Leading financial services firm Motilal Oswal Financial Services will bar its clients from taking intraday short-selling position on stocks that are not part of the futures and options (F&O) segment from Monday.
Motilal Oswal Financial Services, with 10.3 lakh clients at the end of January, is the first large brokerage to undertake such a move at a time when the markets have been battered for five straight months.
Short-selling is the practice of selling shares one doesn't own at the time of the transaction.
The development comes even as the Sebi-constituted Industry Standards Forum (ISF), comprising exchanges, brokers and other stakeholders, is seeking greater clarity on a regulatory circular on short-selling issued last year, a broker said on the condition of anonymity.
Currently, retail investors can short sell a stock only on an intraday basis if they don't own the shares. Before the close of trading, the sell position has to be closed out if the client doesn't own the shares. Institutional investors who short sell, on the other hand, have to borrow the shares from the exchange's stock lending and borrowing mechanism (SLBM) and give delivery.
Reason behind the move
Motilal Oswal, in a note to its business partners or authorized personnel (APs) on Friday, cited a Sebi circular of 5 January last year that spells out the framework for short selling—selling stocks one doesn't own at the time of the trade.
APs help brokers in onboarding of clients.
"We would be restricting the non-F&O stocks for short-selling in intraday product. Same would be effective from 03 March 2025," the firm stated in the note to its business partners.
The note further states, “Request you to note the same before placing order in intraday product as first trade on buying needs to be done only.”
Interestingly, the Sebi circular permits short-selling by retail as well as institutional investors while barring naked short selling or carrying forward of a short position by any class of investor who doesn't own the shares.
In response to Mint's query on the Sebi circular, a Motilal Oswal Financial Services spokesperson said that the reporting of short-selling in non-F&O stocks has been in place as per Sebi guidelines. "This circular is an internal communication to strengthen risk controls," the spokesperson said.
The spokesperson said that “there is no blanket ban”, but that the measure introduced by the firm will prevent “unintended short-selling in non-F&O stocks, reducing auction penalties for clients.”
The firm said the note had been shared with its business partners and not clients.
The Sebi circular also states, "The institutional sellers shall disclose upfront at the time of placement of order whether the transaction is a short sale. However, retail investors would be permitted to make a similar disclosure by the end of the trading hours on the transaction day."
The brokers, Sebi further states, are "mandated 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 exchanges have to consolidate such information and disseminate it on their websites for the information of the public on a weekly basis. The frequency of such disclosure may be reviewed from time to time with the approval of Sebi.
Jimeet Modi, founder and group CEO of Samco, said that Sebi rules don't bar short sales for clients so long as the position is squared off by 3:15 pm on the same day. He added that naked short selling, or carrying forward a short position without owning the stock to the next trading session, was barred.
The Nifty and the Sensex are in correction territory—having fallen nearly 16% and 15% each from their record highs in September last year to 22,124.7 and 73,198.10 points on Friday.
The Nifty is perched precariously above its 4 June low of 21,884.5 as of Friday after relentless FPI net selling of ₹2.13 trillion since October from the Indian markets—figure includes the primary and secondary segments.
This low was made after the ruling Bharatiya Janata Party (BJP) failed to win a majority on its own in last year's Lok Sabha elections. However, the markets rallied by 20% to their September highs from that level on the premise of policy continuity after the BJP formed a coalition government in the third term. But markets corrected sharply thereafter.
Samco's Modi said his concern now stemmed from the fact that markets tended to go contrary to consensus of bottom or top formation.
"The real worry is the consensus among investors and traders that markets will get support around the June low of 21,800-22,000 and bounce from there. Anecdotally, markets tend to move contrary to consensus of a bottom or a top," Modi said.