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Mumbai Feb 28 Budget 2007-08 has allowed institutions to short sell with compulsory settlement by delivery, along with securities lending and borrowing to facilitate delivery.

Short selling refers to sales of securities not held by the seller; while closing the deal, the seller enters the market to pick up the scrips for actual delivery to the buyer.

Market experts have welcomed the move as it will enhance liquidity, depth and create newer avenues.

"Overall this is a good move to improve market efficiency. Short selling is a part of all developed markets in the world. It will lead to greater market depth. However, guidelines from the SEBI are awaited for trading," said Mr Ajay Bagga, CEO of Lotus India Mutual Fund.

"It will be another source for improving alpha (returns) for mutual funds," said Mr Prateek Agrawal, Head (Equities), ABN Amro Asset Management.

Short selling, usually done in a bearish market, will help participation in a falling market, according to experts.

"It will enable institutions to take advantage of both sides of the market - rising and falling," said Mr Sandesh Kirkire, CEO of Kotak Mahindra Asset Management Ltd.

"Earlier, investors could only use the derivative route to hedge their portfolio when markets fell. This move will allow institutions to participate in a falling market."

Market depth will improve once short selling is allowed. But institutions are still awaiting guidelines on settlement of trade, etc.

"Preparation of a roadmap for permitting institutions to short sell in the market could bring about the much needed breadth and depth in Indian capital markets," said Mr C. Parthasarthy, Chairman of the Karvy Group.

"It could also pave the way for the development of a vibrant stock lending and borrowing mechanism, and at the same time facilitate actual delivery against futures and options at a later date."

He added: "It would not only lead to greater institutionalisation of the markets but also reduce volatility in the marketplace." However, clarity is awaited on whether institutions will include foreign institutions.

"The move will create a level playing field for domestic institutions vis-à-vis FIIs," said Mr Krishna Kumar Karwa, Managing Director of Emkay Share and Stock Brokers Ltd. "It will allow hedging of risk and help the market stabilise. It will also add a lot of liquidity in the markets through institutions," said Mr Alok Vajpeyi, Vice-Chairman and Managing Director of Dawnaday AV Financial Services Ltd.

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