Introduction: The Securities and Exchange Board of India (SEBI) has issued a crucial circular, SEBI/HO/MRD/MRD-PoD-3/P/CIR/2024/1, dated January 05, 2024. This circular introduces a comprehensive framework for short selling in the Indian securities market. This article delves into the key aspects outlined in the circular, shedding light on the regulations, provisions, and implications for market participants.
Detailed Analysis:
1. Definition of Short Selling: SEBI’s circular defines “short selling” as the act of selling a stock that the seller does not own at the time of the trade. This establishes a foundational understanding for the subsequent regulations.
2. Permitted Investors and Classes: The circular permits all classes of investors, including retail and institutional investors, to engage in short selling activities.
3. Prohibition of Naked Short Selling: Naked short selling is strictly prohibited in the Indian securities market. All investors are mandated to honor their obligation of delivering securities during settlement.
4. Institutional Investor Regulations: Institutional investors are restricted from day trading, requiring them to fulfill their obligations on a gross basis. The custodians will settle deliveries on a net basis with the stock exchanges.
5. Provisions for Failure to Deliver: Stock exchanges are mandated to frame deterrent provisions against brokers failing to deliver securities during settlement, ensuring a robust mechanism to prevent failures.
6. Securities Lending and Borrowing Scheme: A Securities Lending and Borrowing (SLB) scheme will be implemented simultaneously with the introduction of short selling by institutional investors, providing impetus to short selling.
7. Eligibility of Stocks for Short Selling: Stocks traded in the Futures and Options (F&O) segment are eligible for short selling. SEBI retains the authority to review the list of eligible stocks periodically.
8. Disclosure Requirements: Institutional investors must disclose upfront whether a transaction is a short sale. Retail investors can make a similar disclosure by the end of the trading day. Brokers are mandated to collect and disclose scrip-wise short sell positions to stock exchanges.
Conclusion: In conclusion, SEBI’s recent circular on the framework for short selling establishes a structured approach to enhance market efficiency while safeguarding investor interests. The regulations cover a wide range of aspects, from defining short selling to disclosure requirements, aiming to create a transparent and secure environment for trading in the Indian securities market.
This regulatory move, issued under the powers conferred by the Securities and Exchange Board of India Act, marks a significant step in shaping the Indian securities market. Market participants and stakeholders are urged to familiarize themselves with the outlined framework to ensure compliance and seamless participation in the evolving landscape of short selling. The circular, available on the SEBI website, serves as a comprehensive guide for all stakeholders involved in the securities market.
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Securities and Exchange Board of India
Circular No. SEBI/HO/MRD/MRD-PoD-3/P/CIR/2024/1 Dated: January 05, 2024
To
All Recognized Stock Exchanges
All Recognized Clearing Corporations
All Depositories
Sir/Madam,
Subject: Framework for Short Selling
1. SEBI vide Master Circular No. SEBI/HO/MRD2/PoD-2/CIR/P/2023/171 dated October 16, 2023 issued the Master Circular for Stock Exchnages and Clearing Corporations. Paragraph 10 of Chapter 1 of the Master Circular contains the framework on ‘Short Selling and Securities Lending and Borrowing Scheme’.
2. The broad framework for short selling is specified in ‘Annexure 3’ of Chapter 1 of the said Master Circular. In this regard, it is mentioned that the contents of ‘Annexure 3’ of Chapter 1 of the Matser Circular dated October 16, 2023 shall be read as under (which are in line with the provisions of rescinded SEBI Circular No. MRD/DoP/SE/Dep/Cir- 14/2007 dated December 20, 2007):
“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. All classes of investors, , 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 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.”
3. This circular is issued in exercise of the powers conferred under Section 11(1) of the Securities and Exchange Board of India Act 1992 read with Regulation 51 of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018, Section 26(3) of the Depositories Act, 1996 and Regulation 97 of Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.
4. This circular is available on SEBI website at sebi.gov.in at “Legal Framework – Circulars.”
Yours faithfully,
Hruda Ranjan Sahoo
Deputy General Manager
Tel no.: 022-26449586
Email: [email protected]
