SEBI Committee Approves Ease In Short-Selling Norms, Draft Circular To Be Out Soon: Sources

The Securities and Exchange Board of India may soon ease norms for short-selling, people in the know told NDTV Profit. The proposal to ease the restrictions was approved in the last meeting of the Secondary Market Advisory Committee and is likely to be followed up with a draft circular soon.

Short-selling means betting on a stock's price downfall where you borrow a stock and sell it at the current price, and subsequently buy it back at a lower price and return it to the lender. However, if the said stock's price rises instead, the investor ends up making a loss.

The market watchdog came out with regulations for short-selling for the first time in 2007, and the norms were reiterated in January 2024.

The SEBI's 2024 circular explicitly states that only stocks traded in the futures and options segment are eligible for short-selling. This means that it is not allowed for stocks outside the F&O segment unless SEBI decides to review and expand the list of eligible stocks.

A source directly privy to the matter mentioned that after the January 2024 circular, the higher-ups in the broking industry faced some confusions and some brokers even started getting notices from the regulator. Subsequently, the industry raised the issue to the regulator and discussions in the SEBI committee followed.

Another source mentioned to NDTV Profit that short-selling was not happening in all stocks earlier and the industry wanted more of it. Hence the recommendations to ease norms were raised and approved in the committee, the person said.

The changes may pave way for expansion of short selling to all stocks, except those in the trade-to-trade or T2T segment, which are stocks where every trade must result in delivery, leaving no room for intraday trading.

Institutional investors like mutual funds currently have to declare if they are short-selling, whereas the retail investors must report their short-selling by the end of the day.

SEBI may remove these requirements because modern clearing and settlement systems already track these transactions, the sources indicated.

Right now, if traders fail to deliver shares, they face a 0.05% penalty, and stock exchanges take action against brokers. SEBI may remove the exchange's role in enforcement and let clearing corporations handle it directly, as per the sources.

The proposed changes could simplify the process and reduce regulatory burdens.

An email seeking response to this story was sent to the regulator and any reply to the same would be added to the story.