Market regulator Securities and Exchange Board of India (Sebi) Friday told institutional investors to disclose all short-sell transactions upfront at the time of placing an order. The regulator, however, permitted retail investors to make a similar disclosure by the end of the trading hours on the transaction day.
Short-selling is the sale of a stock which a person does not own at the time of trade but has merely borrowed. The aim is to profit from a decline in the asset’s price by later buying the shares at a lower cost to cover the short position.
In October last year, Sebi had issued a broad framework on ‘Short-Selling and Securities Lending and Borrowing Scheme’. The norms issued Friday are an addition to that framework.
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The new norms come two days after the Supreme Court rejected demands for a court-monitored probe by the Central Bureau of Investigation (CBI) or a special investigation team (SIT) into allegations of stock manipulation and accounting fraud against the Adani Group by the US-based short-seller Hindenburg Research in a January 2023 report.
The court also asked the Centre to probe “the loss which has been sustained by Indian investors as a result of the volatility caused by the short positions taken by Hindenburg Research and any other entities acting in concert with Hindenburg Research” and “enquire into whether there was any infraction of law by the entities, which engaged in short-selling on this occasion”.
“The institutional investors shall disclose upfront at the time of placement of order whether the transaction is a short-sale,” Sebi said in its framework for short-selling.
The market regulator mandated brokers 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.
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The stock exchanges should then consolidate such information and disseminate the same on their websites for the information of the public on a weekly basis, it said.
In the framework issued in October, Sebi had allowed short-selling for all classes of investors, including retail and institutional. It has banned “naked short-selling” in the Indian securities market and asked all investors to mandatorily honour their obligation of delivering securities at the time of settlement.
Naked short-selling is when a trader sells shares in some asset without first borrowing them or ensuring they could be borrowed.
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Sebi has not allowed any institutional investor to engage in day trading — that is, square-off their transactions intraday. In other words, all transactions would be grossed for institutional investors at the custodians’ level and the institutions would be required to fulfil their obligations on a gross basis.
As per the framework, the securities traded in F&O (futures & options) and segments are eligible for short-selling and Sebi may review the list of stocks that are eligible for short-selling transactions from time to time.
Short-selling is a longstanding market practice that has often been the subject of considerable debate across the world. The votaries of short-selling consider it a desirable and an essential feature of a securities market. Critics say short-selling, directly or indirectly, can destabilise the market.