The Securities and Exchange Board of India (Sebi) has allowed short-selling and securities lending and borrowing from April 21, 2008. In view of the above you might want to know a few basics of short selling.
What is short selling?
Short-selling, in the context of the stock market, is the practice where an investor sells shares that he does not own at the time of selling them. He sells them in the hope that the price of those shares will decline, and he will profit by buying back those shares at a lower price.
How is short-selling beneficial?
Short-selling is considered an essential feature of the securities market not just for providing liquidity, but also for helping price corrections in over valued stocks.
Supporters of short-selling claim its absence distort efficient price discovery, gives promoters the unfettered freedom to manipulate prices and favors manipulators than rational investors.
Securities market regulators in most countries, and in particular, all developed securities markets, recognize short-selling as a legitimate investment activity. The International Organization of Securities Commissions (IOSCO) has also reviewed short-selling and securities lending practices across markets and has recommended transparency of short-selling, rather than prohibit it.
What are the drawbacks of short-selling?
Critics of short-selling feel selling, directly or indirectly, poses potential risks and can easily destabilize the market. They believe that short-selling can accelerate declining trend in share prices, increase share price volatility, and force the price of individual stocks down to levels that might not otherwise be reached.
They also argue that declining trend in the share prices of a company can even impact its fund raising capability and undermine the commercial confidence of the company. In a bear market in particular, short-selling can contribute to disorderly trading, give rise to heightened short-term price volatility and could be used in manipulative trading strategies.
SEBI HAS ALLOWED SHORT SELLING FROM APRIL 21, 2008
Sebi had come out with a circular on December 20, 2007, specifying the broad framework for short selling by institutional investors and a full-fledged securities lending and borrowing scheme for all market participants. According to Sebi the move was aimed at protecting the interests of investors in securities and to promote the development of, and to regulate the securities market. The regulator also said that funds will need to start paying margins upfront along with other investors
“In order to provide a level-playing field to all the investors in the cash market as in the case of the derivatives market, the aforesaid circular is partially modified to provide that all institutional trades in the cash market would be subject to payment of margins as applicable to transactions of other investors,” the regulator said.
The measure will take effect in two phases.
“To begin with, from April 21, 2008, all institutional trades in the cash market would be margined on a T+1 basis with margin being collected from the custodian upon confirmation of the trade,” the regulator said. “Subsequently, with effect from June 16, 2008, the collection of margins would move to an upfront basis.”
The nation’s stock exchanges has issued the necessary guidelines and put in place the necessary systems to ensure the operationalization of the measure, the regulator said.
|
