The board of stock-market regulator Securities and Exchange Board of India (Sebi) on Thursday approved short-selling by institutional investors (as indicated in this year’s Budget). The regulator also made disclosure norms for real-estate companies more stringent (see story on page 1), gave an in-principle approval for mandatory rating of initial public offerings (IPOs), and allowed listed companies to save on costs by mailing abridged annual reports—instead of the full reports—to their shareholders.
Institutional investors had been demanding that they be allowed to short-sell, because they considered this an effective way to tackle a volatile market.
A short-sale is the sale of a security that the seller does not own but promises to deliver. The seller completes the transaction at settlement time by borrowing or buying stocks. In a rising market, short-selling is seen as a way to cool down overvalued stocks; in a falling market, short sellers lend buoyancy to the market.
According to existing rules, only retail investors are allowed to sell short. In December 2005, Sebi’s secondary market advisory committee framed guidelines for short-selling. It recommended that short-selling be allowed only in stocks that are currently traded in the derivatives segment. It also said naked short-sales—selling without owning or borrowing a stock—should not be allowed.
It is not clear whether the new norms will come in place on the basis of this report. There have been differences between the capital-market regulator and the banking regulator on the scope of short-selling. The Reserve Bank of India has been of the view that in the initial phase, only domestic institutions should be allowed to short-sell.
The stock market regulator has not given a deadline for short-selling to commence. A National Stock Exchange official said the exchange would be ready in three weeks for the purpose.
“There are situations when companies get excessively priced, and it’s good to have a system like short-selling,” says James Brieding, managing director of Naissance Capital, a Swiss investment bank.
“Any market without short-sellers is like a man running with one leg tied. We need to have different views in the market, ” said Ramesh Damani, a broker on the Bombay Stock Exchange.
Vallabh Bhansali, chairman of Enam Financial Consultants, an investment bank, said short selling would allow for better price discovery.
Rana Rosen and Saumya Roy contributed to the story.