Short Selling in India

Short Selling in India

Subject : Economy

Section :Capital Market

Concept :

• Market regulator Sebi has indicated to the Supreme Court that it is not in favour of banning short-selling or sale of borrowed shares, and said it is investigating allegations made by a short-seller against the Adani Group as well as its share price movements.
• Background
• Initially, market regulator SEBI has banned short selling of securities in 2001.
• After that, SEBI issued short-selling guidelines for institutional investors in July 2007.
• Seven years after short selling was banned, both retail and institutional investors had the option to go short in 2008.

Broad framework for short selling in India

• Short selling” shall be defined as selling a stock which the seller does not own at the time of trade.
• All classes of investors, viz., retail and institutional investors, shall be permitted to short sell.
• Naked short selling shall not be permitted in the Indian securities market and accordingly, all investors would be required to mandatorily honour their obligation of delivering the securities at the time of settlement.
• No institutional investor shall be allowed to do day trading e., square-off their transactions intra-day. In other words, all transactions would be grossed for institutional investors at the custodians’ level and the institutions would be required to fulfill their obligations on a gross basis.
• The custodians, however, would continue to settle their deliveries on a net basis with the stock exchanges.
• The stock exchanges shall frame necessary uniform deterrent provisions and take appropriate action against the brokers for failure to deliver securities at the time of settlement which shall act as a sufficient deterrent against failure to deliver.
• A scheme for Securities Lending and Borrowing (SLB) shall be put in place to provide the necessary impetus to short sell. The introduction of a fullfledged securities lending and borrowing scheme shall be simultaneous with the introduction of short selling by institutional investors.
• The securities traded in F&O segment shall be eligible for short selling.
• SEBI may review the list of stocks that are eligible for short selling transactions from time to time.
• The institutional investors shall disclose upfront at the time of placement of order whether the transaction is a short sale.
• However, retail investors would be permitted to make a similar disclosure by the end of the trading hours on the transaction day.
• The brokers shall be mandated to collect the details on scrip-wise short sell positions, collate the data and upload it to the stock exchanges before the commencement of trading on the following trading day.
• The stock exchanges shall then consolidate such information and disseminate the same on their websites for the information of the public on a weekly basis.
• The frequency of such disclosure may be reviewed from time to time with the approval of SEBI.

Debate over Short selling

• Proponents of short selling consider it an outstanding and fundamental feature of the securities market.
• On the other hand, critics of short selling firmly believe that short selling poses potential risks and can quickly destabilise the market.
• Securities market regulators in most countries, particularly in all developed securities markets, recogniseshort selling as a legitimate investment activity.
• The International Organisation of Securities Commissions (IOSCO) also examines short selling and securities lending practices in various markets and recommends greater transparency in short selling rather than a ban on short selling.

Naked Short Selling

• In naked short selling, stocks are not borrowed.
• Therefore, in times of panic, more people could dump their holdings, without any obligation to fulfil their settlements, thereby pushing the prices of the stock further down.
• It is illegal in India.

Difference between covered short sales and naked short sales

• Covered short sales are those in which the seller arranges for the delivery of shares he has sold by borrowing them. Naked short sales are those in which the seller does not intend to provide for the delivery of shares he has sold.