After the Supreme Court decision on Adani-Hindenburg petitions, the Securities and Exchange Board of India (Sebi) has released a broad framework for Short Selling. Refusing the petitions, the apex court had asked Sebi to find out whether there was a loss suffered by Indian investors after Hindenburg's report on the Adani group. In the broad framework, Sebi has defined “Short Selling” as selling a stock which the seller does not own at the time of trade and added that all classes of investors, viz., retail and institutional investors, are permitted to short sell. But it barred naked short selling in the Indian securities market and accordingly, all investors have been asked to mandatorily honour their obligation of delivering the securities at the time of settlement.
Following these most recent revisions, the short-selling framework provided in the Master Circular sent to Stock Exchanges and Clearing Corporations in October 2023 is now in line with the framework described in a much earlier circular from 2007. According to the Sebi framework, "No institutional investor shall be allowed to do day trading i.e., square-off their transactions intra-day. In other words, all transactions would be grossed for institutional investors at the custodians’ level and the institutions would be required to fulfil their obligations on a gross basis. The custodians, however, would continue to settle their deliveries on a net basis with the stock exchanges."
"The stock exchanges shall frame necessary uniform deterrent provisions and take appropriate action against the brokers for failure to deliver securities at the time of settlement which shall act as a sufficient deterrent against failure to deliver. A scheme for Securities Lending and Borrowing (SLB) shall be put in place to provide the necessary impetus to short-sell. The introduction of a full-fledged securities lending and borrowing scheme shall be simultaneous with the introduction of short selling by institutional investors," it added.
Sebi framework also mentioned the following -
- The securities traded in the F&O segment shall be eligible for short selling. SEBI may review the list of stocks that are eligible for short-selling transactions from time to time.
- The institutional investors shall disclose upfront at the time of placement of 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.
- The brokers shall be mandated to collect the details on scrip-wise short-sell positions, collate the data and upload it to the stock exchanges before the commencement of trading on the following trading day. The stock exchanges shall then consolidate such information and disseminate the same on their websites for the information of the public every week. The frequency of such disclosure may be reviewed from time to time with the approval of Sebi.