Short selling to be allowed by July this year

28 May 2007

Mumbai: After more than six years, the Securities and Exchange Board of India (Sebi) will launch a more sophisticated version of short-selling in equity markets for both domestic and foreign institutional investors (FIIs) in July this year.

Under the proposed scheme, short selling in individual scrips will be capped at 10 per cent of the free float of shares of any company. The free float of a listed security is the proportion of shares available for purchase in the market by investors.

In principle, it is the part of shares not held by strategic shareholders or promoters.
To start with, short selling will be allowed in only those scrips for which derivative products are available.

The market regulator will only allow covered short sale when a settlement is backed by physical delivery of shares and there is a heavy penalty for market participants indulging in naked short sales, or transactions in which a broker fails to deliver shares at the time of settlement of trade.

Exchanges will be given the discretion to decide on the margin requirement of brokers involved in short selling. Several broker-wise and client-wise caps are likely to be imposed.

A single clearing member of an exchange may have an open position in short selling capped at 10 per cent of the total market-wide position in a certain scrip or Rs50 crore, whichever is less.