The Hindu Business Line : SEBI panel recommends short selling by institutions

A SECURITIES and Exchange Board of India (SEBI) committee has recommended that institutional investors such as FIIs and mutual fund be allowed to short-sell shares in the market akin to retail investors.

Short selling means selling a stock which the seller does not own at the time of trade.

In order to do short-selling by institutional investors, SEBI's secondary market committee recommended that stock exchange's clearing house should act as intermediary for lending and borrowing of securities. Custodians, banks and financial institutions can also lend securities.

"Introduction of full-fledged securities lending and borrowing scheme should be simultaneous with the introduction of short selling by the institutional investors," said SEBI's discussion paper.

It said initially short selling be permitted only in those stocks in which derivative products are available.

However, SEBI has said naked short sales would not be permitted, which means that investors would be required to honour their obligation of delivering the securities at the time of settlement.

Institutional investors would have to disclose upfront at the time of placement of order whether the transaction is a short sale and borrow to the satisfaction of the broker. They also have to pay margins on such trades similar to retail investors. Institutional investors do not pay margins as all their trades are for delivery.

However, the retail investors would be permitted to make a similar disclosure before the end of the trading hours on the transaction day. Institutional investors are not allowed to do day trading.

Stock exchanges would have to disclose the detail of short sales position in each scrip on their Web sites only after the close of market hours of the next trading day.

On securities lending and borrowing system, the committee said that apart from the lending and borrowing of securities by clearing houses of stock exchanges a full fledged securities lending and borrowing scheme should be introduced by approved intermediaries. In the first stage custodians, banks and financial institutions should act as intermediaries.

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