The stock market regulator Securities and Exchange Board of India (Sebi) has proposed permitting institutional investors to sell shares short to provide a level playing field to all classes of investors.An advisory committee of the Sebi said short selling of equities may be allowed initially in those stocks in which derivative instruments like stock futures and stock options are available.Sebi currently only allows retail investors to sell short — the practice of selling securities you do not own in anticipation you can buy them back cheaper at a later date.Currently, there is a ban on investors such as banks, mutual funds, insurance companies and foreign institutional investors from selling shares short. They are required to settle on the basis of delivery of securities owned and held by them.Sebi’s Secondary Market Advisory Council, in a discussion paper, said institutions seeking to short-sell would mandatorily have to honour the obligation of delivering the securities at the time of settlement. The panel suggested institutions may also be prohibited from intra-day trading or squaring off their transactions intra-day.‘‘All transactions would be grossed for institutional investors at the custodians’ level and the institutions would be required to fulfil their obligations on a gross basis,’’ the committee said.The Sebi panel also recommended introduction of lending and borrowing in securities to facilitate short sales. ‘‘In the absence of vibrant market for securities lending and borrowing, short selling may not work effectively,’’ the committee said.‘‘The introduction of a full-fledged securities lending and borrowing scheme should be simultaneous with the introduction of short selling by the institutional investors,’’ it said.The committee has recommended that the institutional investors would be obligated to disclose upfront at the time of placement of order whether the transaction is a short sale and demonstrate their ability to borrow to the satisfaction of the broker. However, the retail investors would be permitted to make a similar disclosure before the end of the trading hours on the transaction day.
