Short selling virtually got a clean chit from the stock market regulator on Thursday. The Securities and Exchange Board of India (Sebi) said there was no evidence to blame short selling for the stock market slide since September.
Sebi chairman Chandrakant Bhaskar Bhave told media in Mumbai that countries that had banned short selling had seen their markets dipping. “Most of them have restarted short selling,” he added.
According to him, the prolonged fall in the markets was instead the results of the collapse of liquidity in international financial markets, the subsequent failure of financial entities and the consequent global recession that has set in. The Bombay Stock Exchange’s Sensex has fallen by 37.54% since September 15, when Lehman Brothers went bankrupt.
The regulator’s position is similar to that of the finance ministry, which too did not buy the presumption that short selling was responsible for the market crash. In short selling, an investor sells a borrowed share. If the market goes down, the investor makes a profit as he can buy the stock at a lower price than the one at which he sold short.
From October, Sebi has been posting scrip-wise data on short selling on its Web site every week to improve transparency in the market. “We don’t have evidence that short sellers were driving the market down,” Bhave said. There is, therefore, no move to ban short selling, he added
Bhave said his agency was still examining the investment pattern of the foreign institutional investors, the largest category of investors in India. Sebi had examined their accounts of shares lent overseas for short selling. “After having conveyed our disapproval, we have not seen any activity in the overseas markets,” he added. Last month the regulator had warned some FIIs against short selling Indian equities to overseas entities. The business allowed them to side step the margin needs for short selling specified by Sebi. He said the long-term India story was holding out well as seen from FII sale and purchase patterns.
A Sebi release on Thursday said there has been no visible manipulation for the slide in the ICICI Bank scrip in October. ICICI Bank on September 17, 2008 had told Sebi, there was “a malicious rumour to the effect that some of the top management have been selling ICICI Bank shares for the last few days”. The ICICI shares slipped 12.5% from Rs 640 on September 15 to Rs 560.30 on September 17.
“By and large, the trading patterns are consistent with the shareholding pattern of ICICI with predominant holdings by FIIs, the general buying and selling behaviour by FIIs and the broad movements of the market during this period” the Sebi release said.
Speaking about the host of problems faced by the mutual fund industry in a crashing market, Bhave said the mutual funds industry too was facing a liquidity crisis similar to that of the corporate sector.
Bhave asserted that there were no signs of bad investments by mutual funds. However, in the October meltdown was an opportunity for MFs and the regulators to take a re-look at the MF business, the rules that govern them and the extent to which improvements are required, especially in debt-based schemes, he said.
He said that logically, when the industry faced redemption pressures they would have to sell some holdings, and this was a global phenomenon not just restricted to India. Since, equity holdings are more liquid, they fund houses had liquidated some holdings.
Also, since Indian investors were not as highly leveraged as the developed market investors, there was still scope for investors to resume their activities in the market. “This is the silver lining,” Bhave said.
On the partnership of Sebi and Securities Commission, Malaysia, he said Sebi and the Malaysian entity could work together in some areas. One area could be cross-listing, he said, where a Malaysian company could seek to raise capital in India and vice-versa. This will give both Malaysian and Indian investors access to each other’s markets.
“So far, our source of capital was from the developed world but now the developing world is also coming into its own. For emerging markets, there is an opportunity to co-operate amongst themselves and diversify their sources of capital,” he said.
•Sebi has no plans to abolish short selling
•No irregularity in ICICI Bank stock movements
•No signs of bad investments by MFs
•New norms for debt-based MFs on the cards
•FIIs no longer lend shares in overseas markets