As part of its efforts to deepen the cash market segment, capital market will shortly constitute a working group to overhaul the short-selling norms as well the stock lending and borrowing mechanism.
“We will soon form a working group to comprehensively review short-selling and the securities lending and borrowing (SLBM) frameworks,” Sebi Chairman Tuhin Kanta Pandey told a CNBCTV18 event here on Friday.
Stating that the regulator is focused on deepening the cash equities market to spur capital formation, Pandey said, “An active securities lending and borrowing scheme is critical for improving price discovery and facilitating inter-linkages between the cash and derivative segments.”
The SLBM facilitates the settlement of securities sold short, while lenders can earn a fee on their idle securities, while short-selling is an investment strategy wherein an investor borrows a share and sells it on the open market, betting the price will fall. The investor then buys the shares back at a lower price to return to the lender, pocketing the difference as profit or loss. It is a strategy used to profit from a decline in shares prices.
SLBM allows an investor to lend her shares to other investors for a fee, or borrow shares she doesn't own, for a fee. This allows lenders to earn extra income on their holdings without selling them, while borrowers can use the shares for purposes like short selling or arbitrage. The whole process is governed by regulations, making it a secure and regulated process.
Sebi had earlier sought the views of all stakeholders including exchanges, clearing corporations and brokers for the proposed short-selling mechanism.
Meanwhile, Pandey also said at another even that the Sebi is consulting the RBI to introduce bond derivatives for retail investors to deepen the corporate bond market which currently is Rs 54 trillion vs Rs 91 trillion bank credit.
“For the corporate bonds market, our way forward will be to make debt instruments more attractive for retail,” he said, adding the outstanding bank credit to the industry and services stand at Rs 91 trillion while outstanding corporate bonds is only Rs 54 trillion, highlighting a primary challenge and greatest opportunity.
“Deepening our equity, bonds and alternative investment market is imperative to diversify and provide an alternate source of funding for our ambitions,” he added.
He also said Sebi has floated a proposal to allow debt issuers to offer incentives to certain investor categories to encourage retail participation and other rationalisation measures. There are also plans for a nationwide education campaign to make investors aware about this market which will be rolled out shortly in consultation with all stakeholders.
He said a consultation paper will issued soon for IPO-bound companies to further rationalise existing contents of the offer document summary, adding that this summary will also be made available separately to investors from the offer document to encourage informed feedback from them.
There is another proposal for companies whose pre-IPO shares are pledged that will ensure that lock-in requirements are automatically enforced even if pledge is invoked or released, thereby preventing listing delays.