The Securities and Exchange Board of India (SEBI) is considering a significant overhaul of short-selling regulations, potentially allowing it for all stocks except those in the trade-to-trade (T2T) segment. The proposal may also eliminate short-sale disclosures and penalties currently enforced by stock exchanges, according to sources familiar with the matter.
Short selling enables investors to sell a stock without owning it at the time – a strategy used to wager on the decline in stock prices. Currently, there is a prohibition on naked short-selling, with SEBI requiring investors to meet their obligation to deliver securities at the time of settlement. Only stocks eligible for futures and options (F&O) trading are permitted for short selling.
The regulator has noted that non-institutional investors are still involved in short selling of non-F&O stocks as they can sell a stock, regardless of its availability in the derivative segment, and close out their position within the same trading day, a source explained.
Additionally, SEBI’s move towards direct payout of securities may impact short-term trading strategies like buy-today-sell-tomorrow, as securities may not be credited to demat accounts until after market hours on the following day, the source stated. To address this issue, the regulator is expected to propose that stocks purchased in earlier settlements but not yet delivered to the demat account will not be classified as short sales.
A consultation paper on the subject is anticipated to be released before next week. SEBI did not respond to an emailed query.
Disclosure rollback
Under current regulations, institutional investors must disclose upfront if a transaction is a short sale, while retail investors must report it by the end of the trading day. Subsequently, brokers and exchanges are mandated to publish weekly scrip-wise short-sale positions.
SEBI is likely to abolish these disclosure requirements, as advancements in clearing and settlement processes since the introduction of the Securities Lending and Borrowing (SLB) mechanism in 2007 have rendered them unnecessary, said a regulatory source.
“Since institutional investors can only participate in delivery-backed transactions, upfront short-sale disclosures serve no purpose. Requiring brokers to monitor retail investors’ short sales necessitates real-time access to a client’s demat account, putting non-depository brokers at a disadvantage,” explained an industry source.
Double penalties
Presently, trading members face penalties of 0.05 per cent of the shortage value for failing to deliver securities, with exchanges also mandated to take action against brokers for settlement failures. However, SEBI may eliminate the exchange’s enforcement role once direct payout of securities is implemented.
With clearing corporations capable of tracking short deliveries at the client level, imposing penalties at both the exchange and clearing corporation levels could result in double charges.
