The Hindu Business Line : Short selling: Institutions stand to gain

The Indian stock market regulator Securities and Exchanges Board of India (SEBI) has granted the permission to all classes of investors to short sell in the Indian stock markets. This move is not likely to be very beneficial to retail investors, though institutional investors stand to gain to some extent. SEBI has allowed short selling in only those securities that are traded in the futures and options segment, in the initial period. There are also going to be standard contract sizes.

Retail investors already have the option of taking a negative call on a stock and going short by selling futures, buying put options or writing call options. The success of this device would depend on the interest that the stock lending and borrowing (SLB) entities charge. Unless the initial outlay and costper transaction are significantly lower, small investors may prefer ’shorting’ a stock in the F&O segment rather than short-sell in cash. 7-day tenure Another reason why retail investors may not prefer selling short in the cash segment through the new route is because the tenure of the contracts for short-selling is just seven days. This takes away the flexibility that the longer duration contracts in the F&O segment allows. However, institutional investors such as arbitrage funds stand to gain by this move. Previously, they could exploit the price differential between cash and derivatives only by buying in cash and selling the futures or options. Now they can also sell in cash and buy futures and options. Lending holdings Mutual funds, banks and financial institutions that hold shares they do not wish to sell in the near future can also earn additional returns by lending their holdings under the stock lending and borrowing scheme.

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