CB Bhave and the Sebi he heads have done a remarkably good job in some very tough times. Now, Sebi’s decision not to ban short-selling seems to have been right on the ball. Bhave, in a media interaction on Thursday, gave a clean chit to short-selling—one of the most criticised stock market actions. It seems now clear, from evidence in India and elsewhere, particularly in markets where short-selling was banned, that the sharp decline in stock markets had very little to do with short-selling and much more to do with the collapse of major financial institutions, imminent recession and huge outflows of money from stock markets as funds began to stock up on liquidity in the midst of the most severe credit squeeze and deleveraging in a generation. The best evidence for the latter explanation for the stock market collapse is the continued slide in those stock markets where short-selling had been banned—more than 20 countries, including the UK and Australia, had imposed restrictions on this market action.
Why, then, was short-selling being held culprit in the first place? Perhaps it’s the nature of short-selling which causes a problem of perception. Short-selling basically involves the sale of a borrowed stock, which the person who sold it buys only after the actual sale. So, if the price of a stock falls after its sale, the seller makes money by buying it at a cheaper rate. It is thus easy for people to perceive the intent of short-sellers to drive the market