NSE plans new short-selling system

Move aimed at luring more investors to the market

The National Stock Exchange (NSE), the country’s largest bourse, plans to offer a new system for short sales within the next few weeks, a move aimed at luring investors to the local market after expanding in the US and Singapore.

The company, which counts Goldman Sachs Group Inc and Temasek Holdings Pte as shareholders, will introduce the short-selling platform to meet “huge demand,” Chief Executive Officer Ravi Narain said.

NSE is expanding in India, as foreigners pumped in a net $4.3 billion this year, 18 per cent more than a year earlier, data compiled by Bloomberg show. The nation’s benchmark stock index dropped less than half the MSCI Emerging Markets Index’s 13 per cent slide from its April 15 peak.

Short selling shares, that is, selling without having them, is possible only in the derivatives segment. However, NSE plans to allow investors to borrow shares and then sell them in the cash market through the securities lending and borrowing mechanism. This mechanism was introduced some time ago, but has not picked up. NSE will now introduce a revised mechanism to facilitate short selling.

“My view is that if the whole world is rushing to India, you’d have to be brain dead to be rushing out,” Narain said yesterday. “Our strategy should be to continue to attract foreign investors to Indian assets onshore and to bring foreign products to Indian markets.”

Temasek, Singapore’s state-owned investment company, called its five per cent investment in NSE “a proxy to India’s growth and the development of its capital markets” when it bought out NYSE Euronext’s stake this month. The economy may grow eight per cent in the 12 months through March 31, the central bank predicted on April 27. That would follow last year’s 7.2 per cent expansion.

China, Germany
NSE’s average daily turnover in equities has more than doubled in the past four years, according to data on its website. Narain, who was involved in setting up the Indian bourse since its incorporation in 1992, now wants to broaden the products with the new short-selling system allowing traders to borrow the assets they deal in.

China introduced short sales and margin trading two months ago, and this week said it would allow some foreign funds to trade index futures. Germany, earlier this month, banned uncovered short selling of some bonds and naked short selling on the shares of 10 German financial companies, saying such practices endanger the stability of the economy.

NSE is also speeding up the time transactions take to enter and leave its system, and Narain forecast executions will be cut to less than one millisecond by the end of the year from five milliseconds.

S&P 500
Among products due to be available by year-end were an intraday volatility index and other options, said Narain, a Cambridge University-trained economist with a MBA from the Wharton School of University of Pennsylvania.

NSE, which began trading equities in November 1994, plans to sell its index futures in the US under an agreement with CME Group Inc, owner of the world’s biggest futures exchange. That will allow Standard & Poor’s 500 Index and Dow Jones Industrial Average futures to trade in rupees on the Indian bourse.