SEBI Allows Short-Selling By All Classes Of Investors; Ban On Naked Short Selling Remains

The market regulator Securities and Exchange Board of India (SEBI) said on Friday that investors across all categories like retail and institutional investors are permitted to short sell, but reiterated that naked short selling shall not be allowed in the Indian securities market.

Furthermore, all stocks that trade in the futures and options segment are also eligible for short-selling. "Short selling" is defined as selling a stock that the seller does not own at the time of trade.

The market regulator said, "Naked short-selling shall not be permitted in the Indian securities market and accordingly, all investors would be required to mandatorily honor their obligation of delivering the securities at the time of settlement."

In its Broad framework for short selling, SEBI said that a scheme for Securities Lending and Borrowing (SLB) shall be put in place to provide the necessary impetus to short sell. The introduction of a full-fledged securities lending and borrowing scheme shall be simultaneous with the introduction of short selling by institutional investors.

According to the framework, no institutional investor is allowed day trading or square-off their transactions intra-day. This means that all transactions are to be grossed for institutional investors at the custodians' level and the institutions are required to fulfill their obligations on a gross basis. "The custodians, however, would continue to settle their deliveries on a net basis with the stock exchanges," said SEBI.

Other important pointers mentioned in SEBI's framework for short selling include:

• The stock exchanges shall frame necessary uniform deterrent provisions and take appropriate action against the brokers for failure to deliver securities at the time of settlement which shall act as a sufficient deterrent against failure to deliver.
• The securities traded in the F&O segment shall be eligible for short selling. SEBI may review the list of stocks that are eligible for short-selling transactions from time to time.
• The institutional investors 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 shall be 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 shall then consolidate such information and disseminate the same 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.

In October last year, SEBI issued a master circular mentioning the provisions on short selling for stock exchanges and clearing corporations.

The development follows the January 3 Supreme Court judgment in the Adani-Hindenburg case. The apex court noted that Solicitor General Tushar Mehta, representing SEBI, informed the Court that the market regulator had in principle accepted the suggestions of the court-appointed panel for tweaking the regulatory framework to strengthen it and is working on the issue.