There is a time and place for every idea. When Sebi banned shortselling of stocks in 2001 following the Ketan Parekh securities scandal, it was seen at the time as a panic response to an altogether different malaise. However, six years on, Sebi has now decided it?s time the market had the benefit of shortselling again. Why now? The answer is simple: because the Indian market is now ready for this key component. For one, the Indian market is now globally acknowledged as one of the world?s safest and most efficient. For another, with the success of derivatives trading, it has also shown that products of this nature can be handled with maturity by market players. Add to that the robust market surveillance system, the Integrated Market Surveillance System, and you have enough factors giving the regulator confidence that shortselling will not lead to problems.
To Sebi?s credit, it has not yet announced a date for the relaunch of shortselling, but has laid down the rules well in advance to help players prepare for it. Besides, it has unveiled new norms for the other critical corollary, the stock lending and borrowing (SLB) mechanism, which will be implemented on the ground by the stock exchanges. Without a proper SLB, there can hardly be a workable shortselling regime, and Sebi has correctly insisted the two must go hand in hand. Sebi has also put forward some important caveats. For example, naked short sales?those which are undertaken without any securities being owned by the seller?will not be allowed, and the sales must be settled by delivery at the end of the settlement period. Also, institutional investors will not be allowed to square-off their trades intra-day. All scrip-wise short sale positions would also have to be uploaded by brokers to the stock exchanges before trading commences the next day. These conditions will ensure that the facility is not misused for reckless selling simply to make a quick buck at the cost of market safety. All in all, by allowing short sales, Sebi has rightly acknowledged that it serves a purpose. A market is composed of opposing positions, and if a player wants to take a ?sell? view, he must have as much freedom and flexibility as possible to exercise it within safety limits. Shortselling allows that flexibility. It also adds depth to the market.
