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PR No.171/2005 SEBI SEEKS PUBLIC COMMENTS ON
THE DISCUSSION PAPER ON SHORT SELLING AND SECURITIES LENDING AND BORROWING 1.
SEBI
has, today, released a discussion paper prepared by its Secondary Market
Advisory Committee (SMAC), on the issue of short selling and securities lending
and borrowing. The discussion paper is available on SEBI’s
website – www.sebi.gov.in, for
public comments. This discussion paper reviews the present policy on short
selling and securities lending and borrowing in the Indian Securities Market,
examines the practices followed by securities market regulators in other
countries, assesses the relevant issues of regulatory concern in the context of
market confidence and investor protection and recommends a regulatory framework
for short selling and securities lending and borrowing in the Indian Securities
Market. 2.
Short
selling – the sale of a security that the seller does not own – is one of the
long-standing market practices, which has often been a subject of considerable
debate and divergent views in most of the securities markets across the world. Short selling has been
recognised as a legitimate investment activity by regulators of many securities
markets across the world, which also have an active
market for equity derivatives, including stock futures. Another feature that is
common to most securities markets is a vibrant market for lending and borrowing
of securities which not only compliments short selling in securities but also
enables the investors to earn returns on their idle securities. 3.
The
major recommendations of the SMAC on the subject are as under : i.
In the
Indian securities market, “short selling” may be defined as “selling a stock which
the seller does not own at the time of trade”. ii.
The
present regulatory restrictions which allow only the retail investors to short
sell should be removed to enable a level playing field for all classes of
investors. In other words, the institutional investors who are currently
prohibited by the respective regulations should be permitted to short sell. iii.
Naked
short sales would not be permitted. All
investors would be required to mandatorily honour
their obligation of delivering the securities at the time of settlement. No
institutional investor shall be allowed to do day-trading i.e. square off their
transactions intra-day. All transactions would be grossed for institutional
investors at the custodians’ level, and the institutions would be required to
fulfil their obligations on a gross basis. The custodians, however, would continue to settle their deliveries on a
net basis with the stock exchanges. iv.
The
stock exchanges should frame a uniform penalty structure and take appropriate
action against the brokers for failure to deliver securities at the time of
settlement which would act as a sufficient deterrent against naked short
selling. v.
To
begin with, short selling may be permitted only in those stocks in which
derivative products are available. vi.
The institutional investors would be obligated to
disclose upfront at the time of placement of order whether the transaction is a
short sale and demonstrate their ability to borrow to the satisfaction of the
broker. However, the retail investors would be permitted to make a similar
disclosure before the end of the trading hours on the transaction day. vii.
All
stock brokers should be mandated to maintain sufficient documentation regarding
the ability of their clients to borrow and deliver the securities at the time
of settlement so as to ensure sound audit trail. viii. 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 will then consolidate such
information and disseminate the same on their websites for the information of
the public to begin with, only after the close of market hours of the next
trading day. ix.
All
the transactions of institutional investors shall be margined similar to the
transactions executed by the retail investors. x.
The introduction of full-fledged securities lending
and borrowing scheme should be simultaneous with the introduction of short
selling by the institutional investors. Accordingly, the scope of the existing
securities lending and borrowing scheme must be widened into a full-fledged
lending and borrowing scheme enabling participation of all classes of
investors, including retail investors. xi.
The
clearing corporation/house (CC/CH) of the exchanges should act as Approved
Intermediaries (AIs) for the limited purpose of
lending/borrowing securities for meeting settlement shortages and the stock
exchanges should go ahead with the operation xii.
Apart
from the lending and borrowing of securities by CC/CH for settlement shortages,
a full fledged securities lending and borrowing scheme should be introduced by
SEBI/Stock exchanges through the AIs route. In the
first stage, only custodians, Banks and FIs may be
registered as AIs for the purpose of lending and
borrowing of securities. xiii. The lending and borrowing
transactions shall be executed on the automated, screen-based platform to be
provided by the stock exchanges. xiv. The stock exchanges should
jointly work out and put in place uniform mod xv.
The agreements between the various parties to a
lending/borrowing transaction should be form xvi. The lending and borrowing transactions
executed under the aforesaid regulatory framework shall not be treated as “transfer
of securities” and would, therefore, be considered as eligible for exemption
under the Income Tax Act. 4.
Comments,
if any, on the aforesaid discussion paper may be sent by email to shortsales-slb@sebi.gov.in or by post so as to reach the following address
by Shri V.S. Sundaresan
General Manager Securities and Exchange Board of 29th Floor, World Trade Centre - 1 Cuffe Parade Mumbai – 400005 Mumbai |
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