The data put out by the market regulator, Securities and Exchange Board of India (Sebi), may not reveal the true nature of the amount of short-sales in the Indian market, say market participants. The actual amount of short-sales in the Indian market as a result of offshore short-selling could be around $ 2 billion or close to a fifth of the total selling by foreign institutional investors (FIIs) in 2008.
Sources indicate that of the total FIIs selling, short-sales could be as much as 12 to 13 per cent. In 2008, FIIs have sold around $ 11 billion worth of equities, bringing down the Indian markets and pushing major frontline stocks to historical lows.
So far, only 17 FIIs have reported the data but there are, in all, over 250 FIIs registered with the Sebi. Of this, around 50 are brokers registered as FIIs, who are active in the lending and borrowing business. The current data covers only 33 per cent of the FIIs that actually issue P-notes and facilitate offshore short-selling. The leading FIIs who are active in this business are Goldman Sachs, UBS, Morgan Stanley, Deutsche Bank, JP Morgan and Merrill Lynch, according to market sources.
What happens, in offshore short-selling, is this: FIIs, who issue P-notes to their clients, lend stocks purchased by a party A to a party B that wants to take a short position in the Indian market. They do this by writing derivative contracts to both parties A and B and in the process, the stock that they had bought for party A and kept in their custody is sold on behalf of party B. This short-selling has led to Indian markets dropping to the levels reached only in 2006. The benchmark index Sensex closed at 9,975.35 points on Friday. It has also led to the rupee depreciating at a breakneck pace triggered by a continuous outflow of dollars. The rupee has weakened by close to 24 per cent since the start of 2008.
Further,the data published is of only 42 stocks out of which 38 are in the futures and options (F&O) segment — there are 266 stocks in F&O, which indicates that the short-sales could be much higher than Rs 500 crore. On these 3 days — October 10, 13 and 14 — FIIs sold equities worth Rs 4,014 crore, of which the short-sales are around Rs 500 crore, which is around 12.5 per cent of the total FII sales on those 3 days. However, the data makes no mention of prominent stocks such as real estate major, DLF.
The open interest data in single stock futures further bears this out.
Brokers feel that if the estimated $ 2 billion worth of shorts in the Indian market were to get covered, it would lend some semblance of stability to the Indian markets, and the rupee. If the market stabilises, then even the genuine sellers who are selling desperately today will stop thinking that bottom has been reached.
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Market experts say that the regulator should make delivery-based settlement compulsory in derivative marker which is followed by other world markets. “If there is delivery bsed settlement then short sellers will have to borrow shares to give delivery and the markets would get some cushion.
“Currently, the cash based settlement in our markets is exploited by short sellers who are building huge intra-day positions and covering it up at the end,” said Deven Choksey, managing director K R Choksey Shares and Securities.
While the market regulator has asked for data of outstanding positions as on October 9,in a footnote to the data on Friday, Sebi's official stance, till recently, was that there is no shorting happening in the Indian markets since the stock lending and borrowing mechanism of the regulator had witnessed little action since it was started in April 2008.