Sebi allows short selling by mutual funds

The Securities and Exchange Board of India (Sebi) has amended rules governing mutual funds to allow the domestic fund houses to engage in short-selling of securities and stock lending and borrowing.

The new rules, which will come into effect after Sebi announces the detailed framework on new capital market instruments, however, prohibit mutual funds from naked short selling. The fund houses shall buy and sell securities only on the basis of deliveries.

A Sebi notification dated October 31, which was put on its website this evening, also brought the exchange traded funds under the ambit of reduced expenses and investment and advisory fees stipulated by the regulator recently.

Sebi also said the total expenses of an index fund, including the investment and advisory fees, should not exceed 1.5 per cent of the weekly average net assets. This is a major revision from the existing 2.25 per cent.

On derivatives transactions, Sebi barred mutual funds from carry-forward transactions "provided that mutual funds may enter into derivatives transactions on a recognized stock exchange, subject to the framework specified by the Board (Sebi)."

Short selling is the sale of a security that the seller does not own at the time of trade. The institutional investors, including FIIs, domestic financial institutions and mutual funds, are not currently allowed to sell short.

The Union Budget for 2007 had proposed the introduction of short selling for institutional investors.

Dealers said the Sebi notification on mutual funds will not have a major bearing on the markets as the investment strategies of existing schemes do not allow short-selling.

"Mutual funds will be allowed to introduce new and innovative schemes after the new rule comes into effect," Rajiv Anand, head of investment, Stanchart Mutual Fund, said.

The proposal to allow short selling (stock lending and borrowing, as well) was awaiting clearance from the Reserve Bank of India, according to sources.

Sebi Chairman M Damodaran had said that short-selling would be allowed in case of futures and options (F&O) stocks initially.