RBI seeks nod for short sales

MUMBAI, Dec 26: The Reserve Bank of India RBI has made a proposal to the finance ministry to permit short selling of securities which a...

MUMBAI, Dec 26: The Reserve Bank of India RBI has made a proposal to the finance ministry to permit short selling of securities which are listed under the securities lending scheme of the Securities amp; Exchange Board of India Sebi.

The move comes close on heels of the recommendations of an RBI-appointed high power committee for a new legislation christened Government Securities Act GSA repealing the existing Public Debt Act. The proposed act will empower the Reserve Bank to regulate the entire securities market, which is currently under the ambit of Securities Contract Regulation Act of Sebi.

The proposed GSA is currently lying with the ministry of finance for approval. At present, short selling or forward selling of securities is not permissible.

The proposal for removal of ban on short selling of securities listed under the securities lending scheme of Sebi is put forth by the high power committee headed by RBI deputy governor YV Reddy.

According to the working group, the SLS introduced bySebi will go a long way in developing secondary market in securities and other debt instruments provided the scheme is made popular. According to officials closely associated with the working group, quot;This scheme could become more useful if their short selling of securities is permitted which under the present legal setup is prohibited.quot; This proposal is a part of the group8217;s suggestion to revive securities market.

The securities lending scheme, which was introduced in 1997, does not have any takers owing to the underdeveloped gilts market. quot;The quantum of trading in the gilts market is very small which is why the SLS of Sebi has not picked up in the last two years,quot; Sebi said. As per the scheme, lenders and borrowers enter into an agreement with approved intermediary for depositing the securities for the purpose of lending and borrowing through them. Under the scheme, there is no direct agreement between lender and borrowers for lending or borrowing of securities.

The lending of securities under thescheme through an approved intermediary and return of equivalent securities of the same type and class by borrowers will not be treated as disposal of the securities.