Mumbai, Dec. 20: Market regulator Sebi today decided to permit all classes of investors — institutional and retail — to sell shares without owning them at the time of trade.
The stock exchanges would issue the necessary guidelines in this regard and will put in place systems to operationalise the mechanism of short-selling, Sebi said in a circular here.
The actual date of implementation will be intimated by Sebi later.
However, the system of naked short selling as is available in the US markets has not been allowed, and all investors must honour their obligation of delivering the securities at the time of settlement.
The decision will have a soothing effect on stocks and their prices will no longer vary randomly, said V. K. Sharma of Anagram Stock Broking. This will also help the companies to lend idle stocks and earn some income, he added.
The Sebi has also decided to implement a full-fledged lending and borrowing scheme to enable the settlement of all securities sold short. Stock exchanges would issue guidelines in this respect as well.
The market regulator advised stock exchanges and depositories to put necessary systems in place to distinguish between the lending and borrowing transactions executed for short-selling from the normal market transactions in the demat system
While retail investors were already allowed to sell short, the decision to include institutional investors is likely to encourage these players in the stock market.
Sebis decision to allow short-selling and come out with a broad framework in this direction is good for the market as it would create more liquidity, brokerage firm SMC Global vice-president Rajesh Jain said. Stock markets should welcome the news, if global cues are positive, he said.
According to the broad framework for short-selling issued by Sebi, no institutional investor would be allowed in day trading, which means squaring-off transactions during the day.
Institutional investors would disclose in advance at the time of the placement of a order whether the transaction is a short sale. However, retail investors would be permitted to make a similar disclosure by the end of the trading hours on the transaction day.