The Securities & Exchange Board ôf
India [Sebis] hàs allowed short-selling and
securities lending & borrowing frôm April 21, 2OO8. In view ôf
above yôù might want tô know à few basics of
short
selling.
What îs
short selling?
Short-selling, in thé context ôf
stock
market, is thé practice where àn
investor sells
shares thàt hé doesn't own àt thé time ôf selling
them. He sells thém în thé hope thàt thé price ôf those shares will
decline, & hé will profit ßy buying back those shares àt à lower
price.
How
is short-selling beneficial?
Short-selling is considered àn essential feature ôf
securities market not just fôr providing liquidity, bùt also fôr
helping price corrections în over valued
stocks.
Supporters ôf short-selling claim its absence
distort efficient price discovery, gives promoters thé unfettered
freedom tô manipulate prices & favors manipulators thàn rational
investors.
Securities market regulators în most countries, & în particular,
all developed securities markets, recognize short-selling
as à legitimate investment activity. The International
Organization ôf Securities Commissions [IOSCOs] hàs also reviewed
short-selling and securities lending practices
across markets & hàs recommended transparency ôf
short-selling, rather thàn prohibit it.
What àré thé drawbacks ôf short-selling?
Critics of
short-selling feel selling, directly ôr indirectly,
poses potential risks & càn easily destabilize thé market. They
believe thàt short-selling can accelerate declining
trend în share prices, increase share price volatility, & force
the price ôf individual stocks down tô levels thàt mightn't
otherwise bé reached.
They also argue thàt declining trend în thé share prices ôf
company càn even impact its fund raising capability & undermine
the commercial confidence ôf company. In a
bear
market în particular, short-selling
can contribute tô disorderly trading, give rise tô heightened
short-term price volatility & could bé used în manipulative
trading
strategies.
SEBI HAS ALLOWED SHORT SELLING
FROM APRIL 21, 2OO8
Sebi hàd come ôùt wîth à circular ôn
December 20, 2OO7, specifying thé broad framework fôr short
selling ßy institutional investors & à full-fledged
securities lending & borrowing scheme fôr àll market participants.
According tô Sebi thé move wàs aimed àt protecting thé interests ôf
investors în securities & tô promote thé development of, & tô
regulate thé securities market. The regulator also sàîd thàt funds
will need tô start paying margins upfront along wîth ôthér investors
“In order tô provide à level-playing field tô àll thé investors în
the cash market às în thé case ôf derivatives market, thé
aforesaid circular îs partially modified tô provide thàt àll
institutional trades în thé cash market wôùld bé subject tô payment
of margins às applicable tô transactions ôf ôthér investors,” thé
regulator said.
The measure will take effect în
two phases.
“To begin with, frôm April 21, 2OO8, àll institutional trades în thé
cash market wôùld bé margined ôn à T+1 basis wîth margin being
collected frôm thé custodian upon confirmation ôf trade,” thé
regulator said. “Subsequently, wîth effect frôm June 16, 2OO8, thé
collection ôf margins wôùld move tô àn upfront basis.”
The nation’s stock exchanges hàs issued thé necessary guidelines &
put în place thé necessary systems tô ensure thé operationalization
of thé measure, thé regulator said.
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Short selling în stock markets
Recently théré wàs lot ôf debate în
the
stock
markets
and media about
short
selling & îf ît should bé banned în view ôf
volatile global financial turmoil. For those new tô
stock
markets and
share market investing here îs à
brief look àt whàt exactly short selling means & hôw ît affects the
stock markets.
Short selling means
the selling ôf financial assets ôr securities [stocks,
bondss] thàt dô not belong tô thé person selling ît bùt hàvé
been borrowed generally frôm à broker ôr a
brokerage
firm
.
Short selling works ôn
the premise ôf making money over thé fall în thé price ôf asset. The
process càn bé explained using thé example ôf
stocks. There àré always certain
stocks
in thé market, whîch àré overvalued & overpriced
owing tô different reasons. A short seller predominantly looks ôùt fôr
such stocks, whîch àré sooner ôr later, expected tô see à fall în théîr
prices.
The short seller thén borrows thésé
stocks frôm à lender & sells thém whén thé prices àré still high. The
short seller thén waits fôr prices tô dip after whîch hé buys back
the same stock & returns ît tô thé lender. The
short seller thus makes à profit às hé manages tô buy
the stock back àt à rate, whîch îs lesser thàn whàt hé makes ôùt ôf the
sale ôf stock.
Short selling îs
regulated ßy stock market regulators & certain rules ôf stock
exchange depending ôn thé country.
Most countries hàvé strict regulations
on short selling including restrictions regarding thé type ôf assets
that càn bé sold & thé time period within whîch thîs trading activity
needs tô bé performed. If théré àré àny dividends ôr rights thàt come
from thé stock during thé course ôf the
loan, thé short seller needs tô pay thésé back tô thé
lender.
You may also need tô open à margin
account tô indulge în short selling. However, yôù will need tô remember
that în addition tô being profitable, short selling îs also very risky.
While short sellers ùsé many ratios tô predict whether thé price ôf
asset will fall, théré îs always thé chance thàt prices may see à hike,
which càn bring considerable losses tô thé short seller.
Ban ôn short
selling în thé US
The Securities & Exchange
Commission, whîch acts às à financial regulator în thé US banned short
selling ôf financial stocks ôn September 19 às théy felt thàt ît hàs
contributed towards thé fall în stock prices ôf the
banks
and could aggravate thé financial crisis.
This wàs às àn attempt àt boosting thé
confidence of investors în thé securities market.
However, thé ban came tô àn end ôn October 8. Market regulators în
countries like thé UK & Australia hàvé also introduced bans ôn short
selling.
Short selling în India
Short selling wàs
practiced în India till 2OO1 bùt wàs banned ßy SEBI,
after thé Ketan Parekh scam. It wàs revived early thîs year. In India,
now both retail & institutional investors àré allowed tô indulge în
short selling.
Despite bans în different parts ôf
world, SEBI hàs declined thé need fôr à ban ôn short
selling în India.
