In a recent circular, the Securities and Exchange Board of India (SEBI) has introduced new regulations pertaining to short selling by institutional and retail investors. While most market observers explained that this is more of a clarification, these measures are however seen as steps to enhance transparency and provide timely information to both institutional and retail investors.
According to the current guidelines, institutional investors have to disclose if the transaction is a short sale while placing the order and retail investors have the option to make this disclosure by the end of the trading day. Kishor Ostwal, CMD, CNI Research pointed out that, “This is just a clarification circular and technically makes no impact on the market. However, shorts like Hindenburg are now protected, as disclosures are mandatory now.”
Additionally, SEBI mandates brokers to collect details on scrip-wise short sell positions, collate this data, and upload it to stock exchanges before the next trading day begins. Anirudh Garg, Partner and Fund Manager INVAsset added that the fact that stock exchanges will then consolidate and disseminate this information weekly on their websites for public awareness aims to “enhance transparency and provide timely information to both institutional and retail investors in the Indian stock market.” SEBI emphasizes that these rules complement the existing framework for short selling in India and reserves the right to review the frequency of such disclosures.
Sonam Srivastava, Founder and Fund Manager at Wright Research, raised a point of concern and explained that “SEBI’s recent regulations on short selling present a dual-edged scenario. While aiming to curb market manipulation and enhance price discovery is commendable, it’s essential to acknowledge the potential impact on market efficiency. Restricting short selling, particularly naked shorting, may hinder liquidity, especially in smaller stocks, potentially making the market less responsive to fundamental shifts and impacting price discovery.”
Srivastava believes that recent volatile episodes, potentially fueled by manipulative short selling, likely influenced this decision. Additionally, a focus on protecting retail investors, given the complexity of short selling, may have played a role, “Therefore, close monitoring of the new guidelines is imperative. Evaluating whether the benefits of curbing manipulation outweigh the potential cost of reduced market efficiency requires a data-driven approach. Periodic reviews and adjustments are crucial to maintaining a healthy balance between stability and dynamism.”
