The short sales ban drama and its implications

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: much of an impact, as the overseas lending volumes are insignificant.

“Moreover, there are the futures and options available for people to go short on,” says Dharmesh Mehta, head, broking, Enam Securities. At the same time, there is a need to keep a tab on these activities and in some cases take stern action as well.

“When you, as a domestic investor, fill up a form for making an investment, you have to answer thousands of questions. Then how can the foreign investors not answer them,” said Ajit Dayal, director, Quantum Advisors in an interview with FE. “Who are these players, what are they up to? We need to know them. May be they are good for the system, may be they are not.”

Oswal concurs, “We need to have more transparency in this area.” And this is exactly what the regulator is up to. They have asked overseas investors to furnish more data to understand the pattern. And Sebi has clearly mentioned that they are against the lending for short sales overseas. The reasoning, reckon experts, is because most of the trades are in the over-the-counter segment, which means that they are customised. Exchange-based transactions have a greater transparency and credibility.

In a speech given at a recent event, Sebi chairman Bhave had stressed on the need to have trust and credibility in the market, even in competitive times.

He mentioned that the current financial meltdown was exaggerated due to the fact that the trust factor has collapsed and people were not sure that the counter party would fulfill their obligations.

In a similar vein, a huge build-up in overseas lending, which is not monitored, has the potential to create a huge crisis. At the moment, the deals are small, but they have the potential to blow up if not monitored closely or curbed totally.