New Delhi: As part of efforts to broaden the equity markets, regulator Sebi will issue guidelines on short-selling within two-three months that will enable institutional investors to sell stocks without owning them.
“The guidelines for short-selling would be coming in 2-3 months,” Sebi chairman M. Damodaran said.
The market watchdog at its board meeting held on 22 March had allowed short-selling by institutional investors, both domestic and foreign. However, the relevant guidelines or notification is yet to come.
The decision on short-selling followed the announcement by Finance Minister P Chidambaram in the Budget on 28 February on the issue. The Sebi-appointed secondary Market Advisory Committee, had also recommended short-selling by institutional investors in October 2005.
Currently, short-selling is only available to retail investors and institutional investors are not allowed.
It is believed that initially short-selling would be permitted only in those stocks in which derivative products are available.
Besides, naked short sales might not be permitted, which means investors would be required to honour their obligation of delivering the securities at the time of settlement.
The introduction of short-selling is likely to benefit the market in more ways than one.
Apart from improving efficiency and liquidity, it will also help increase participation in a falling market since institutions will try to take advantage of such a market by going short, thus improving the market depth.
According to the present guidelines, institutional investors — FIIs, mutual funds, banks, insurance companies — are mandatorily required to settle on the basis of deliveries of securities owned and held by them.
The issue of allowing institutional investors to short-sell is linked to stock lending and borrowing.
It will lead to the setting up of a vibrant stock lending and borrowing mechanism and could also lead to actual delivery against futures and options in the future.
The stock lending and borrowing programme was in vogue for institutional investors until 1997 under Fera, which was replaced with Fema in 1999-00.
A revised scheme for lending and borrowing stocks was prepared after the stock markets experienced huge volatility in May 2006.
The Budget had also proposed lending and borrowing programme to facilitate short selling.
Analysts said while short selling may not necessarily curb volatility, it would reflect future market realities, on the basis of which the authorities may take corrective steps.
It is a market way of sending correct signals and not the government-designed anti-volatility mechanism, they said.