Short Selling in India

Published
17th Feb, 2023

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?

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.

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.
The International Organisation of Securities Commissions (IOSCO) has also reviewed short selling and securities lending practices across markets and has recommended transparency of short selling, rather than prohibiting it.