SEBI Bans Naked Short Selling and Restricts Day Trading for Institutional Investors to protect retail investors and prevent market abuses.

• SEBI bans naked short selling, a practice where investors sell securities without owning or borrowing them.
• No institutional investor is allowed to engage in day trading or square off transactions intra-day.
• All investors across categories allowed for short selling, except for naked short selling.
• SEBI may review the list of stocks eligible for short selling from time to time.
• Institutional investors required to confirm upfront if a trade is a short sale.

In a significant move aimed at enhancing market integrity and curbing potential manipulation, the Securities and Exchange Board of India (SEBI) has introduced a comprehensive framework for short selling, with a ban on naked short selling and restrictions on day trading for institutional investors. The market regulator’s new guidelines also include mandatory disclosure requirements, eligibility criteria for short selling, and the implementation of a securities lending and borrowing scheme (SLBM). The decision follows the Supreme Court’s directive to investigate potential breaches of market rules in light of allegations made by US short seller Hindenburg Research against the Adani Group.

According to SEBI’s latest regulations, all investors across different categories will be permitted to engage in short selling, except for naked short selling. Short selling involves selling a stock that the seller does not own at the time of the trade. This practice is seen as risky and has the potential to create artificial downward pressure on stock prices.

One of the notable restrictions imposed by SEBI is the prohibition of day trading for institutional investors. Institutional investors will no longer be allowed to square off their transactions intra-day, aligning with SEBI’s efforts to promote stability and discourage speculative trading practices.

Moreover, SEBI clarified that all stocks trading in the futures and options (F&O) segment are eligible for short selling. Investors, irrespective of their category, will be obligated to deliver the securities at the time of settlement. This move is aimed at ensuring transparency and fairness in the market.

The regulator also emphasized its commitment to periodically reviewing the list of stocks eligible for short selling. This dynamic approach allows SEBI to adapt to changing market conditions and align its policies with evolving market dynamics. As part of its tightened disclosure rules, SEBI called on stock exchanges to frame uniform deterrent provisions against brokers failing to deliver securities at the time of settlement.

The introduction of a securities lending and borrowing scheme (SLBM) will coincide with the initiation of short selling by institutional investors. The SLBM is expected to facilitate the borrowing and lending of securities, promoting liquidity and efficiency in the market.

SEBI’s disclosure requirements include upfront confirmation by institutional investors regarding short sale trades, while retail investors can make necessary disclosures by the end of the trading day. Brokers are mandated to collect scrip-wise short sell positions and upload them to exchanges before the commencement of trading on the following day. The stock exchanges will consolidate and disseminate this information on a weekly basis, ensuring transparency and access to relevant data for market participants and the public.

While SEBI’s move is aimed at curbing market manipulation and enhancing price discovery, experts caution that the new regulations could potentially impact market efficiency, especially in smaller stocks. The limitations on short selling, particularly naked shorting, might impede liquidity and responsiveness to fundamental shifts, affecting overall price discovery.

Sonam Srivastava, Founder and Fund Manager at Wright Research, acknowledges the dual nature of SEBI’s regulations. She emphasizes the need for a data-driven approach, periodic review, and adjustments to strike a balance between stability and dynamism in the market. The overarching goal remains the protection of retail investors and the prevention of market abuses, with SEBI poised to monitor and adapt its regulations as needed.