Securities and Exchange Board of India (Sebi) has amended rules governing mutual funds to allow domestic fund houses to engage in short-selling of securities and stock lending & borrowing.The new rules, which will come into effect after Sebi announces detailed framework on the new capital market instruments, however, prohibit mutual funds from naked short selling - meaning the fund houses can buy and sell securities only on the basis of deliveries.A Sebi notification dated October 31, which was put on its website this evening, also brought exchange traded funds in the ambit of reduced expenses and investment and advisory fees stipulated by the regulator recently.Sebi said the total expenses of the scheme, including the investment and advisory fees for an index fund scheme, should not exceed 1.5% of the weekly average net assets. This is a major revision from the existing 2.25%.On derivatives transactions, Sebi barred mutual funds from carry-forward transactions "provided that mutual funds may enter into derivatives transactions in a recognised stock exchange, subject to the framework specified by the board (Sebi)."Short selling is the sale of a security that the seller does not own at the time of trade. This is currently not allowed for institutional investors, including FIIs, domestic financial institutions and mutual funds. Union Budget for 2007 had proposed the introduction of short selling for institutional investors.Dealers said the Sebi notification on mutual funds will not have a major bearing on the market as the investment strategies of all the existing schemes do not allow them to engage in short-selling. "Mutual funds will be allowed to come up with new and innovative schemes once the new rule come into place," Rajiv Anand, head of investment at Stanchart Mutual Fund, said.Sources said the proposal to allow short selling (and stock lending & borrowing) was awaiting clearance from the Reserve Bank of India.Sebi chairman M Damodaran had said that all the stocks currently available in the futures & options (F&O) trading will become eligible for the proposed short-selling of stocks in the first phase.
