Sebi Regulates Short-selling Trades, Prohibits Naked Short Selling
Institutional and retail investors are now required to disclose upfront, during the order placement, whether the transaction involves a short sale
The market regulator Securities and Exchange Board of India (SEBI), on Friday, introduced certain regulations about short-selling trades in the stock market.
Sebi permitted all investors to short-selling trades and also allowed futures and options (F&O) stocks for such trades, however, Sebi strictly banned naked short selling.
Short selling means selling the stocks that the seller does not own while executing trade orders, whereas naked short selling refers to selling stock without delivery confirmation.
“All investors would be required to mandatorily honour their obligation of delivering the securities at the time of settlement. No institutional investor shall be allowed to do day trading or square off their transactions intra-day, said the market regulator's framework on short selling and securities lending and borrowing scheme. Short selling means selling a stock that the seller does not own at the time of trade,” said Sebi.
“In this circular, Sebi has introduced new regulations pertaining to short selling by institutional and retail investors. Institutional and retail investors are now required to disclose upfront, during the order placement, whether the transaction involves a short sale. These rules complement the existing framework for short selling in India and reserves the right to review the frequency of such disclosures. These measures aim to enhance transparency and provide timely information to both institutional and retail investors in the Indian stock market,” said Anirudh Garg, Partner and Fund Manager at Invasset, PMS.
Institutional investors will begin short selling simultaneously with the introduction of a full-fledged securities lending and borrowing system (SLBM).
“The latest SEBI short-selling regulations are undoubtedly a double-edged sword. While their stated aim of curbing market manipulation and enhancing price discovery is laudable, their potential to dampen market efficiency shouldn't be ignored. Limiting short selling, particularly naked shorting, can impede liquidity, especially in smaller stocks. This could make the market less responsive to fundamental shifts, potentially harming price discovery,” said Wright Research's Founder and Fund Manager, Sonam Srivastava.
Retail investors can make the required disclosures before the end of trading hours, but institutional investors must affirm and notify up front if the trade is a short sale. Brokers are required to gather scrip-wise short-sell positions and upload them to exchanges by the next trading day.
However, let's not forget the rationale behind Sebi's move. The recent memory of volatile episodes, potentially exacerbated by manipulative short selling, likely played a role. Additionally, a concern for retail investor protection might have factored in, as short selling can be complex and easily misunderstood, added Srivastava.
