Sebi says institutional investors must report any short selling of shares upfront: Check full circular

In a significant move aimed at curbing market volatility, markets watchdog Securities and Exchange Board of India (Sebi) said on Friday that institutional investors have to disclose upfront at the time of placing an order whether a proposed transaction is a short sale or not.

Sebi has made certain changes related to norms pertaining to short selling in the market. 

What is short selling?

Short selling in the stock market refers to the practice wherein an investor sells borrowed shares with the anticipation that the stock price will decline in the future. 

The process involves the investor borrowing shares from a broker, selling them at the current market price, and then buying them back at a later time, ideally at a lower price, to return them to the lender. The difference between the selling and buying prices represents the profit or loss for the investor. 

Short selling can be a speculative strategy for traders who believe that certain stocks are overvalued or will underperform in the near term. However, it also carries significant risks, as there is no limit to the potential loss if the stock price rises unexpectedly. 

To regulate this practice and maintain market stability, stock exchanges and regulatory authorities like Sebi impose certain restrictions and disclosure requirements on short selling activities.

Sebi bars both retail and institutional investors from short selling stocks.

What did Sebi say?

While amending its year-old circular related to short selling, Sebi said, "the institutional investors shall disclose upfront at the time of placement of order whether the transaction is a short sale".

But it said that retail investors would be permitted to make a similar disclosure by the end of the trading hours on the transaction day.

"The brokers shall be mandated to collect the details on scrip-wise short sell positions, collate the data and upload it to the stock exchanges before the commencement of trading on the following trading day. The stock exchanges shall then consolidate such information and disseminate the same on their websites for the information of the public on a weekly basis," Sebi said in the circular on Friday.

The circular, issued to stock exchanges, clearing corporations and depositories, also said the frequency of such disclosures may be reviewed from time to time with the approval of Sebi.

In recent times, there have been concerns about the practice of short selling and subsequent volatility in the securities market.

Sebi circular on broad framework for short selling

1. “Short selling” shall be defined as selling a stock which the seller does not own at the time of trade.

2. All classes of investors, viz., retail and institutional investors, shall be permitted to short sell.

3. 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.

4. No institutional investor shall be allowed to do day trading i.e., square-off their transactions intra-day. In other words, 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.

5. The  stock exchanges shall frame necessary uniform deterrent provisions and take appropriate action against the brokers for failure to deliver securities at the time of settlement which shall act as a sufficient deterrent against failure to deliver.

6. A scheme for Securities Lending and Borrowing (SLB) shall be put in place to provide the necessary impetus to short sell. The introduction of a full-fledged securities lending and   borrowing scheme shall be simultaneous with the introduction of short selling by institutional investors.

7. The  securities traded in F&O segment shall be eligible for short selling. SEBI may review the list of stocks that are eligible for short selling transactions from time to time.

8. The institutional investors shall disclose upfront at the time of placement of order whether the transaction is a short sale. However, retail investors would be permitted to make a similar disclosure by the end of the trading hours on the transaction day.

9. The brokers shall be mandated to collect the details on scrip-wise short sell positions, collate the data and upload it to the stock exchanges before the commencement of trading on the following trading day. The stock exchanges shall then consolidate such  information  and  disseminate the same on their websites for the information of the public on a weekly basis. The  frequency of such disclosure may be reviewed from time to time with the approval of SEBI.”