Sold Short

But that chapter has not ended; the show-cause notices on 33 brokers in Bombay, Calcutta and Delhi show that Sebi continues to live in the age of simplicity. These brokers are alleged to have been engaged in short sales: in other words, to have sold shares forward that they did not possess. Sebi has thrown the book at them "" charged them with violation of the Sebi Act, the Sebi Brokers' Regulations, and the Fraudulent and Unfair Trade Practices Regulations. But the question needs to be asked: what is wrong with short sales? Suppose someone who thinks that the price of a share will be lower tomorrow meets someone who does not think so, and sells him shares expecting that the lower price tomorrow will enable him to pick them up cheaply for delivery. What is he doing wrong? Transactions of this sort run into crores every week on the NSE. Sebi has never objected to them. They cannot even be detected unless they cross a settlement date. If they do and a seller cannot deliver, all stock exchanges have regulations in place to deal with that: basically, they buy the shares by auction for delivery to the buying broker, and charge the selling broker the excess of the purchase price over the forward selling price if any.

 

The reason why Sebi is pursuing the brokers is even more questionable: they are supposed to have given a bear hammering to certain shares. When was Sebi given powers to ensure that share prices do not go up and down? Instead of favouring bulls against bears or vice versa, Sebi should give serious thought to the basic shortcoming of the Indian capital market that makes market cornering possible: namely, the low volume of transactions. Forward trading is part of the remedy, not the problem: it raises the volume and improves liquidity.