Hungry fund managers are angry with India, call for fixing upstairs market

 Global investors are urging the Securities and Exchange Board of India to fix the upstairs market

As all institutional investors know, purchasing shares in bulk can be a real pain in India. Traders at a biggish asset manager would be lucky to fill even a fifth of the entire demand from individual funds. The rest will become a feast for unrelated buyers.

It’s a design quirk, which grew out of a misplaced egalitarian sensibility and a fear of mischief by business families.

The idiosyncrasy is not without its costs. Imagine what would happen if a Nike store owner tried to accommodate a wholesale buyer inside a packed retail showroom by shouting to everyone that the next 15,000 pairs come at a 15% discount. There would be a stampede. Other customers could rush to the cash register first, the shop might run out of shoes, the bulk buyers would go home disappointed. This is why most other markets have a well-established tradition of an “upstairs market” for large orders that runs parallel to the “downstairs market.” It’s just more sensible to organize things this way.

But a preponderance of family-controlled firms in the country’s business landscape made the Indian regulator wary to take a laissez-faire approach to side deals. What if the controlling shareholders, or “promoters,” set up hard-to-trace investment entities in offshore tax havens to play their own stock back home, confounding price discovery on the main exchange? So the upstairs market is allowed to work only twice a day, for 15 minutes each time, and with stringent price restrictions that render it ineffective.

A sizable buy order in Mumbai begins its life like in any other place: The broker lines up a seller, maybe another institution. But if the agreed price involves a discount or premium to the previous close of more than 1%, the “block deal,” as these wholesale transactions are known, can’t be conducted in a separate window for negotiated trades. The orders have to be punched into the main market screen, where other participants are waiting, the term sheet of the bilateral deal usually having leaked beforehand.