SEBI Announces Comprehensive Framework for Short Selling and Securities Lending
In a significant development, the Securities and Exchange Board of India (SEBI) has unveiled a comprehensive framework governing short selling and securities lending and borrowing scheme (SLBM). The regulatory body’s announcement, made on Friday, outlines key guidelines aimed at fostering transparency and integrity in the Indian securities market.
Inclusion of All Investors in Short Selling, With a Strict Prohibition on Naked Short Selling:
SEBI has granted approval for investors across all categories to participate in short selling activities. However, a notable restriction has been imposed to disallow naked short selling, a practice where a seller engages in short selling without possessing the securities at the time of the trade. This measure is designed to ensure the legitimacy and stability of the market.
Eligibility of All F&O Segment Stocks for Short Selling:
SEBI’s directive highlights that all stocks trading in the futures and options (F&O) segment are eligible for short selling. This move is anticipated to enhance market liquidity and provide investors with a broader range of options for executing short selling strategies.
Obligation Adherence for Delivering Securities:
The market regulator emphasizes the mandatory obligation for all investors to deliver securities at the time of settlement. This requirement underscores SEBI’s commitment to upholding the integrity of transactions and ensuring timely fulfillment of contractual obligations.
Prohibition on Day Trading and Intra-day Square Off for Institutional Investors:
SEBI’s framework explicitly prohibits institutional investors from engaging in day trading or squaring off transactions intra-day. This measure aims to promote a more stable and long-term approach to investing among institutional participants.
Supreme Court’s Directive Prompts Investigation:
The regulatory changes follow a directive from the Supreme Court, urging SEBI to investigate potential losses suffered by investors and assess any breaches of the law related to short positions. This directive was prompted by allegations from US short seller Hindenburg Research, which claimed that the Adani Group had violated stock market rules. SEBI is currently conducting an investigation into these allegations.
Introduction of Securities Lending & Borrowing Scheme (SLBM) Concurrent with Institutional Short Selling:
SEBI has announced that the introduction of a comprehensive Securities Lending & Borrowing Scheme (SLBM) will coincide with the implementation of short selling by institutional investors. This integrated approach aims to facilitate a more robust and efficient securities lending mechanism in the market.
Enhanced Disclosure Requirements for Brokers and Investors:
SEBI has mandated brokers to collect and upload scrip-wise short sell positions on exchanges before the commencement of trading on the following day. Retail investors have the flexibility to make necessary disclosures by the end of the trading hours. The regulatory body emphasizes the importance of transparent reporting to enhance market visibility and public awareness.
Balancing Market Stability and Efficiency:
Acknowledging the potential impact on market efficiency, market experts caution that limitations on short selling, particularly naked shorting, may impede liquidity, especially in smaller stocks. However, SEBI’s move is seen as a proactive measure to curb market manipulation and protect retail investors. A data-driven approach, with periodic reviews and adjustments, will be crucial to maintaining a healthy balance between market stability and dynamism. Monitoring the impact of these regulations will be essential to assess whether the benefits of curbing manipulation outweigh potential costs to market efficiency.
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