Despite concerns raised by the Reserve Bank of India, the government will allow foreign institutional investors (FIIs), overseas asset management companies and foreign banks to short-sell as well as lend & borrow of stocks.
In a recent meeting of the high-level committee on capital and financial markets, the RBI recommended that the government allow short selling only to local institutional investors. It said allowing foreign portfolio investors could add to the volatility in the stock markets.
The finance ministry has, however, reiterated its position favouring participation of foreign entities as well. A finance ministry official told FE, the RBI?s concerns had been addressed and issue has been settled. The Securities & Exchange Board of India (Sebi) would issue guidelines in a couple of months to allow foreign as well as domestic portfolio investors to participate in the scheme, he added.
In this year?s Budget, finance minister P Chidambaram announced a plan to allow short selling and lending & borrowing of shares by portfolio investors?both domestic and foreign.
Stock lending allows SEBI approved intermediaires (AIs) to lend securities they hold to other investors. AIs lend these securities for a fixed period at a negotiated price to enhance returns on their portfolio. The borrower returns these securities once the stipulated period expires. Short selling enables an investor to sell a security he does not own.
To begin with, the government may restrict short selling and stock lending & borrowing scheme only in those stocks in which derivative products are available. Sebi may review the stocks available for the scheme from time to time, the official said. The regulator would also decide which AIs can participate in the programme.
Besides complementing short selling, the lending & borrowing scheme enables investors to earn returns on their idle securities. Although there is no restriction at present on short selling by retail investors (only intra-day short selling is allowed in the derivatives segment), institutional investors are barred from it. Once the scheme is unveiled, institutional investors too will be able to take part in it?a move expected to inject liquidity in the market.
?Allowing institutions to short sell shares would certainly bring in liquidity in these stocks while their participation in lending & borrowing programme helps in balancing out the volatility during sharp upswing and downswing in the market,? said Nirmal K Agarwal, president of Association of NSE members of India.