MUMBAI: All classes of investors, retail as well as institutional players like FIIs and mutual funds, will be allowed to short-sell shares in the spot market from April 21.
Short-selling refers to the practice of selling a stock which the seller does not own at the time of trade with the hope of buying it back at a lower price.
At present, individual traders’ short-sell shares during the day and square off their positions before the closing bell. However, institutions are not allowed to indulge in such intra-day speculations.
Now, SEBI is putting in place a mechanism where the short-seller can borrow the shares to meet the delivery commitment. Just as an investor borrows money to buy shares, it will now be possible to borrow shares to sell. Under this, all categories of investors can now lend the stocks they own and borrow the ones they don’t.
However, while allowing the long-awaited measure, a circular issued by the capital market regulator SEBI on Wednesday said that “naked short-selling will not be permitted and all investors will be mandatorily required to honour their obligation of delivering the securities at the time of settlement.”
Significantly, this would mean that day traders would no longer be in a position to sell and then buy back during the day. The new guideline will not only force these active investors to change the way they play the market, but also impact liquidity in the short term.
Short-selling transactions will be done through a separate screen, other than the one currently in use for regular transactions.
The new platform, an automated, screen-based and order-matching system similar to current trading terminals, will be provided by the clearing houses of stock exchanges. To begin with, all stocks in the futures and option segments will be eligible for borrowing and lending.
The tenure of borrowing/lending shall be fixed at 7 days. According to a brokerage, investors may have to first borrow them to short-sell and for this, exchanges may allow a one-hour window in the morning. This will allow players to borrow in the morning and sell during the day.
However, market participants say that if an investor is keen to go short on a stock, the F&O route would be cheaper and convenient than borrowing shares. However, the borrowing mechanism could come in handy when there is an arbitrage possibility.
“Such schemes work in markets where there are no single stock futures. However, one of the advantages would be that it could minimise the manipulation of futures price through cash market deals,” said a broker.
Short-selling refers to the practice of selling a stock which the seller does not own at the time of trade with the hope of buying it back at a lower price.
At present, individual traders’ short-sell shares during the day and square off their positions before the closing bell. However, institutions are not allowed to indulge in such intra-day speculations.
Now, SEBI is putting in place a mechanism where the short-seller can borrow the shares to meet the delivery commitment. Just as an investor borrows money to buy shares, it will now be possible to borrow shares to sell. Under this, all categories of investors can now lend the stocks they own and borrow the ones they don’t.
However, while allowing the long-awaited measure, a circular issued by the capital market regulator SEBI on Wednesday said that “naked short-selling will not be permitted and all investors will be mandatorily required to honour their obligation of delivering the securities at the time of settlement.”
Significantly, this would mean that day traders would no longer be in a position to sell and then buy back during the day. The new guideline will not only force these active investors to change the way they play the market, but also impact liquidity in the short term.
Short-selling transactions will be done through a separate screen, other than the one currently in use for regular transactions.
The new platform, an automated, screen-based and order-matching system similar to current trading terminals, will be provided by the clearing houses of stock exchanges. To begin with, all stocks in the futures and option segments will be eligible for borrowing and lending.
The tenure of borrowing/lending shall be fixed at 7 days. According to a brokerage, investors may have to first borrow them to short-sell and for this, exchanges may allow a one-hour window in the morning. This will allow players to borrow in the morning and sell during the day.
However, market participants say that if an investor is keen to go short on a stock, the F&O route would be cheaper and convenient than borrowing shares. However, the borrowing mechanism could come in handy when there is an arbitrage possibility.
“Such schemes work in markets where there are no single stock futures. However, one of the advantages would be that it could minimise the manipulation of futures price through cash market deals,” said a broker.
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