Source : INDIA TODAY NEWS
Markets regulator Sebi is planning to make it easier for investors to short stocks by nearly doubling the number of shares available for borrowing and lending, while also reducing collateral requirements, reported news agency Reuters.
The proposed changes are aimed at boosting activity in the cash equity market and encouraging investors to shift away from the country’s much larger derivatives market, where retail investors have suffered heavy losses in recent years.
advertisement
If approved, the move would mark one of the biggest overhauls of India’s stock lending and borrowing mechanism in years.
WHAT IS SHORT SELLING?
Short selling, commonly known as “shorting”, is a way of making money when a stock’s price falls.
Normally, investors buy a share first and hope its price rises before selling it.
In short selling, an investor borrows shares, sells them in the market and later buys them back. If the share price falls in the meantime, the investor returns the borrowed shares and pockets the difference as profit.
For example, if you borrow a share worth Rs 1,000, sell it and later buy it back for Rs 900, you make a profit of Rs 100 before costs.
However, if the stock price rises instead of falling, losses can mount because the investor still has to buy back the shares to return them.
WHAT IS SEBI PLANNING?
According to the Reuters report, Sebi plans to expand the stock lending and borrowing mechanism (SLBM), which allows investors to borrow shares for short selling.
At present, only 176 companies out of nearly 2,600 stocks listed on the National Stock Exchange (NSE) are eligible for borrowing and lending.
The report says Sebi wants to nearly double that number by relaxing some of the existing eligibility norms so that a much larger pool of liquid stocks can be shorted.
Currently, stocks qualify for the lending and borrowing framework based on factors such as liquidity, trading volumes and their ability to support derivatives trading. One requirement, for instance, is an average monthly trading turnover of at least Rs 100 crore over the previous six months. The report says Sebi is considering easing some of these thresholds.
The regulator is also looking at reducing collateral requirements. At present, investors may have to provide collateral of up to 130% of the value of borrowed shares. In comparison, collateral requirements in markets such as the US and Europe are generally around 100%.
According to the report, the proposals are likely to be finalised by the end of this year.
WHY NOW?
India’s stock market has grown rapidly over the past decade, with the market capitalisation of NSE-listed companies rising from around $1 trillion to over $5 trillion.
But the derivatives market has expanded even faster.
According to the report, capital deployed in derivatives is now around three times that of the cash market, while the gross value of derivative contracts is nearly 500 times larger than the cash market—much higher than in major global markets.
Sebi has repeatedly flagged concerns over excessive retail participation in derivatives, saying that nearly 90% of retail investors lose money in this segment.
The government has also taken steps over the past 18 months to make derivatives trading more expensive in an effort to curb excessive speculation.
By making short selling easier in the cash market, Sebi hopes more trading activity shifts towards transactions backed by actual shares rather than leveraged derivative contracts.
WHY ARE SO FEW STOCKS ELIGIBLE TODAY?
India’s stock lending rules are among the strictest globally.
Following stock market scams in the past, regulations governing the cash market were tightened in the early 2000s and again between 2017 and 2020.
As a result, only a small fraction of listed companies currently qualify for borrowing and lending despite thousands of stocks being listed on the NSE.
The report also notes that Sebi had constituted a working group last year to review the stock lending and borrowing framework.
WHAT DOES THIS MEAN FOR INVESTORS?
If the proposals are implemented, investors will have access to a much wider range of stocks for short selling.
Institutional investors and sophisticated traders could find it easier to hedge portfolios or profit from falling stock prices. Investors who lend their shares through the stock lending and borrowing mechanism could also earn additional income.
However, short selling remains a high-risk strategy because losses can be unlimited if a stock’s price continues to rise.
The report also notes that, unlike the US and Europe where stock lending often happens through brokers, India requires all stock borrowing and lending to be conducted through recognised exchanges.
While foreign investors have sought changes to this framework, the report says Sebi is unlikely to alter this requirement as it believes routing transactions through exchanges improves transparency and liquidity.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)
– Ends
SOURCE :- TIMES OF INDIA
