26th May 2025 (13 Topics)
Short Selling
Context
The Securities and Exchange Board of India (SEBI) has proposed significant changes to India’s short-selling framework, including allowing short-selling for all stocks (except those in the trade-to-trade segment), eliminating mandatory disclosure requirements, and modifying enforcement norms related to settlement failures. These reforms aim to deepen market liquidity and align India’s regulatory practices with global standards.
Short Selling:
Short selling is a trading strategy where an investor borrows a stock, sells it on the market, and buys it back later at a lower price to return it, profiting from the price decline. It’s a mechanism for price discovery and allows hedging and speculation.
Current Framework in India (as per SEBI rules):
- It is allowed only in stocks listed in the Futures and Options (F&O)
- Naked short selling (without borrowing shares) is prohibited.
- Institutional investors must disclose short sales upfront.
- Retail investors must disclose by end of the trading day.
- The settlement failures result in penalties (0.05% of the shortage value).
- Exchanges publish weekly short-sale data scrip-wise.
Key Proposed Changes by SEBI (2025 Draft Proposal):
- Wider Scope: Allow short-selling in all stocks except T2T (Trade-to-Trade) segment stocks, expanding the universe for short-sale strategies.
- Relaxation of Disclosure Norms:
- Eliminate mandatory disclosures of short sales by both institutional and retail investors.
- Settlement Enforcement Changes:
- Stock exchanges will no longer need to enforce delivery failure penalties once direct payout mechanisms to investors are fully implemented.
- Non-Short-Sale Clarification:
- Securities purchased in earlier settlements but pending delivery in demat will not be treated as short sales.
Fact Box:
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PYQ:In the context of Indian economy, non-financial debt includes which of the following? (2020)
Select the correct answer using the code given below:
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