Sebi Underscores Damaging Effect Of Short Selling

Sebi has also said short sales in India is not specifically prohibited. It said in the US such sales were banned under certain conditions. The regulator has, however, said that some existing regulations and exchange by-laws have a bearing on short sales.

Sebi has said short selling has not been defined under either its regulations, the stock exchange by-laws or even the Securities Contracts (Regulation) Act.

Under the present legal framework, short selling can be dealt with under the Sebi (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Markets) regulations and some by-laws of the BSE.

Sebi said though short selling can occur in the course of normal trading, and is a feature of the stock markets, it has the potential to cause damage to the person selling short and to market safety.

 

Sebi said that in the US, short selling has been defined as any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by or for the account of the seller.''

In the US, short sales are prohibited:

nbelow the last sale price or

nat the last sale price, unless that price is above the next preceding different price at which a sale of the security was reported.

The conditions in the US also call for an affirmative determination by a member dealer about the character of the trade. If the trade is a short sale, then a declaration to the effect that deliveries will be ensured is required, Sebi has pointed out.

In the Indian context, regulation 4 (a) of the Sebi unfair trade practices regulation says: No person shall effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person.

Regulation 4(d) of the same regulations states: No person shall enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a devise to inflate, depress, or cause fluctuation in the market price of securities.''