The Securities and Exchange Board of India (SEBI) is considering a major revamp of short-selling regulations, potentially allowing it for all stocks except those in the trade-to-trade (T2T) segment. The proposal may also scrap short-sale disclosures and penalties currently imposed by stock exchanges, according to sources familiar with the matter.
Short selling allows investors to sell a stock without owning the stock at the time–a strategy used to bet on the fall in stock prices. Currently, there is a ban on naked short-selling, with SEBI mandating investors to fulfil their obligation to deliver securities at the time of settlement.
Only stocks eligible for futures and options (F&O) trading were allowed for short selling.
The regulator has observed that non-institutional investors still engage in short selling of non-F&O stocks since they can sell a stock, irrespective of its availability in the derivative segment, and square off their position within the same trading day, a source explained.
Furthermore, SEBI’s push toward direct payout of securities may impact short-term trading strategies like buy-today-sell-tomorrow, as securities might not be credited to demat accounts until after market hours on the following day, the source said. To address this, the regulator is likely to propose that stocks purchased in earlier settlements but not yet delivered to the demat account will not be considered short sales.
A consultation paper on the matter is expected before next week. SEBI did not respond to an emailed query.
Disclosure rollback
Under current rules, 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 must publish weekly scrip-wise short-sale positions.
SEBI is likely to do away with these disclosure norms, as advancements in clearing and settlement since the introduction of the Securities Lending and Borrowing (SLB) mechanism in 2007 have made them redundant, said a regulatory source.
“Since institutional investors can only engage in delivery-backed transactions, upfront short-sale disclosures serve no purpose. Requiring brokers to track retail investors’ short sales requires real time access to client’s demat account, which puts non-depository brokers at a disadvantage,” an industry source explained.
Double penalties
Currently, trading members face penalties of 0.05 per cent of the shortage value for failing to deliver securities, with exchanges also required to take action against brokers for settlement failures. However, SEBI may remove the exchange’s enforcement role once direct payout of securities is implemented.
With clearing corporations able to track short deliveries at the client level, imposing penalties at both the exchange and clearing corporation levels could lead to double charges.
