Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

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Fri, 30 Dec 2005

Short selling in India

The Securities and Exchange Board of India has put out a discussion paper recommending that all market participants should be permitted to short sell shares and that a transparent system of securities lending should be introduced. These are recommendation that I enthusiastically agree with.

However, I see no reason why short selling should be restricted to stocks on which derivative contracts are permitted. Short selling should be seen as a defence against market manipulation and therefore a measure to improve market integrity. It is therefore more necessary in stocks that are prone to market manipulation. On the other hand, derivative contracts are typcially not permitted on precisely the stocks on stocks that are prone to market manipulation. The proposal is therefore best seen as a convenient resting point on the path to allowing short selling in all stocks.

The other critical issue is of regulatory risk that retail short sellers have faced in the past. Though short selling by individuals has been permissible most of the time, SEBI has on certain occasions banned short selling peremptorily in response to market fluctuations. An assurance that this would not happen again would be welcome. Any future restriction on short selling should only be after due process of consultation and with a reasonable transition arrangement

Posted at 14:16 on Fri, 30 Dec 2005     View/Post Comments (6)     permanent link