Capital markets committee allows short selling by FIIs

The capital markets committee, headed by Reserve Bank of India governor Bimal Jalan, has allowed covered short-selling by foreign institutional investors. This means that FIIs can sell short, to the extent that they have shares to back them.

FIIs have so far not been allowed to participate in borrowing through the securites lending and borrowing system. They can now also borrow against global depository receipts sent for conversion or against shares sent for dematerialisation. Now, the FIIs will able to sell short if they can cover their short sales.

The other members of the committee were D R Mehta, chairman, Securities and Exchange Board of India, and E A S Sarma secretary, department of economic affairs. The meeting was attended by Sebi officials, and officials from the finance ministry and the Reserve Bank of India.

The stock markets are almost at their top.This move could mean that there will be selling pressure from foreign institutional investors. But the other viewpoint is that foreign institutional investors also should should also enjoy the facility that individuals and stock brokers enjoy.

The other way of bringing about a level playing field is what Sebi is considering doing next. That will happen once mutual funds are allowed to invest in overseas markets. Coupled with this, if two-way fungibility is also announced, it will be a further step towards establishing a level playing field.

Indian mutual funds cannot currently utilise arbitrage opportunities, which foreign institutional investors can.