'SEBI's circular on short selling will have mixed effect on markets,' say traders on social media

Traders were divided on social media on Friday after market regulator Securities and Exchange Board of India (SEBI) said in a circular that institutional investors will have to disclose upfront whether a transaction in Indian securities involves short selling, while retail investors will have to do so by the end of the day when a trade is made.

Existing Indian rules do not allow so-called naked short trades, where an investor sells short without having already borrowed or located the shares or securities to be sold.

"The new SEBI short selling circular is a nothing-burger. It simply says: Oh you can borrow and short sell stocks. But if you do, you must reveal that you did so when you trade. (For retail investors, at EOD, for institutions, before trading). Exchanges will display aggregate short interest on each stock every day.

"This probably stems from the Supreme Court Adani case, where SEBI said they will have appropriate disclosures. These are appropriate, of course, and will cause "short squeezes" if too many people borrow and short a stock. I don't see this affecting 99.99% of our lives. Nothing has changed. Naked short selling was never allowed. You had to settle with delivery at end of day with all open positions. There are big penalties. Institutions such as Mutual funds, AIF, Insurance cos etc. can't do intraday anyhow," said CapitalMind's Deepak Shenoy on X platform (formerly Twitter). 

"This new rule will have mixed effect on the market. 
- Retail can know a stock thats heavily shorted by the institutional players.
- Reduction in manipulative activities to stock price.
- Who knows with population and demat penetration potential like India, we could force a short seller squeeze on institutional players," quipped an X user. 

"I have always believed in tracking institutional data before initiating new trades. As Per my study, the new short selling framework (Disclosure at EOD) applied by SEBI will definitely give us an edge," said another X user. 

"In my opinion, this is a good first step to eventually allow all stocks to be short sell in Indian financial markets. A lot of the euphoria and price manipulation in Small and micro space is due to lack of short selling in this segment. The fear is just not there," said Amit Kumar Gupta, a SEBI registered research analyst. 

"SEBI's move comes after the Supreme Court asked the regulator to examine whether investors suffered losses and whether any short-positions were created in breach of the law ahead of a Hindenburg Research report last year which alleged that India's Adani Group had broken stock market rules. These allegations are being investigated by SEBI. The Adani Group has denied any wrongdoing.

"The latest SEBI short selling regulations are undoubtedly a double-edged sword. While their stated aim of curbing market manipulation and enhancing price discovery is laudable, their potential to dampen market efficiency shouldn't be ignored. Limiting short selling, particularly naked shorting, can impede liquidity, especially in smaller stocks. This could make the market less responsive to fundamental shifts, potentially harming price discovery. However, let's not forget the rationale behind SEBI's move. The recent memory of volatile episodes, potentially exacerbated by manipulative short selling, likely played a role. Additionally, a concern for retail investor protection might have factored in, as short selling can be complex and easily misunderstood," said Sonam Srivastava, Founder and Fund Manager at Wright Research.