SEBI updates short-selling framework with two provisions, aligns with 2007 circular

The Securities and Exchange Board of India (Sebi) has added two more conditions to framework for short selling.

Institutional investors have been asked to disclose upfront when they are placing the order whether the transaction is a short sale, according to a circular issued by market regulator SEBI on January 5.

Retail investors have been permitted till the end of the trading day to make the same declaration.

Brokers and stock exchanges have been asked to collate this information and make it available to the public through their websites. With these latest updates, the framework for short-selling given in the Master Circular issued to Stock Exchanges and Clearing Corporations in October 2023 has been aligned with a framework outlined in a much-earlier 2007 circular.

This comes soon after the Supreme Court's judgement on petitions seeking a court-monitored investigation into alleged manipulation in Adani Group stocks, following the Hindenburg report. The Apex Court, while refusing this plea, asked Sebi to investigate whether Indian investors suffered losses from the research agency's actions or if there were short-positions taken in the market that went against the law.

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The first of the updated provisions reads: "The institutional investors shall disclose upfront at the time of placement of order whether the transaction is a short sale. However, retail investors would be permitted to make a similar disclosure by the end of the trading hours on the transaction day."

The second reads: "The brokers shall be mandated to collect the details on scrip-wise short sell positions, collate the data and upload it to the stock exchanges before the commencement of trading on the following trading day. The stock exchanges shall then consolidate such information and disseminate the same on their websites for the information of the public every week. The frequency of such disclosure may be reviewed from time to time with the approval of SEBI."

Under the existing framework, all classes of investors are allowed to short sell but none are allowed to take naked short trades. Also, there are additional restrictions placed on trades institutional investors can take.

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The framework states: "No institutional investor shall be allowed to do day trading i.e., square-off their transactions intra-day. In other words, all transactions would be grossed for institutional investors at the custodians’ level and the institutions would be required to fulfill their obligations on a gross basis. The custodians, however, would continue to settle their deliveries on a net basis with the stock exchanges."