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FPI trades in HDFC Bank stock in limbo

Pavan Burugula, Samie Modak & Anup Roy/Mumbai 18 Feb 17 | 01:28 AM

In what could be a tricky situation, some trades of overseas investors in HDFC Bank may have to be reversed, as foreign investors’ prescribed investment limit of 74 per cent in the private sector lender was breached in Friday’s trades before the Reserve Bank of India (RBI) issued a circular banning further purchases in the counter. 

HDFC Bank is a favourite stock of foreign portfolio investors (FPIs), and the foreign investment cap of 74 per cent of its equity is typically fully utilised. On Thursday evening, the central bank had lifted restrictions on fresh purchases by foreign investors, as their stake had dropped below the prescribed limit. On Friday, FPIs rushed to buy the stock and the limit was crossed. 

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Sources, however, said that the leg-room was limited, while the demand for the stock from overseas investors was huge. The unprecedented demand saw the 74 per cent investment ceiling getting breached shortly after the stock opened for trade. The RBI circular reimposing the ban, however, came only a few hours before the close of trade. Sources said there was also a delay between the issue of the circular and notification to the stock exchanges.

The situation created panic among custodians, who are intermediaries responsible for the clearing, settlement and reporting of FPI trades. RBI is said to have called an emergency meeting with custodians to discuss the matter. 

Sources say the fate of trades close to Rs 6,000-7,000 crore could be uncertain. According to stock exchange data, close to Rs 15,000 crore worth of trading took place in HDFC Bank on Friday. Of this, around Rs 10,000 crore worth of trades (2.8 per cent stake) were earmarked for delivery. 

“Most of the buying in the HDFC Bank counter was seen from FPIs and hence, the foreign holding could have even reached 76 per cent. As this is in excess of the 74 per cent investment cap, some of the trades might have to be annulled. It will be a challenging situation for the custodians, as the trades have happened at a premium to the market price," said an official with a foreign bank, who deals with FPIs.    

Foreign shareholding up to 74 per cent in the bank through American depository receipts, foreign institutional and portfolio investors, foreign direct investments and non-resident Indians is allowed.   

The central bank is learnt to have put the onus on custodians to ensure that the foreign investment cap is maintained. RBI declined to comment on the issue.

Shares of HDFC Bank had climbed as much as 9.5 per cent to Rs 1,450 on Friday in intra-day trades. 

The shares gave up most of the gains after the RBI reimposed the foreign shareholding ban, with the stock closing just 3.75 per cent higher at Rs 1,377. 

It remains to be seen how the trade reversal will be carried out by the custodians and exchanges.

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