The Securities and Exchange Board of India (SEBI), the Indian stock market regulator has announced in a published circular on March 19 to allow the short selling mechanism for all class of investors include qualified institutional bidders (QIB) and mutual fund houses by April 21. From the same day institutional players will have to pay margins on their share transaction as SEBI stated in the released circular.
To provide a full-fledged game in the stock market, SEBI has reopened the opportunity for QIBs include foreign institutional investor and mutual fund houses to short selling the shares by April 21, 2008. Initially, institutional investors and mutual fund houses would eligible to short-selling only in the Future & Options segment, not in the cash segment.
However, there is not any sort of ban for retail investors in any market segment. SEBI has labeled a ban over qualified institutional investors in short-selling in consequences of Ketan Parekh scam in 2001.
SEBI will review the stocks in which short-selling has been allowed from time to time to verifying that QIBs and stock brokers are following the directives up to what extent.
Thought SEBI was considering to restore this rule earlier but it feared that market could slid deeply in the massive pressure of short-selling.
Short-selling is a way of trading in which traders/investors can sell the share without owning it in the hope of sliding the price later and then it would buy it. In the case of short-selling, it is necessary for the retailers to purchase the short-selling shares in the same day of selling before closing bell.
However, institutional investors are not allowed for such intra-day short-selling. They can make the settlement with 7 days of period.
Now, investors can first borrow the shares to short-selling like retail investor borrow the money for trading from the market operators and then can sell it. From this SEBI’s new regulations it will be possible for all the investors to borrow the shares in the place of borrowing money and selling it too.
For short-selling in the F&O, players can borrow the shares in the first hour of trading and can sell it throughout the day. A separate window will be open for short-selling and exchanges may allow a one-hour window in the morning for borrowing.
Though, SEBI has allowed short-selling in derivatives but ‘naked short-selling’ is not allowed and SEBI hopes to all investors to honour their responsibility of delivering the securities at the time of settlement.
With this new directive of SEBI, the intra-day traders will not be in a position to sell and then buy back during the day. This new guideline will not only force these dynamic investors to change the way of playing, but also impact liquidity in the short term.
SEBI has issued a notice to all stock exchanges and depositories to make mandatory amendments in the relevant rules and regulations to implement the decision of SEBI.
Margin money
Same like short-selling SEBI has also decided to make compulsory for the institutional investors to pay margin on their share transactions in the cash segment from April 21. It was currently available only for retail investors and to those who do proprietary trading.
“In order to provide a level playing field to all the investors in the cash market as in the case of the derivatives market,” said SEBI in the circular.
Margin money is a percentage of the value of the stocks that investors have to pay to the brokers in the replacement of investor’s stock order that broking agency provides the stock to the investors in the lack of money.
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