F&O quotient seen as key to short sales

The market expects short sales to be restricted, initially, to stocks with huge derivatives volumes.

This follows the Securities and Exchange Board of India's (Sebi) intention of allowing short selling by institutional investors.

Further, they expect the regulator to specify that there will not be naked short selling, which means investors will have to honour their obligation of delivering the securities at the time of settlement.

Similarly, the proposed stock lending and borrowing programme, which is also expected to be introduced simultaneously with short selling, would also be restricted to the shares in the derivatives segment.

"The introduction of short selling, will, I hope, bring an end to the comments by foreign brokerage houses on excessive valuation in Indian markets. If you think, the valuations are excessive, then you go short. Genuine short selling will make our markets more healthy," said Alex K Mathews, research head of Geojit Financial Services.

"Lot of shares are going up to dizzying highs. Short selling will make share prices to remain close their intrinsic value."

Adds Jayant R Pai, vice-president of Parag Parikh Financial Advisory Services: "Short selling should be allowed in scrips that are very liquid and those that are in the F&O category. It (shorting) will act as a perfect hedging tool for institutional investors."

But Pai said Sebi should also evolve a system whereby it allowed investors to exit a counter when scrip hit upper circuit for several sessions at a stretch. "Right now, the auction route is the only way out."

Since a vibrant securities lending and borrowing scheme is considered a necessary requirement to provide sufficient impetus for short selling, analysts said Sebi would also have to decide on which are the institutions that would qualify to offer such services.

It is expected that in the first stage only banks and financial institutions would be allowed to provide stock lending and borrowing programme. The stock lending and borrowing services is expected to help investors earn returns on their idle securities.

"It is wrong to assume that short selling would make the markets vulnerable to steep falls. Actually, it helps the market to take in both the points of view - bullish and bearish. We are now allowing only the first point of view to take a call on our markets," said a dealer with another brokerage house.

As per proposed short selling plan, institutional investors would be obligated to disclose upfront at the time of placement of order whether the transaction is a short sale and demonstrate their ability to borrow to the satisfaction of the broker.

As naked short selling is expected to be prohibited, it is expected that no institutional investors would be allowed to square off transactions intra-day.