Securities and Exchange Board of India chairman C.B. Bhave has done well to quickly dismiss the possibility that India may follow a few developed markets such as the US and the UK and ban the short-selling of shares.
The restrictions that were imposed recently in a few Western stock markets, after financial panic and huge shorting threatened to send share prices off the cliff, are likely to be transient. The bans there were in response to an emergency. India is not in such dire straits.
Short-sellers are not very popular worldwide, even though they are a healthy counterweight to the natural exuberance of most other investors. A healthy financial market needs traders who are ready to borrow shares and sell them in the hope that their prices will fall.
There is one more reason why India needs to be open to short-selling. A lot of the foreign convertible bonds around the world are bought by the so-called convertible arbitrage funds, which buy a convertible bond and short-sell the underlying stock.
India is and will continue to be a large issuer of foreign convertible bonds. Their sales could get hit if short sales are banned.