Short selling (the sale of a security that the seller does not own) is a long-standing market practice, yet one which has often been the subject of considerable debate in securities markets worldwide. Indian regulators displayed their anxiety about short selling when the Indian stock markets experienced a steep fall in 2008. The Securities and Exchange Board of India (SEBI) promptly imposed a curb, by withdrawing its approval of overseas short selling by foreign institutional investors (FIIs), typically related to offshore derivative instruments (ODIs) they had issued. SEBI believed that such selling caused stocks to plummet in value.
However, a report in the Economic Times, dated 15 November, suggests that there is no link between ODI-induced short-sales overseas and the market fall in India. According to the report, a senior official in the Finance Ministry stated that only 192 million of the total 100 billion shares in 224 companies were lent abroad up until 9 October.
The senior official further stated that price movements in 10 of the biggest value losers in the domestic market bore no relation to overseas lending activity in their scrips.
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The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.
