SEBI bans naked short selling, no institutional investor shall be allowed to do day trading
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The Securities and Exchange Board of India (SEBI) on Friday said that investors across all categories will be allowed for short selling, but naked short selling will not be permitted. The market regulator also said all stocks that trade in the futures and options (F&O) segment are eligible for short selling. All investors would be required to mandatorily honour their obligation of delivering the securities at time of settlement, said SEBI.
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.
SEBI may review list of stocks eligible for short selling from time to time, said the market regulator as part of its tightened disclosure rules for short selling. "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," said SEBI.
The move comes after the Supreme Court asked SEBI to examine whether investors suffered losses and whether any short positions were created in breach of the law ahead of US short seller Hindenburg Research's report last year, which alleged that Adani Group had broken stock market rules. These allegations are being investigated by SEBI. The Adani Group has denied any wrongdoing.
Existing Indian rules do not allow so-called naked short trades, where an investor sells short without having already borrowed or located the shares or securities to be sold.
Introduction of a full-fledged securities lending & borrowing scheme (SLBM) shall be simultaneous with the introduction of short-selling by institutional investors, said SEBI.
Institutional investors have to confirm and inform upfront if the trade is a short sale while retail investors can make necessary disclosures by end of the trading hours. Brokers have been mandated to collect scrip-wise short sell positions and upload on exchanges before next trading 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," said the market regulator.
"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.
"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. Therefore, it's crucial to monitor the impact of these new guidelines closely. We need to see if the benefits of curbing manipulation outweigh the potential cost of reduced market efficiency. A data-driven approach, with periodic review and adjustments, would be key to ensuring a healthy balance between stability and dynamism," said Sonam Srivastava, Founder and Fund Manager at Wright Research.
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.
SEBI may review list of stocks eligible for short selling from time to time, said the market regulator as part of its tightened disclosure rules for short selling. "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," said SEBI.
The move comes after the Supreme Court asked SEBI to examine whether investors suffered losses and whether any short positions were created in breach of the law ahead of US short seller Hindenburg Research's report last year, which alleged that Adani Group had broken stock market rules. These allegations are being investigated by SEBI. The Adani Group has denied any wrongdoing.
Existing Indian rules do not allow so-called naked short trades, where an investor sells short without having already borrowed or located the shares or securities to be sold.
Introduction of a full-fledged securities lending & borrowing scheme (SLBM) shall be simultaneous with the introduction of short-selling by institutional investors, said SEBI.
Institutional investors have to confirm and inform upfront if the trade is a short sale while retail investors can make necessary disclosures by end of the trading hours. Brokers have been mandated to collect scrip-wise short sell positions and upload on exchanges before next trading 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," said the market regulator.
"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.
"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. Therefore, it's crucial to monitor the impact of these new guidelines closely. We need to see if the benefits of curbing manipulation outweigh the potential cost of reduced market efficiency. A data-driven approach, with periodic review and adjustments, would be key to ensuring a healthy balance between stability and dynamism," said Sonam Srivastava, Founder and Fund Manager at Wright Research.
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