The Telegraph
Since 1st March, 1999
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Panel cooks up revival recipe for short sales

Mumbai, Aug. 20: Short sales and margin trading could be back in the trading ring if a key proposal made by a Sebi committee finds its way to the statute books.

The secondary market advisory committee (SMAC), which looked at ways to make the scam-prone markets a safer place, set the ball rolling by redefining short sales as failure to deliver securities at the time of settlement. Earlier, it meant selling shares without being in physical possession of them. It said sales not backed by securities should be monitored at the time of delivery.

The regulator made it compulsory for all sales to be backed by delivery from March 8, 2001 in an effort to snuff out the kind of volatility that rocked markets that month. After this, bourses had no proper short sales mechanism barring, of course, the derivatives segment.

The recommendations, if implemented, will come as a shot in the arm for Bombay Stock Exchange (BSE), where brokers have long been clamouring for a variant of margin trading to be allowed after badla was proscribed. It will also give the country’s oldest bourse a chance to catch up with the derivatives-savvy NSE.

Making a pitch for short sales, the committee said these should be monitored by putting in place a sound and efficient securities lending and borrowing mechanism. This would entail borrowing of securities by the clearing corporation to meet settlement shortfalls. The return of these shares by the clearing corporation should be independent of the normal settlement.

Headed by Clearing Corporation of India (CCI) chairman R. H. Patil, the panel said banks and NBFCs recognised by the Reserve Bank should be permitted to finance margin trading, and that brokers should merely be facilitators. Margin trading, it felt, can be immediately started since ushering in this arrangement will not require a raft of legal amendments.

Also discussed by the committee today were ways to introduce a system where brokers finance clients for margin trading, and the legal hurdles that would have to be surmounted before this can become a reality.

The bilateral agreement between the client and the broker, the panel said, should incorporate risk-containment measures.

As a precaution, it said only corporate brokers would be allowed to participate in margin trading. This too, if they have a net worth of at least at Rs 3 crore, and debts not exceeding five times that amount.

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