Nithin Kamath makes a case for short sellers. Hailing short sellers as “massively underrated” but crucial players, the Zerodha co-founder stressed the need to clear regulatory hurdles and simplify the process. He highlighted that the lack of short selling the leading to ‘distortion in the market.’
“The lack of short selling in Indian markets is causing potential market distortions. Unless we make shorting of stocks easy in the Indian markets, price discovery will be impaired. India has been a structurally long-only market with almost no shorting activity, because borrowing stock to short is really hard and is an offline process,” he wrote in a lengthy LinkedIn post.
The Zerodha co-founder likened short sellers to ‘janitors’ who cleaned up the markets and made it more efficient, calling them “massively underrated”. Kamath also cautioned that an ongoing preference for long positions may have prompted a distinct lack of short-selling talent — even if large funds wanted to start the practice. The only real way to short stocks at present, he noted, was by using futures or options.
“But there are only 224 F&O stocks, which means you can’t short the vast majority of the problematic stocks. Also, these contracts expire every month, and the cost of rolling over these contracts is significant (only the 1st month contract is liquid). Unless this changes, there will always be weird distortions in the prices of Indian markets…Securities lending and borrowing (SLB) is still an offline process, and most brokers don’t offer an online option,” he added.
How does short-selling work in India?
Short selling is heavily regulated by the Securities and Exchange Board of India with some practices such as ‘naked short selling’ remaining illegal. Institutional investors are prohibited from day trading in short sales and required to disclose such transactions at the time of order placement. Brokers keep detailed records and share short-selling data with stock exchanges for public dissemination. Short sellers must borrow shares through the SLB framework to ensure delivery at settlement.
It is only permitted for stocks listed in the future and options (F&O) segment — currently comprising of 223 stocks on the National Stock Exchange and even fewer choices via the Bombay Stock Exchange. The process of short selling and stock trading happens entirely through electronic platforms in India. But brokers often require offline interactions for the SLB mechanism to borrow shares from lending investors since it is not well integrated.
SEBI mulls easing of norms
The Securities and Exchange Board of India is actively considering measures to ease short-selling norms and expand the list of eligible stocks. According to guidelines introduced in January 2024, it plans to allow short-selling of nearly all stocks except those in the trade-to-trade segment. Requirements for investors to disclose short sales within a timeframe may also be relaxed or removed completely. Reports suggest that SEBI is also mulling the possibility of transferring stock exchanges enforcement responsibilities from exchanges to clearing corporations.