FIIs get RBI nod for short-selling

After a long gap, the Reserve Bank of India (RBI) on Tuesday allowed registered foreign institutional investors (FIIs) and their sub-accounts to short-sell, lend and borrow equity shares in Indian companies.

This finally paves the way for short-selling in the Indian equity market, which was banned in 2001.

According to bankers, even if the market regulator had given its nod for short-selling in December 2007, the RBI permission was needed since FIIs need to lend and borrow equity shares to participate in short-selling.

This is because participation by FIIs in lending and borrowing of shares for short-selling requires clearance from the Foreign Exchange Management Act (Fema). This move is expected to improve liquidity and depth in the Indian capital markets.

Sebi, the capital market regulator, had already given its nod for short-selling in December 2007, which it had banned in 2001.

Short-selling, which is an essential feature of all developed markets, is the sale of securities that an investor does not own. Investors undertake short-selling when they feel that the prices of shares are overvalued.

They execute short-sales on expectation that prices of shares that they have sold will come down. Since Sebi had allowed delivery-based short-selling, the transaction will be completed with physical delivery of sales. This in turn needs lending and borrowing of shares.

RBI has allowed the FII participation in short-selling as well as borrowing and lending of equity shares in sectors compliant with the current foreign direct investment policy. Short-selling is restricted to equity shares that are in the ban list or caution list of RBI.

RBI has further specified that borrowing of equity shares by FIIs will only be for the purpose of delivery to short-sales and the margin or collateral will be maintained by FIIs only in the form of cash. An FII cannot receive any interest on such margin or collateral.

It has been clarified that the designated custodian banks will separately report all transactions pertaining to short-selling of equity shares and lending and borrowing of equity shares by FIIs in their daily reporting with a suitable remark (short sold/ lent/borrowed equity shares) to RBI for monitoring purposes.

Under the existing Fema, FIIs were not allowed to engage in short-selling and were required to take delivery of securities purchased and give delivery of securities sold.

SHOT IN ARM

Sebi had already given its nod for short-selling in December 2007

Short-selling is the sale of securities that an investor does not own

Investors undertake short-selling when they feel that the prices of shares are overvalued