In the year 1998, for the first time the regulator took the drastic step to short-sale. This was done after the 30-share index, Sensex, dropped 26% between from April 21 to mid-June. The steep fall was aggravated by India"s nuclear tests in Pokhran.
In an effort to stop this fast slide, SEBI banned short-selling from June 17. Though the on the first day of the ban, the Sensex went up nearly 8%. But over the next five-trading sessions, the Sensex fell 11.7%. The Foreign Institutional Investors (FIIs) were worried about US trade sanctions upon the nuclear tests. Hence, they continued to dump shares, this made the short sale ban ineffective.
The next time SEBI took a similar step was in 2001. The global technology bubble burst had affected the Indian stock market as well. The unwinding of speculative positions had accelerated the fall. Therefore, after the Sensex dropped 10% between mid-February and early March, in response the market regulator, SEBI, banned short sales effective from March 8. This ban was in effect for nearly four months till July 2. But it could not save the Sensex, as it declined 15% during this period.
Changing its tactics during the global meltdown of 2008, SEBI refrained from any outright ban on short sales. Although its counterparts in US and UK had introduced a type of selective ban. Instead, the Indian market regulator banned short-sales by foreign funds, as thet were borrowing the shares for a fee from the participatory note accounts of foreign broking firms and then dumped them in the market. This move too did not help much in the face of genuine selling by many foreign funds, anxious to cut their losses in a sliding market.
So will it take the same step if there is a crisis of confidence again? If it has observed well then chances are this time the market regulator will not bother much.