SEBI’s Proposed Reforms in Short-Selling Regulations

GS 3 – ECONOMY

Context

The Securities and Exchange Board of India (SEBI) is exploring amendments to short-selling regulations to broaden market access, ease disclosure requirements, and refine penalty structures.

Historical Background

• 2001: SEBI imposed a ban on short selling.
• 2007: Institutional investors were granted permission to engage in short selling under new guidelines.
• 2008: The scope was extended to include both retail and institutional investors, seven years after the initial ban.

Understanding Short Selling

Short selling is a trading strategy where investors sell securities they do not own, anticipating a decline in prices to repurchase them at a lower cost.

• Current Restrictions: SEBI prohibits naked short selling and permits short selling only for stocks listed in the Futures & Options (F&O) segment.

Types of Short Selling

• Covered Short Selling:
  • The seller borrows shares beforehand to ensure delivery at the time of settlement.
  • Allowed in India under specific regulatory conditions.
• Naked Short Selling:
  • The seller does not arrange to borrow shares before selling.
  • Can trigger panic selling, leading to further market declines.
  • Prohibited in India due to its potential to disrupt market stability.

Proposed Reforms in Short Selling

• Expanded Market Participation: SEBI intends to permit short selling across all stocks, except those in the trade-to-trade (T2T) segment, moving beyond the current restriction to F&O stocks.
• Eased Disclosure Requirements: Institutional investors may no longer need to report short sales upfront, while retail investors could be exempt from end-of-day reporting due to advancements in clearing mechanisms.
• Impact on Direct Payouts: With SEBI’s transition to direct payout systems, stock crediting may be delayed, potentially affecting buy-today-sell-tomorrow (BTST) strategies.
• Revised Short Sale Definition: Stocks purchased in previous settlements but not yet credited to demat accounts may no longer be categorized as short sales.
• Penalty Structure Adjustments: Instead of stock exchanges imposing penalties, enforcement will be limited to clearing corporations to avoid duplicate penalties.