SEBI bans naked short selling, no institutional investor shall be allowed to do day trading

SEBI bans naked short-selling, and no institutional investor shall be allowed to do day trading - Provided by Business Today

The SEBI (Securities and Exchange Board of India) on Friday said that investors across all categories will not be allowed for naked short selling will not be permitted, but will be allowed for short selling. SEBI also stated that all stocks that trade in options and futures segments are eligible for short selling. All investors will be required to honor their obligation of delivering the securities at the time of settlement.

The officials of SEBI said that no institutional Institute will be allowed to do any day trading or square off their transactions intra-day. SEBI said on the Market regulator's framework on short selling and securities borrowing and lending scheme. Short selling means selling a stock that the owner does not own at the time of trade.

Securities and Exchange Board of India may review the stocks that are eligible for short selling from time to time, they said it during the disclosures rules for short selling. The stock exchanges of India should take strict action against those brokers who violate these rules. 

Supreme Court has asked SEBI to review whether investors suffered losses and whether any short positions were created in breach of the law ahead of US short sellers. Hindenburg Research's report last year alleged that the Gautam Adani group had broken share market rules. These allegations are being investigated by the Securities and Exchange Board of India. Gautam Adani has denied all the allegations made by Hindenburg Research's report.

Current Indian rules do not allow naked short selling, where the trader sells short without owing the shares or securities that are to be sold.

Introduction to a full-fledged SLBM (Securities Lending & Borrowing Scheme) will be simultaneous with the introduction of short-selling by institutional investors stated by SEBI.

Now Institutional Investors will have to confirm and inform the Stock Exchange that if the trade is short sale retail investors can make mandatory disclosures by the end of the trading hours. 

Market regulators of SEBI said, "The brokers will be required to collect the details on scrip-wise short sell positions, collect the data, and upload it to the stock exchanges before the commencement of trading on the following trading day. The stock exchanges will consolidate that information and data and then disseminate the same on their websites for the general public. The disclosures may be reviewed from time to time with the approval of SEBI."

The new rules of SEBI on short-selling are undoubtedly a double-edged sword. It can hurt the market as well. Their aim of curbing market manipulation and enhancing price discovery is laudable, their potential to decrease market efficiency should not be ignored. Limiting the short selling, especially naked shorting, can delay liquidity, especially in smaller stocks. This step can make the market less responsive to fundamental shifts, potentially harming price discovery.

"However, we should not forget the motive behind this move. The recent manipulation of short selling forced the SEBI to take this decision. Additionally, a concern is that the retail investors' protection might have factored in, as short selling can be easily misunderstood. It is very important to monitor the impact of these rules on the stock market. SEBI needs to see if the advantages of curbing manipulation outweigh the potential cost of reduced market efficiency. A data-driven approach, with periodic review and adjustments, would be the key to ensuring a healthy balance between stability and dynamism," said Sonam Srivastava, Founder and Fund Manager at Wright Research.