Short Selling in India
24th Feb, 2023
Naked Short Selling
- In naked short selling, stocks are not borrowed.
- Therefore, in times of panic, more people could dump their holdings, without any obligation to fulfil their settlements, thereby pushing the prices of the stock further down.
- It is illegal.
After Hindenburg Research, a US-based short seller, released a report on the Adani Group, several questions have been raised on short selling – if it’s ethical, how it’s done, is it legal in India.
What is short selling?
- Short selling involves borrowing stock you do not own, selling the borrowed stock, and then buying and returning the stock only if and when the price drops.
- It’s completely opposite to how a bullish transaction takes place.
- In such transactions, you buy a stock hoping the price will go up. You wait until it goes up to a certain extent.
- However, short selling is mostly done to earn in a falling market. In this case, the investor is bearish on the markets.
For instance, an investor borrows a certain number of shares from a broker, and sells these shares in the market for Rs 100. In the future, when the price of the shares fall to Rs 80, then the investor can buy them at a lesser price, return them to the broker, thereby making a profit of Rs 20.
Is it legal?
- Securities market regulators in most countries, particularly in all developed securities markets, recognise short selling as a legitimate investment activity.