The Hindu Business Line : Intra-day short sales to improve liquidity in securities market

THE proposal to permit intra-day short sales was essentially to benefit some of the financial institutions for participating in the securities market and improving the liquidity.

Short sales are sales of securities that the seller does not own but needs to borrow to deliver to the buyer. Currently, the negotiated dealing system (NDS) is exclusively for banks and primarily dealers. FIs such as insurance companies and mutual funds are not participating in the system at present. Detailed guidelines are yet to be issued by the RBI.

However, traders said that the mechanism would allow these institutions also to participate indirectly in the NDS platform or online dealing system. The mechanism would allow the banks or the SGL account holders to sell the securities on behalf of the clients and later take delivery of the securities during the day from their respective customers.

Mr V. Ravikumar, Senior Director - Treasury of the Infrastructure Development Company Ltdsaid, "The greatest beneficiaries of short sales when introduced would be the financial institutions."

This is the first stage of the proposed relaxation in the NDS market and is intended to help price discovery. A technical committee of the RBI had proposed in July 2005 for the introduction of short sales on a three-stage basis, intra-day short sales, short selling on a net duration basis, (the participants can short sell any security, subject to the delivery being invariably insisted upon and that is no net short duration of the portfolio at any point of time), short selling with the open position fixed at 1 per cent of the obligations

But bankers said that the benefits of short selling would allow for greater liquidity in the markets. This was especially for primary dealers. At present, primary dealers are allowed to maintain only long positions, essentially deal in securities they have. This exposed them to major interest rate risks. Short selling is essentially seen as a risk management tool, traders said.

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