As India’s capital markets grow in depth and sophistication, the Securities and Exchange Board of India (SEBI) has initiated early-stage discussions to revamp the block deal mechanism. This comes in response to persistent demands from stakeholders including mutual funds, brokers, and investment bankers, who have long advocated for more flexibility in executing large transactions without affecting market volatility.

Why SEBI Is Reviewing the Block Deal Framework

Block deals serve as a crucial tool for institutional investors like mutual funds, insurance companies, and pension funds to transact large volumes of shares in a controlled and transparent manner. These trades are executed through designated windows, using pre-negotiated terms and strict parameters to avoid market manipulation and price distortion.

As the Indian equity market evolves, SEBI recognises the need to reassess this mechanism to ensure it keeps pace with increased market liquidity, investor participation, and dynamic trading behaviours.

Five Key Areas Under SEBI’s Review

1. Minimum Deal Size Threshold

The current minimum threshold for a block deal is either ₹10 crore or 5 lakh shares, a standard set back in 2017. Given the expansion of India’s equity market in recent years, SEBI is now seeking feedback on whether this threshold should be raised.

A higher threshold may better reflect current market depth and institutional trade sizes, allowing only significant trades under this mechanism and thus preserving its intent of enabling large, negotiated deals.

2. Price Band Flexibility

Currently, block deals must be executed within a narrow ±1% band around a reference price, aimed at maintaining price stability and avoiding manipulation. However, this rule has posed challenges, particularly in mid- and small-cap stocks, where liquidity is naturally lower.

SEBI is now evaluating the idea of increasing this band to ±2%, which could help improve execution efficiency for larger trades and reduce unintentional trade failures due to price mismatches.

Institutional participants have flagged that tight price bands limit share availability and increase the risk of trade leaks, making the execution environment less predictable.

3. VWAP Time Window Adjustment

For afternoon block deals, the reference price is based on the Volume Weighted Average Price (VWAP) during a 15-minute window (1:45 PM to 2:00 PM). The deal itself is executed based on the price between 2:00 PM to 2:05 PM.

Market players have pointed out that such a short window may not reflect fair market value, especially during volatile sessions. The SEBI working group is considering extending this VWAP calculation window to 30 minutes, which could provide a more stable benchmark and better protection against sudden price swings.

4. Differential Price Bands for Morning and Afternoon Sessions

Both morning and afternoon block deal windows currently apply a uniform ±1% price band. However, market behaviour varies significantly during different times of the trading day, and SEBI is assessing whether it makes sense to introduce different flexibility levels for the two sessions.

This would help align pricing mechanisms with liquidity patterns and ensure more natural market adjustments, especially when institutional activity peaks in the latter half of the day.

5. Review of Existing Block Deal Windows

There are presently two time slots for block deals:

• Morning Window: 8:45 AM to 9:00 AM

• Afternoon Window: 2:05 PM to 2:20 PM

SEBI is examining whether these windows remain optimal or if changes are required to meet evolving trading needs. Institutional participants have suggested that expanding or repositioning these windows could provide better alignment with market flows.

Proposed New Window During Closing Auction Session

To further enhance block deal flexibility, SEBI has proposed a third trading window during the Closing Auction Session (3:30 PM to 3:45 PM). This proposal is particularly aimed at helping passive funds reduce tracking errors when aligning portfolios with indices.

Key features of this new window include:

• Wider ±5% price band

• Settlement at the equilibrium price, where the maximum trade volume can occur

If implemented, this will be a significant structural enhancement and provide funds more precision and confidence in matching index values closely.

Stakeholder Consultations Underway

These proposals are being evaluated by a working group formed by SEBI and stock exchanges. The group is currently gathering feedback from a wide spectrum of market participants, including:

• Mutual fund managers

• Stockbrokers

• Investment bankers

• Buy-side institutions

No final decisions have been made, and the process is still in the consultation stage, according to sources familiar with the matter.

An official response from SEBI has not yet been released, but the regulator is expected to follow due process including public consultations before implementing any changes.

Why This Matters for the Market

The block deal mechanism plays a pivotal role in the efficient functioning of capital markets, allowing for:

• Bulk trade execution without affecting stock price

• Reduced volatility

• Lower information asymmetry

• Improved transparency for institutional investors

As SEBI pushes to align Indian markets with global standards, a more dynamic block deal framework could:

• Attract higher foreign institutional investment (FII)

• Improve trading execution in mid-cap and small-cap segments

• Enhance price discovery and market integrity

Conclusion

SEBI’s initiative to revamp the block deal mechanism reflects a growing acknowledgment of India’s rapidly maturing capital markets. With increasing trading volumes, participation from global funds, and expanding retail involvement, it’s critical that trade execution methods keep pace with these changes.

By re-evaluating thresholds, price bands, and trade timing, SEBI is aiming to make block deals more efficient, transparent, and robust — ultimately boosting investor confidence and market depth.

As these proposals evolve, all eyes will be on the regulator’s next move and how it balances flexibility with market integrity in the coming months.

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