In a move aimed at deepening the stock market, the Securities and Exchange Board of India (Sebi) has authorised all institutional investors — domestic and FIIs — to short sell in the cash segment. In another major step, the regulator has also made it mandatory for all initial public offerings (IPOs) to get a rating. Sebi has also tightened the disclosure norms for real estate companies which are planning to launch their IPOs in a bid to know the real valuation of the property and to arrest any kind of asset bubble in this sector. “The time frame for short selling will be decided fairly quickly,” Sebi chairman M Damodaran said after the market regulator’s board meeting on Thursday. Sebi had a preliminary discussion with stock exchanges (SEs) on the issue and they were prepared, he added. As of now, only retail investors are allowed to short sell (which means the sale of a security that the seller does not own). Former Sebi member and professor at IIM Ahmedabad Jayanth R Varma said, “Allowing institutional investors to sell short will act as a kind of resistance when the market moves in one direction. In the short run, it may cause some volatility, but in the longer run, it will definitely help in curbing volatility and improve price discovery.” Though naked short selling — without the backing of stocks — will not be allowed, investors will have to fulfill their delivery obligation by borrowing shares through the securities lending and borrowing (SLB) mechanism. The SLB mechanism can be implemented through a clearing corporation or the custodian route, where investors can lend their shares to those who sold short. Of course, the lending investors can earn a fee for the shares lent. “It has been made mandatory for real estate sector companies to disclose the land bank details, accompanied by the ownership and agreement status in the offer document,” Damodaran said, adding, “The land bank should be the real bank where there is a complete disclosure of details. All the agreements must be made available in case of any kind of scrutiny.” Sebi’s decision assumes significance as another regulator, RBI, has time and again cautioned the financial market about the possible asset bubble in the real estate sector. The regulator said that the real estate companies will make continuous disclosures in the post-IPO period. “The projection of the value of the land should be made on the present value instead of the future valuation,” he said.
