Lessons from the HDFC Bank stock fiasco

Last week's breach of foreign portfolio investor (FPI) limits in HDFC Bank stock conveys two strong messages. It demonstrated the massive demand for quality Indian company stocks in the international markets. It also demonstrated that Indian regulators can be naive.

 On February 16, 2017, the Reserve Bank of India (RBI) removed HDFC Bank from its foreign investment ban list. It meant that the next day -- on Friday, February 17 -- foreign investors could buy the HDFC Bank stock from the open market. While the market had clearly anticipated that the demand would be high for the HDFC Bank stock, the regulators didn't anticipate the kind of rush seen.

 On February 17, the stock of HDFC Bank opened nearly 9 per cent higher and by afternoon had touched a high of Rs 1,450. Within hours of the market opening the foreign investment cap had hit its upper limit. At 1:40 pm, RBI put HDFC Bank back into the ban list for hitting the investment cap of 74 per cent. It is evident that the regulators didn't anticipate the surge in demand because the foreign investment cap limit in the HDFC Bank stock was breached even before the notification was released. There was a lag in the notification which led to the development.

 It wouldn't be difficult to find the trades which were executed after the breach in FII limits. The settlement for the HDFC Bank stock is still on hold and some sections of the market feel that the regulators may not annul any trades that have taken place on Friday. Still, there is a high chance that the trades executed by foreign investors after the breach would be annulled. "The quick fill up of the limits and the 66 per cent delivery volume last Friday against 5-10 per cent on a normal day highlight that quality remains in demand despite pricing being moderate and not cheap," says Gurunath Mudlapur, Managing Director at Atherstone Capital Markets, a Mumbai-based investment bank.

 The regulator is yet to take a decision on Friday trades in HDFC Bank's stock. It is also considering who should be held responsible for the breach. But it again proves that market is willing to pay premium for quality and also highlights that the regulators should be vigilant and be able to anticipate the future to avoid mishaps that can give wrong signal to the market players. It can bring a bad name to the Indian market and regulators.