The Securities and Exchange Board of India (SEBI), the country's market regulator, has emphasized that naked short-selling is strictly prohibited in the Indian securities market. In a recent notification, SEBI reiterated that while all categories of investors are allowed to engage in short-selling, naked short-selling is not permitted. The regulator emphasized that investors must fulfill their obligation to deliver securities during settlement.
Naked short selling, the practice of selling short shares that have not been determined to exist or secured, is already banned in numerous global markets. Typically, traders borrow or ensure the availability of a stock before engaging in short selling.
SEBI also reinforced the prohibition on institutional investors participating in day trading, preventing them from squaring off transactions within the same trading day. The regulator specified that institutional transactions would be grossed at the custodians' level, and institutions must fulfill their obligations on a gross basis. Custodians, however, would continue settling deliveries on a net basis with stock exchanges.
This clarification from SEBI follows the recent scrutiny of short-sellers in the Adani-Hindenburg case by the Supreme Court of India. The Supreme Court has urged the government and SEBI to investigate potential violations of the law by the Hindenburg report on short selling and take appropriate action if required.
SEBI's notification also mentioned that securities traded in the Futures and Options (F&O) segment are eligible for short selling. The regulator reserved the right to periodically review the list of stocks eligible for short-selling transactions. Additionally, institutional investors are now mandated to disclose whether a transaction is a short sale at the time of placing an order, as directed by SEBI.
