RBI okays short-selling by registered FIIs

The Reserve Bank of India (RBI), in consultation with Government of India (GoI) and Securities Exchange Board of India (Sebi) have allowed Sebi registered foreign institutional investors (FIIs) and sub-accounts of FIIs to short sell, lend and borrow equity shares of Indian companies. Earlier, FIIs were not allowed to engage in short selling and were required to take delivery of securities purchased and give delivery of securities sold.

Sebi had cleared these proposals allowing institutional investors, including the FIIs to short sell, long ago and the Sebi board also approved these proposals six months ago in last June.

With the final hurdle against these proposals being cleared by the RBI, the stock exchanges (SEs) are likely to launch short selling and securities lending and borrowing (SLB) system from February 1. Sebi has already issued a circular asking the SEs and depositories to issue guidelines and put in place necessary systems in this regard in its circular. A top Sebi official said, ?The SEs have shown their preparedness to launch short selling and SLB at the earliest, and most likely it is expected to be in place by February 1.?

The RBI approval, however, comes with certain conditions. FII participation in short selling as well as borrowing and lending of equity shares will be subject to the current foreign direct investment (FDI) policy and short selling of equity shares by FIIs will not be permitted for equity shares which are in the ban list and/or caution list of RBI.

RBI said, the borrowing of equity shares by FIIs will only be for the purpose of delivery into short sale and the margin or collateral will be maintained by FIIs only in the form of cash. No interest will be paid to the FII on such margin/collateral.

It said, the designated custodian banks will separately report all transactions pertaining to short selling of equity shares and lending and borrowing of equity shares by FIIs in their daily reporting with a suitable remark (short sold / lent / borrowed equity shares) for the purpose of monitoring by the RBI.