SEBI curbs on short selling may work, but it may be a tad too late
During the week, the regulator stopped short of imposing a ban on short selling. Instead, it tweaked the MWPL limits and the margin requirements to discourage the creation of naked short positions. It may still work in curbing speculation but it may be a little too late to matter.
SEBI curbs on short selling
There were expectations that short selling may be banned but that is not the case. Remember, short selling in India is possible in multiple ways. For example, it is possible to sell shares for intraday, without having delivery. One can also borrow and sell shares but that is still not too popular in India. The most popular is the selling of futures on stocks without having an underlying cash market position. For example if you are holding RIL and sell RIL futures, it is a hedged position; otherwise it is naked short selling of futures. The intent is only to curb naked short selling.
The regulator has decided to address the issue of short selling at multiple levels. They have reduced the market wide position limits (MWPL) for most stocks by half so building of naked positions is automatically curbed. Also, for every stock, naked short positions will only be permitted to the extent of Rs.500 crore with normal margin. Once that limit is crossed, then the margin will be doubled. In addition, the margins on intraday selling of stocks have also been increased to reduce naked selling.
Are the curbs coming too late?
Before we get into whether the curbs will work or not; let us look at whether such short selling restrictions have come in too late to make a difference? Firstly, once the market is 36% down from the peak in a span of 45 trading sessions, you can be assured that most of the negative sentiments would be out of the market. That is almost like locking the stables after the horses have bolted. Now the only thing left is for the VIX to stabilize. Secondly, many of the sellers have been institutions and mutual and for them higher margins will hardly be relevant. The last phase in any market is driven by delivery selling and cutting of positions and these will be hardly impacted by these curbs.
Restrictions have rarely worked
Even as the regulator moves in to curb short selling, it must be remembered that such efforts have rarely paid off in the past. In 2001, India imposed a ban on short sales and that led to a 16% correction in the next 15 days post the ban. In 2008, more than 10 countries imposed a ban on short selling and most of these markets lost between 6-10% in the next fortnight. Even in 2020, there have been cases of ban on short selling with similar results. Of course, when a ban on short sales does not work, why will curbs work? Nearly 130 out of 144 stocks are under the Rs.500 crore MWPL limit. That will limit its efficacy!
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