PR No.171/2005


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 –, 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 operationalisation of the close-out procedure for handling settlement shortages and dispense of the auction mechanism, as has been approved by SEBI earlier.






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 modalities for execution, risk management and settlement of the securities lending and borrowing transactions. This will also include the manner in which the securities borrowed, will be returned to the lender and the guarantee provided by the CC/CH by acting as the central counter party.


xv.   The agreements between the various parties to a lending/borrowing transaction should be formalized on the lines of the model agreements provided by the Pan-Asian Securities Lender’s Association (PASLA). 


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 or by post so as to reach the following address by Friday, the 20th January, 2006.


Shri V.S. Sundaresan

General Manager

Securities and Exchange Board of India

29th Floor, World Trade Centre - 1

Cuffe Parade

Mumbai – 400005



December 29, 2005