No major changes in short-selling rules: Know everything about short selling in detail

To safeguard retail market participants from any undue or unethical practices in the securities market, capital markets regulator Sebi recently released a new circular on short-selling. While the fresh notice does not include any material changes in the short-selling practice, it adds some pertinent norms that were not mentioned in the master circular.
 
Last year, short-selling took centre stage after the Adani-Hindenburg saga came to the fore.

So what exactly is short selling?

Simply speaking, short selling is a trading practice wherein traders attempt to make profits in the short term by selling shares that they typically do not own. Later, when the security’s price falls, they buy the security at a cheaper rate, thus booking profit on the trade.

Portfolio managers, on the other hand, make use of the technique to hedge their risk against the downside risk of a long position.

Example illustrating short selling

Say, you borrow 10 shares of a company ABC from any broker and then immediately sell the shares on the bourses at a price of Rs 10 per share, raking in Rs 100. Now, as and when the price decreases to Rs 5 per share, you could use the money to buy back all the shares at a meagre Rs 50, returning all the shares to the brokers. In the process, you end up making a sum of Rs 50 as your profit.

Why is short-selling important for you to understand?

The latest circular highlighted that investors across categories can engage in short selling. Nevertheless, those well-versed in market dynamics need to act diligently, as the exercise can lead to substantial losses.

Are there any changes made to the short-selling technique in SEBI's circular on January 5?

There have been no changes implemented in the short-selling norms. The new circular has been released to include some of the provisions of the main circular that were left in the master circular.

The new circular highlighted that retail investors as well as institutions need to declare their short positions. Further, in respect of institutional investors, it stated that short selling is not allowed for intra-day positions (for equity). It must be noted that this rule was there earlier as well.

Furthermore, it mentioned that FIIs need to disclose short-selling positions before actually carrying out the same.

Brokerages will need to collate the scrips traded for short selling on a day-to-day basis, which the market regulator will review at a later date. This ruling will enable the market to determine where large-scale shortselling has been done. Additionally, all stocks allowed for futures and options (F&O) will be available for short-selling.

Additionally, the circular highlighted that SEBI bans naked short-selling or naked shorting. This technique is the practice where a trader sells shares in some security without first borrowing them or ensuring they could be borrowed. This is different from traditional short selling, when you borrow the shares before selling them.