NEW DELHI: Market regulator Securities and Exchange Board of India (Sebi) on Friday reiterated that naked short-selling is not permitted in the Indian securities market, but investors of all categories can do short-selling.
Sebi also repeated that institutional investors are prohibited from engaging in day trading, meaning they are not allowed to square off their transactions within the same trading day. “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,” said SEBI in a notification.
Already banned in many markets, naked shorting is the practice of selling short shares that have not yet been determined to exist or that the trader hasn’t secured in some way. In general, traders first borrow a stock or determine that it can be borrowed before selling it short.
On not allowing institutional investors from practising day trading, Sebi said that all transactions would be grossed for institutional investors at the custodians’ level and the institutions would be 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. The clarity on short-selling by the market regulator comes days after India’s Apex Court came down heavily on short-sellers in the Adani-Hindenburg case.
The Supreme Court has asked the government and SEBI to see if there was any infraction of law by the Hindenburg report on short selling, and if so, take action in accordance with the law. Sebi notification also read that securities traded in the F&O segment shall be eligible for short selling. The regulator said that it may review the list of stocks that are eligible for short selling transactions from time to time. Sebi dictated institutional investors to disclose upfront at the time of placement of order whether the transaction is a short sale.
Sonam Srivastava, Founder and Fund Manager at Wright Research said 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,” said Srivastava.