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SEBI allows short selling for FIs, FIIs and MFs

Short selling of stocks in the spot market will now become a reality for institutions. In a significant move, capital market regulator Sebi on Thursday (March 22) authorised FIIs, mutual funds and other institutions to short sell stocks—a transaction where an investor can sell stocks without owning them.

Till date, institutions took positions in the futures and options (F&O) market to go short. Once the new guidelines are in place, they will be in a position to short sell even in the spot or cash market. While this may deepen the market and improve liquidity, a lot will depend on the mechanism through which the investor going short borrows the shares to meet its commitment.

Just like an investor borrows money from a bank to buy stock, it should be in a position to borrow stocks from other entities to sell in the market. Understandably, there will be costs of borrowing like margins and interest charges. The system will take off only if such lending and borrowing mechanism is easy, and the cost is affordable.

Currently, only the retail investor can do an intra-day short selling in the spot market. However, an institution cannot sell shares unless it owns the stock. So, what the Sebi move allows is to borrow the stock (from a depository), sell it in the market and buy it back before the market closes to return to the lender. Once the borrowing mechanism is implemented, the institution can carry forward this short position as long as regulation permits.

Short selling will enable institutions to go short on stocks that are not included in the F&O list. Further, they will be in a position to gain from transactions like reverse arbitrage (when the spot rate is more than futures price).

Though the devil always lies in the details, market participants feel that this is a move in the right direction. “This will enable FIIs and domestic institutions to hedge their risks. It will also help contain volatility and create a deeper market,” said DSP Merrill Lynch managing director Andrew Holland.

At a board meeting held in Mumbai, Sebi also announced measures which would enable easier listing of PSUs, lower transaction cost for M&As and IPOs, and introduce mandatory grading of IPOs.

Sebi has also directed realty firms to go ahead with tighter disclosure norms for IPOs. Realty firms raising money from the market will now have to spell out the ownership of the land bank they show to charge a higher IPO premium.

Further, Sebi has made PAN listing for preferential allotment a must. Companies can now send abridged annual reports while summons can be served via e-mail. Sebi has also capped ad valorem fees, which will cut transaction costs on large deals and IPOs. More flexibility for minimum promoter holding pre-issue as well as post-issue for PSUs and statutory bodies will make it easier for them to list. (TNN).

Source : Timesnow

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