The Hindu Business Line : Short-selling does have a rationale

In the cash segment there is no level-playing field for buyers and sellers. There is no stopping one from borrowing money and investing in the cash segment which does give one an advantage over the sellers.

S. Murlidharan

The SEBI (Securities and Exchange Board of India) move to permit stock markets to resume short selling by institutional investors as well has raised eyebrows in some quarters.

Is it playing with fire? Is it inviting trouble? Questions in similar vein are being asked.

A risky move?

The market regulator feels that the step would deepen and enlarge the market. Sceptics and detractors however feel that the F&O segment already serves these purposes, especially the options market that allows one to play for considerably bigger stakes than would be permitted by the cash segment with the same amount of money at disposal.

After all from the options writer, one can buy both the option to buy and sell shares. When the F&O segment provides the level-playing field for both bulls and bears, where was the need for a special trading platform for sellers in the cash segment, aver those opposed to it.

Neutralising the advantage

But a deeper reflection would show that, as it is, in the cash segment there is no level-playing field for buyers and sellers. There is no stopping one from borrowing money and investing in the cash segment which does give one an advantage over the sellers.

It is only to neutralise this advantage that short selling in the cash segment is necessary. For good measure, SEBI has not permitted naked short selling.

After having short sold, one has to borrow shares from those prepared to lend them for a consideration to honour his commitment. This is a good move, the one designed to check unbridled short sales or bear hammering when the chips, scrips and sentiments are down in the stock market.

Fallacious belief

There is somehow a stigma associated with heightened selling activity in the share market. This perception flows from the fallacious belief that share market creates wealth — whereas the truth is it only transfers wealth from one person to another — and therefore those perceived to be spoilsports should be kept away.

While an ever-booming Sensex is music to a gung-ho economist’s and the Finance Minister’s ears, allowing sellers too to have their say would have the effect of bringing about sobriety in the market besides insulating it from sudden cataclysmic upheavals.

An informed seller too needs to let off steam just as an informed buyer must be allowed to take a position proactively. Such a level-playing field prevents the market from staying on a bullish course for an unrealistically long period of time blissfully, if ignorantly, unaware of the brewing trouble.

When something is suppressed for long, the outcome is catastrophic when the lids are lifted, which is why allowing of level-playing field to both bulls and bears is of paramount importance.

(The author is a Delhi-based chartered accountant.)

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