Mumbai: Market regulator Sebi on 20 December decided to permit all classes of investors — institutional and retail — to sell shares without owning them at the time of trade.
“The stock exchanges would issue the necessary guidelines in this regard and will put in place systems to operationalise the mechanism of short-selling,” Sebi said in a circular here.
However, the system of “naked short selling” as is available in the US markets has not been allowed, and all investors must honour their obligation of delivering the securities at the time of settlement.
In order to provide for a mechanism for borrowing of securities to enable settlement of securities that are sold short, Sebi has decided to implement a full-fledged securities lending and borrowing scheme for market participants. Stock exchanges would issue guidelines in this respect as well.
Sebi advised stock exchanges and depositories to put necessary systems in place to distinguish between the lending and borrowing transactions executed for short selling from the normal market transactions in the demat system. The market regulator will intimate date of implementing short-selling later.
While retail investors were already allowed to short-sell, the decision to include institutional investors is likely to encourage these players in the stock market.
Sebi’s decision to allow short-selling and come out with broad framework in this direction is good for the market as it would create more liquidity, brokerage firm SMC Global vice-president Rajesh Jain said. Stock markets should welcome the news tomorrow, if global cues are also positive, he said.
As per the broad framework for short-selling issued by Sebi, no institutional investor would be allowed in day trading, which means squaring-off transactions intra-day.
Institutional investors would disclose in advance at the time of placement of order whether the transaction is a short sale. However, retail investors would be permitted to make similar disclosure by the end of the trading hours.
Securities in the futures and options segment will be eligible for short-selling and Sebi may review the list of stocks eligible for such transactions from time to time.
Brokers will be asked 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 exchange would then consolidate such information and disseminate them on their websites for the information of the public on a weekly basis.
For short-selling, a scheme of lending and borrowing securities is essential. To begin with, this borrowing and lending programme would be operated through clearing corporation, and clearing house of stock exchanges having nation-wide terminals who will be registered as Approved Intermediaries (AIs).
Initially, the securities traded in F&O segment would be eligible for lending and borrowing under the scheme. To start with, contracts with tenure of seven trading days may be direct agreement between the lender and the borrower, Sebi said.