Market regulator Securities and Exchange Board of India (Sebi) is likely to consider modalities for short selling of shares by institutional investors at its board meeting in Mumbai on March 22.
The Sebi board is meeting in pursuance of the announcement made by finance minister P. Chidambaram in the Budget 2007-08, official sources said, adding short-selling is the key agenda of the discussion.
The finance minister in his Budget on 28 February said that Sebi would come out with guidelines for short-selling of securities by institutional investors, that is selling securities without owning them at the time of trade.
The Secondary Market Advisory Committee (SMAC), appointed by Sebi, had recommended short-selling by institutional investors way back in October 2005.
The issue has been hanging in balance due to differences between market regulator Sebi and the Reserve Bank of India (RBI).
Sources said while the RBI favoured a gradual process starting with domestic institutional investors, Sebi preferred to adopt a big bang approach by allowing all institutional investors to short sell from day one.
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.
As they are to settleby deliveries, no margin is levied on their transactions.
The issue of allowing institutional investors to short-sell is inked to the programme for stock lending and borrowing.
The stock lending and borrowing programme was in vogue with institutional investors until 1997 under Foreign Exchange Regulations Act (Fera), which was replaced with Foreign Exchange Management Act (Fema) in 1999-2000. Now the issue is whether proposed lending and borrowing programme could be allowed for foreign institutional investors under Fema.
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.
In a recent interview to a news channel, Sebi chairman M. Damodaran has said: “Now that there is clear, unambiguous settlement in the Budget speech and the structures are in place, we know what to do with stock lending and borrowing mechanism, which is the enabling mechanism to ensure that short-selling accompanied by delivery is taking place and therefore, you will see action on this sooner rather than later.”
Sources said naked shortselling, as allowed in the United States, would not be permitted as per the recommendations of the SMAC. Accordingly, all investors would be required to mandatorily honour the obligation of delivering the securities at the time of settlement.
While short-selling may not necessarily curb volatility, it would reflect future market realities, on the basis of which the authorities may take corrective measures.It is a market way of sending correct signals and not the government-designed anti-volatility mechanism, they said.