Sanjay Bhatia, Director, JM Financial Services feels that for short selling to pickup there need to be excesses in the market. He believes that there has to be a mechanism which is going to provide liquidity on the borrowing and the lending side.  

Excerpts from CNBC-TV18's exclusive interview with Sanjay Bhatia:

Q: What's your own sense of how trade panned out yesterday on these new parameters and do you think that it has come a little too early and by when do you think it will pickup if all things are pretty much in sync at this point?

A: I think for any product to really pickup in the market, it has its own lifespan and for short selling to really pickup there need to be excesses in the market. As of now, the market confidence is pretty low and we are not seeing too much of excesses in the market. Valuations seems to be in sync, so anything for people to come forward to do - a short selling back buy or lending & borrowing, needs to take a little time and this short selling as a product has been accepted by most of the secondary market countries who have a very robust secondary market offerings where short selling has been a legitimate product which has been accepted by them which also has the derivative products and also lending platform provided to them and provided this short selling has to take place.

There has to be a mechanism which is going to provide them liquidity on the borrowing and the lending side and since not many people are really aware of how its going to work. It could be initial take time for people to come up the curve, understand the process because the penalty of not giving the delivery which they have lent can be huge for people who are coming on lending and borrowing and therefore people are taking their sweet time to come into the market and really check this out.
   
Q: For the benefit of viewers can you briefly explain the product again and suggest what can be tweaked to ensure that volumes pickup?

A: Firstly, short selling will come into the market in case people at last see excesses in the market but to really take that short selling to take place in the market, they need to borrow from lending and borrowing a day ahead or in the morning session between 10:00-11:00 am to actively participate on the day of borrowing taking place.

Let us take an example, if it is a Monday morning and market for lending and borrowing which is 10:00-11:00 am, one needs to borrow the stocks within that window to participate on the short sell on Monday itself and in case one is not able to do that then there is no option for one to go and do the borrowing the next day. So what I am trying to say highlight is that any short selling to take place, there has to be an active borrowing taking place in the morning session itself for it to be effective the same day.  

Q: There is one thought that talks about the fact that this may actually prevent some sort of market manipulation - may keep the spot and futures price on some of these stocks that are on the derivate side pretty much in sync and lead to some fair discovery of prices that are traded. Do you share that view at this point of time or do you think that is still too early to make that call?

A: It is too early to make that call but it is a step in the right direction because if we see a few days back, there was one pharma counter, which saw a huge amount of stock future arbitrage. In that case we were having this window in place where one could have had borrowed this stock and could have sold in the market.

These kinds of excesses could have been checked and I think going forward at least there is window which should be available for people to really come forward and make sure that the price recovery mechanism is fair and there is an opportunity for people to really participate.

So going ahead, there could be a lot of volumes that could pickup and these excesses and fair discovery of price for a particular stock could be a reality.   

Q4: We understand that banks and insurance companies are as yet not participating in lending and borrowing stock, more in terms of lending stocks since they have a lot. Will that be a major bottleneck that will prevent the robust growth of this market?

A: They would be the perennial source of getting the stocks on the lending side because basically their mandate is to hold the stock for a long-term perspective and their ideal stock could really earn for them which is lying in their in their depositories. So it is definitely important that large players with a perspective of holding a stock for the long-term come in big way to participate in this scheme so that people get benefit of the large holding that they carry in their portfolio.

Q5: If I am looking to short sell and I go to Stock Holding Corporation of India or to a particular lender and suppose that stock price does not fall but actually goes up and I have taken that stock against some collateral and the value of that also in essence depreciates. So what essentially do I do? Do I go back and buyback those shares from the market to pay back the lender or how exactly does the process work on that front?

A: The regulators have been very fair in initially introducing very high amount of margins both on the borrowing and the lending side, so in case I am a borrower of a stock on the borrowing and lending side, then I need to pay the full amount of money that I need to borrow. Over and above there are 4-5 margins that the markets are going to impose or the exchanges are going to impose that could be Value at Risk (VaR) Margin, extreme loss margin, mark to market margins and fixed price margin on the fee and also on the fixed price margin with regard to the lending price.

These are the five margins which entail or which covers the back of the regulators or the exchanges that in case there is a extreme loss that happens on account of a buyer borrowing the securities, is not able to pay up in an extreme case of prices going up, have sufficient amount of collateral to really cover their backs in case he is not able to meet his commitment.

Coming to the other question, how is he going to meet his liability when he has gone short and things have gone against him? He needs to go and cover up in the market possibly on a T+5 day to deliver the stock on a T+8 on borrowing and lending side and in case he wants to roll that position then he has to do it on a T+6 day lending and borrowing side.