Context

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.

About

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.

Example: 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.