Should Markets Worry About The Large Block Deals Of Late

The umpteenth number of 'promoter' and private equity exits has been the talk of the town, especially with June seeing over two billion dollars in block deals. It's almost a given that as I prepare my trade setup, there will be a block deal or two that will be happening for the day. And mind you, these are not small deals. These are large, multi-million-dollar deals executed in the first 15 minutes of a given day's trade without any dramatic damage to the ticket price of the underlying security.

If anything, in cases of cleanout trades, the stock prices at which the blocks have occurred have reacted very favourably as was in the case of HDFC AMC Ltd. and Delhivery Ltd.

Aside from the Landmark Cars Ltd. deal or Shriram Finance Ltd., in which Piramal Enterprises Ltd. sold its entire 8.3% stake, which was done in the last three days of the week gone by, there are some very interesting deals that have happened in the last two months.

From the Delhivery block deal, where Carlyle Investment Management LLC. sold a 12.53% stake in the company for over Rs 650 crore, to Sansera Engineering Ltd.'s large deal that saw two shareholders combined sell a 14.1% stake, or Kalyan Jewellers India Ltd.'s cleanout trade, where major investor Warburg Pincus sold a 6.2% stake, the deals have been enormous.

However, it was the Go Fashion (India) Ltd. block of 10.8% sold by Sequoia Capital that caught my eye, as the block was launched on a Sunday evening and got absorbed by Monday morning. There have been other large ones, like CMS Info Systems Ltd. or Timken India Ltd., where the promoter entities sold their large holdings, which found takers as well. And there were large institutions like HDFC AMC or Kotak that saw exits via block deals too.

All of this has also led some people to quote a famous quote by a money manager: "In the beginning, the promoter has the vision, and the investor has the money. In the end, the promoter has the money, and the investor has the vision".

Could that be the case? More on that later.

I tried to piece together why this spate of deals could be happening and whether this is a sign of worse times to come or 'acceptable behaviour' in the new India.

The reason I call this a 'new India' is because of what has happened in the last 18 months in Indian public markets. Picture 2022, and the standout feature of the market was the ferocious selling by foreign institutional investors from public markets. FIIs turned net sellers in 2022, offloading equities worth Rs 2.78 lakh crore. And yet, from the peak of 2022 to the trough of 2023, the Nifty fell less than 18%.

Any other period in Indian capital market history would have seen the markets correct viciously in percentage terms. But Indian markets absorbed the selling very well, and that showed the depth of Indian capital markets.

In some parts, it is this depth, this liquidity, and this demand for Indian paper that are leading to large exits because sellers have confidence in the demand for their sales. In some cases, it is a private fund that may be reaching the end of its life cycle and thus wants to liquidate its investments and return the money to its principals. 

One of the best markets to do that is India, due to the liquidity factor.

Some of the stocks seeing the blocks had come out with their IPOs post-Covid. In part due to lock-ins and in part due to soft equity markets ever since the FII selling intensified, exits were difficult. With the markets having recovered and lock-ins having ended, it is a good time to choose to exit, and that is what some of the investee funds are doing.

Thinking about the PE exits, the answer may be simpler. The recycling and redeployment of capital are important for any private equity player. Post-profit booking or the end of the fund lifecycle, this money may get redeployed to other assets.

One could also consider that it is a positive sign that large PE players are getting exits at good prices without the ticker getting marked down too adversely due to the large exits. Note that this is a cycle, and note that the pace of blocks will only go up and increase in size as the size of the market at large moves up and the cycles get compressed.

One should be mindful of the fact that the Indian market has expanded in size quite significantly, and these kinds of deals might actually zoom up in times to come.

Much like what happened in 2022 with FIIs, the block deal sellers are also getting large exits at good prices, which leads to the building of investor confidence in the depth of the market.

This is my hypothesis, and I hope I am correct on this, for I would loathe the other outcome of large public market investors holding a devalued asset, as it impacts the investment capital of an average Indian in mutual funds as well as the confidence factor in equities in the short term.