Short Selling is Here

We had carried an earlier post commenting on the proposed introduction of short selling on the Indian stock exchanges and discussing the broad implications of that move.

Short selling is now being implemented with effect from Monday, April 21, 2008, and the Bombay Stock Exchange as well as the National Stock Exchange have installed their securities lending and borrowing (SLB) mechanisms in preparation for this. The Economic Times has a report.

However, as the Business Standard notes, certain key players in the market such as banks and insurance companies may be unable to participate in short sales unless there is a change in law governing them. Here are some details:

“According to sources close to the development, banks are not allowed to short-sell equities.

“According to Section 6 of the Banking Regulation Act and the Securities Contract Regulation Act, banks are not allowed to short-sell. It will require an amendment to the Act if banks were to short-sell and RBI (the Reserve Bank of India) is not in favour of this,” said a source.

Even for lending and borrowing of equities to facilitate delivery-based short-selling, banks will require a separate provision from RBI.

There has to be a cap within the overall exposure to the equity market to restrict banks’ exposure to lending and borrowing of securities.

The Insurance Regulatory and Development Authority (Irda) too is not in favour of insurance companies short-selling equities.

Irda is of the view that insurance companies cannot short-sell in the equity market as it amounts to speculation and the Act does not permit speculation with policyholders’ money.

However, it is in the process of framing guidelines for insurance companies to engage in lending and borrowing of stocks to earn on the idle portfolio.”

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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