Sebi plans to make it easier to short stocks. Here's what it means for investors
Markets regulator Sebi is planning to make it easier for investors to short stocks by nearly doubling the number of shares available for borrowing and
Markets regulator Sebi is planning to make it easier for investors to short stocks by nearly doubling the number of shares available for borrowing and lending, while also reducing collateral requirements, reported news agency Reuters. The proposed changes are aimed at boosting activity in the cash equity market and encouraging investors to shift away from the country's much larger derivatives market, where retail investors have suffered heavy losses in recent years. Read Full Story If approved, the move would mark one of the biggest overhauls of India's stock lending and borrowing mechanism in years. WHAT IS SHORT SELLING? Short selling, commonly known as "shorting", is a way of making money when a stock's price falls. Normally, investors buy a share first and hope its price rises before selling it. In short selling, an investor borrows shares, sells them in the market and later buys them back. If the share price falls in the meantime, the investor returns the borrowed shares and pockets the difference as profit. For example, if you borrow a share worth Rs 1,000, sell it and later buy it back for Rs 900, you make a profit of Rs 100 before costs. However, if the stock price rises instead of falling, losses can mount because the investor still has to buy back the shares to return them.
WHAT IS SEBI PLANNING? According to the Reuters report, Sebi plans to expand the stock lending and borrowing mechanism (SLBM), which allows investors to borrow shares for short selling. At present, only 176 companies out of nearly 2,600 stocks listed on the Stock Exchange (NSE) are eligible for borrowing and lending. The report says Sebi wants to nearly double that number by relaxing some of the existing eligibility norms so that a much larger pool of liquid stocks can be shorted. Currently, stocks qualify for the lending and borrowing framework based on factors such as liquidity, trading volumes and their ability to support derivatives trading. One requirement, for instance, is an average monthly trading turnover of at least Rs 100 crore over the previous six months. The report says Sebi is considering easing some of these thresholds. The regulator is also looking at reducing collateral requirements. At present, investors may have to provide collateral of up to 130% of the value of borrowed shares. In comparison, collateral requirements in markets such as the US and Europe are generally around 100%. According to the report, the proposals are likely to be finalised by the end of this year. WHY NOW? India's stock market has grown rapidly over the past decade, with the market capitalisation of NSE-listed companies rising from around $1 trillion to over $5 trillion.
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