Sebi Considers Ban On Short Sales In Falling Market

Sebi has also been keeping tabs on short sales in Indian markets. According to sources, short selling has taken alarming proportions and taken a toll on Indian market indices. A Sebi investigation into bear hammering in select stocks on Indian market is still on, and the regulator is believed to be close to finalising a policy to check short sales.

Sources say developed markets have a clear policy of banning short sales in a falling market. The American Nasdaq market, for instance, does not allow operators to sell short while a stock is declining.

The developed stock exchanges insist on the sellers providing details of stocks to the exchange authorities before selling, and short selling in those markets essentially means selling borrowed stock. In India, short selling is a phenomenon where sales are made where there is no stocks in possession at all.

 

Sources said that in India one option before Sebi could be to insist that, in a falling market, the details of the stocks are provided to the exchange as proof that the shares are indeed in the possession of the seller. This would discourage and ban short sales in depressed market conditions.

The starting point would be to define what constitutes a falling market. According to sources, Nasdaq has such a definition.

In a recent case on the National Stock Exchange, several operators sold the Reliance stock without possessing shares. This led to the biggest short delivery auction of 34 lakh shares on NSE, intensifying the demand for a check on short sales.

Of late, Sebi has also clamped down on speculation, by imposing margins across stock exchanges. This has led to a diminishing of speculation.

Abroad, a ban on short sales during a falling market means short sales are permitted only when the last price change was positive. This also acts as a deterrent to hammering stocks. The problem in India is that selling borrowed stock is a concept which would also involve a stock lending mechanism, which exists in the developed markets. Mutual funds and financial institutions, which typically hold large chunks of stock, could be the best stock lenders once such a scheme is put into place.