Short selling to get boost with more foreign participants

Short selling in Indian equities is set to get a boost with the global investment bank Citi becoming the first foreign custodian participant on the National Securities Clearing Corporation Ltd (NSCCL) for securities lending and borrowing (SLB) business. Citi is the largest custodian for foreign institutional investors (FIIs) in India with over $100 billion of custody under different asset classes.

Short selling, essentially means selling of a stock that the seller does not own at the time of trade. In March 2001, equity markets regulator, the Securities and Exchange Board of India (Sebi) banned short selling in the Indian stock markets because it led to crash in stock prices. Later, in 2007, the regulator rolled out new guidelines that allowed short selling on borrowed shares.

The SLB business, started in 2008, did not really pick up until last year following the comprehensive guidelines by the regulator that increased the tenor by up to one year and allowed early recall and early repay. This also coincided with the domestic custodian IL&FS becoming a participant on the NSCCL. Still, the SLB business is in a nascent stage with a mere $150 million securities available as lent assets. The lower volume is attributed to a lack of FII participation.

“Citi will be the first foreign custodian participant on this exchange traded platform and, therefore, this is a pioneering business and product from Citi for this market,” said Sudeep Yadav, managing director and head-India Citi Transaction Services”.

The bank is aiming for 10 to 20 per cent of permissible shares under its custody to bring to the SLB business as a participant on the NSCCL and that is expected to boost the SLB business.

NSCCL, the clearing corporation of National Stock Exchange, is an authorised intermediary for the SLB business which facilitates the transactions through a screen-based exchange traded system called SLB–NEAT.

“We have the benefit of a very large securities lending business globally, thereby serving a large set of FIIs who lend through us in other emerging and developed markets, but do not yet trade in India,” said Debopama Sen, managing director & head India Citi Securities & Fund Services.

India has above $200 billion of equity assets under management across FIIs and mutual funds. Additionally, $80 billion is with insurance companies. Potentially, 10 to 20 per cent of these assets can be a part of the SLB market. Currently, only the shares available for futures & options trades are permitted for SLB, but the market participants are expecting soon other shares would be also allowed by the regulator.

Apart from shorting transactions, borrowing of shares are also popular for covering settlement shortages and reverse cash-and-carry arbitrage opportunities globally.