Introduction: Short selling, a strategic move in the securities market, has been a go-to tactic for investors aiming for quick sales and decent profits in a short span. Driven by speculation and risk hedging, short selling involves selling stocks not owned at the time of the trade. In a recent development, the Securities and Exchange Board of India (SEBI) has introduced a new framework for short selling through a circular dated January 05, 2024. This framework, detailed in ‘Annexure 3: Broad Framework for Short Selling,’ outlines key rules that redefine how short selling operates in the Indian securities market.
Short selling -Definition
Short Selling is used in the securities market for the purpose of making a quick sale and to earn a decent profit in a short time.
There are two primary reasons why investors would be involved in short-selling of shares:
1. Speculation – The investor may be speculating the prices of a particular company’s stock to fall due to an impending earnings announcement or several other significant factors.
2. Hedging Risk – Another primary reason for short Selling is that an investor holds a long position in some related security. To protect himself from the downside risk, he short sells the same security to hedge the risk.
New Framework for short selling
Annexure 3: 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. Eligible Investors- All classes of investors, viz., retail and institutional investors, shall be permitted to short sell.
3. No Naked Short Selling Allowed- 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 Day trading by Institutional Investor– 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. Framing of Uniform provisions – 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. Eligible Securities for Short Selling- 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.
7. Disclosure by institutional Investor- 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.
8. Duties of Brokers-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.
9. Disclosure by Stock Exchanges on website– 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.”
Conclusion: The broad framework for short selling, as specified in ‘Annexure 3’ of Chapter 1 of the Master Circular, represents a significant step by SEBI to regulate and enhance transparency in the Indian securities market. As market participants adapt to these new rules, the goal is to strike a balance between facilitating trading activities and safeguarding market integrity. Understanding and adhering to these guidelines will be crucial for investors navigating the dynamic landscape of short selling in India.
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