees. Under the revisions, which have yet to be finalized, block deals would have to be settled by delivery of shares.

For market participants such as Sud at Kkerdos, India needs to provide further incentives for companies to use the safe spaces aside for blocks to avoid a recurrence of mishaps such as the Clean Science one last week.

“Such large block deals — relative to the company size — should happen in separate block windows,” Sud said. “Globally, India is one of the only countries where such large sizes happen during the market.”