Pre-trade share allocation to funds may be mandatory

MUMBAI: The Securities and Exchange Board of India (Sebi) is planning to make pre-trade allocations mandatory for all institutional investors, said two people with knowledge of the matter, reviving a proposal it had floated two years ago. Currently, institutional investors buy large blocks of stocks and allocate them to schemes after purchase. However, the regulator now wants investors to disclose to exchanges in advance what quantity of shares is meant for which fund.The development comes as the regulator has noticed that some investors, especially mutual funds, are giving preference to flagship schemes over others, said the people cited above. The practice is more prevalent in capital market transactions such as initial public offerings (IPOs) and qualified institutional placements (QIPs).The regulator is pushing the framework as a move to enhance transparency in the capital markets. But institutional investors, especially foreign portfolio investors (FPIs), say it’s fraught with several implementation issues.Sebi didn’t respond to queries.The regulator has held discussions with various stakeholders on the matter in the past two months.“There is currently no uniform industry practice for allocation of shares amongst various funds, but most of the fund houses prefer to buy the shares first and then allocate them,” said one of the persons cited above. Sebi had proposed such a move in 2017 but put it on hold after several marquee FPIs expressed reservations.“The FPI fund managers will be in violation of their fiduciary duties if they are forced to follow pre-trade allocations,” said a leading Hong Kong-based fund manager who is a key functionary of the Asian Securities Industry and Financial Markets Association (Asifma), an FPI lobby group. “We have been told by Sebi during consultations that the problem is largely confined to local MFs that are misusing the lack of regulation in the matter. In such a case, FPIs should be kept out of the ambit of the new law.” 73023644 According to market participants, the key issue with pre-trade allocations will be pricing of shares. Currently, the institutional investor buys shares in various blocks and while allotting them across the funds, makes sure that each one gets equity at the same average.“If pre-trade allocation is allowed, funds will have to specify in advance how many shares are meant for which fund and hence the blocks will be allocated accordingly. The result would be different execution prices for different funds, since orders get placed at different times,” said a leading MF executive. “This automatically puts a fund offered by the same AMC (asset management company) at a disadvantageous position compared to another.”FPIs have a fiduciary duty to treat all funds managed by them equally. Allotting shares to different funds at different prices is against this, said a leading global custodian.FPIs are considered price movers as they tend to buy large quantities of shares. When such large demands come up, share prices see sharp swings.Trade allocations have been contentious across global markets. In the past, regulators in the US and UK asked fund managers to follow stricter allocation rules since they were seen directing shares bought at lower prices to proprietary books and others to public schemes. Hence, providing an equitable entry price has been made one of the fiduciary duties of fund managers.c

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