Moneycontrol examines the various aspects of the development, implications of such a ban, and the historical context in the Indian market.
Moneycontrol examines the various aspects of the development, implications of such a ban, and the historical context in the Indian market.
Earlier this week, South Korea brought back a blanket ban on short-selling, ostensibly to stop institutional investors from hammering stock prices by borrowing shares and selling them. This has triggered a debate on social media with some X users suggesting that Sebi may, or should, consider a similar move ahead of the 2024 general elections.
How is short-selling done?
There are two ways. One is naked short-sales, where the seller does not own any shares, but sells them hoping to reverse (square off) the position before it is time to settle the trade. The other way is to borrow shares from someone for a fee, and then sell them in the market.
What exactly has South Korea’s market regulator done?
The Financial Supervisory Service (FSS) has prohibited new short-selling positions in shares on the Kospi 200 index and Kosdaq 150 index till the end of June 2024. It said the move was necessary to protect retail investors as many institutions were indulging in naked short-sales, which is illegal in Korea.
What are market experts in Korea saying?
Korean market experts have criticised the ban, saying there was no crisis to justify the move. The widely held view is that it is politically motivated because retail investors are a major force in Korea’s market and there is an election coming up next year. They have been seeking a ban on short-selling, according to media reports.
Will the Indian authorities consider such a move ahead elections?
Unlikely, going by past trends. Sebi did not ban short-selling at the peak of market in March 2020 during the Covid pandemic.
When do market regulators ban short-selling?
Only during periods of extreme market panic, like in 2001, 2008 and more recently in 2020.
Does short-selling ban help arrest market falls?
It provides a temporary support. The argument against a ban on short-selling is that it interferes with natural price discovery, and reduces liquidity. That apart, there is no credible evidence that curbs on short-selling in the past have helped stabilise stock prices, except briefly.
Can you give an example?
During the global financial crisis in September 2008, the US Securities and Exchange Commission (SEC) temporarily banned short-sales in nearly 1,000 financial stocks to halt the free fall in prices. The stock prices rebounded briefly but then continued to decline for the rest of the period even as the short-sale ban was in effect.
Did Sebi ban short-selling in 2008?
No.
Has Sebi ever banned short-selling?
Yes. In 2001, when it felt that some investors were deliberately hammering share prices through short-selling. But even at that time, the ban on short-sale was only on the down tick, and not on the uptick
What does that mean?
If a share fell from Rs 100 to Rs 99, a trader could not short sell because that would have the effect of further driving down prices. But if the share price rose from Rs 100 to Rs 101, a trader was free to short sell.
Hypothetically, were Sebi to ban short sales, would it be effective?
No. Because those looking to short sell could easily do that through the stock futures segment. Unlike in other major global markets, the practice of of borrowing and selling shares is not widespread in India. There is a stock lending and borrowing window, but the shares traded are a tiny fraction of the floating stock of the company.
Is it possible to ban short-selling in the stock futures segment?
An outright ban will not make sense. But the regulator can ensure there is no naked short-sales by getting brokers to ensure that only clients sell stock futures have an equivalent quantity of the shares. In other words, the regulator can limit activity in the futures segment to hedging trades.
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