SEBI Takes Measures To Check Short Selling, Curb Volatility

SEBI’s new measures to curb market volatility will come into effect on March 23, and will be in effect for one month.

A pedestrian wearing a face mask, as a measure to prevent coronavirus spread, walks past graffiti in Mumbai, on March 20. (Photographer: Kunal Patil/PTI)

The market regulator lowered the limit of positions that can be taken in the futures and options market, increased margin requirements and capped derivatives exposure as it looks to counter volatility and short-selling triggered by the Covid-19 pandemic.

These stocks have tumbled and have seen a build-up of short positions. Any ban would lead to short-covering.

The penalty for increasing positions beyond the limit has been increased to 10 times of the minimum and five times of the maximum penalties specified by exchanges.

Higher Margins For F&O Stocks

The regulator increased margin requirement to 40 percent in the cash market for F&O stocks with market wide position of 50 percent:

  • 20 percent from March 23.
  • 30 percent from March 26.
  • 40 percent from March 30.

Higher Margins For Non-F&O Stocks

For stocks with a price band of 20 percent—the maximum up and down movement—and witnessing an intraday (high-low) price variation of more than 10 percent for three or more days in the last one month, the minimum margin rate shall be:

  • 30 percent from March 23.
  • 40 percent from March 26.
  • 40 percent or max intraday high-low variation (in the last one month), whichever is higher.

Cap On Exposure To Index Derivatives

Mutual funds, foreign investors and trading members—proprietary or on behalf of clients—may take exposure in equity index derivatives subject to the following limits:

  • Short positions in index derivatives cannot exceed the notional value of stocks held in cash.
  • Long positions in index derivatives shall not exceed the notional value cash held, government securities, T-Bills.
  • Additional position limits besides the first 2 will be Rs 500 crore in equity index futures and equity index options contracts, respectively.
  • If the limits are exceeded, an additional deposit and margins shall be payable.

Flexing Of Dynamic Price Bands For F&O Stocks

Stocks in the F&O segment are subject to dynamic price bands. One of the conditions followed by stock exchanges for relaxing the price band is that a minimum of 25 trades should be executed with five different unique client codes on each side of the trade at or above 9.9 percent and so on. In addition to the existing requirements, the dynamic price bands may be flexed only after a cooling-off period of 15 minutes from the time of meeting the existing criteria specified by stock exchanges.

It’s a welcome step but most of the damage has been done, said Chandan Taparia of Motilal Oswal. The reduction in MWPL limit and change in participants position limit in index derivatives to reduce the short-selling could help the market to get stability but major relief will come only if there is stability in global markets coupled with reduced selling cash segment by foreign investors, he said.

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