Mumbai: Short-selling for institutional investors as well as a securities lending and borrowing (SLB) mechanism becomes operational this week, but experts say institutional investors will be preoccupied with the other measure that will be implemented on Monday—the imposition of margins for all institutional trades in the cash market.
Setting the rules: Sebi chief C.B. Bhave. This is the first time that institutional investors will be allowed to go short in the cash segment. (Photo: Ashesh Shah/Mint)
Institutional investors have been busy putting the necessary procedures, such as stan-ding instructions to custodians for foreign exchange deals, in place to meet the deadline.
“Short-selling can wait, but getting the act together on ma-rgining can’t,” says the head of custodial services at a foreign bank who didn’t want to be named. He points out that investors will be busy focusing on operational modalities of the new margining system and, as a result, short-selling and SLB will take a back seat.
Short-selling, or shorting, is the practice of selling securities one does not own. The settlement obligations for the short sale are met by borrowing the shares. The shares are lent under the express condition that they would be returned to the lender at a specified date and adequate margins are collected to safeguard the interest of the lender.
If the price drops, the seller can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, the seller has to buy it back at the higher price, and he loses money. The most obvious reason to short is to profit from an overpriced stock or market. The mechanism under which the shares are borrowed and lent is known as SLB.
Vikramaaditya, head of HSBC Securities Services India, says, “Some of our clients have expressed interest in short-selling and the securities lending and borrowing scheme, while some others may start depending on the markets’ response to the scheme.” Vikramaaditya goes by just one name.
Institutional trades in the cash segment have thus far been exempt from margins. The capital market regulator has now stipulated that even cash trades by institutional investors will be margined, just as they are in the case of retail participants. To start with, margins would have to be paid a day after the trade, and from 16 June, margins would have to be paid up front like by any other investor. These requirements are likely to take centre-stage this week. Besides, as the head of institutional sales at a domestic brokerage house, who didn’t wish to be named, says: “Investors are still trying to understand how the SLB scheme will work.”
Enhancing liquidity