Timing key to short sales: Sebi

The Securities and Exchange Board of India (Sebi) fears the introduction of short selling now would lead to more choppiness in the market, which had seen bouts of volatility in recent weeks amid the turmoil in the US subprime mortgage market.

The markets regulator would, however, introduce short selling in this financial year itself, chairman M Damodaran said.

"The markets are choppy. Some of the other regulators were of the opinion that introduction of short selling would make it more choppy. Timing was the issue for introducing short selling. But it would be introduced in this financial year," Damodaran said in an interview.

Short selling - the sale of a security that the seller does not own - is not allowed for institutional investors, including foreign institutional investors (FIIs), domestic institutions and mutual funds.

The Union Budget for 2007 had proposed the introduction of short selling for institutional investors. The board of Sebi had also paved the way for short selling.

Earlier at a press meet, the Sebi chief had said that all stocks, which were available for derivatives trading, would become eligible for the proposed short selling in the first phase.

"It is a good starting point to allow short selling in those scrips that are in the F&O segment. At a later stage, short selling would be allowed in more stocks. The new system of stock lending and borrowing mechanism would be through the stock exchange," he said.

At present, only retail investors are allowed to short sell. Short selling by institutions would require a comprehensive system of lending and borrowing shares, which was believed to have been put in place by the stock exchanges.

According to the present guidelines, institutional investors ""FIIs, mutual funds, banks, insurance companies "" are mandatorily required to settle on the basis of deliveries of securities owned and held by them.

Under the Foreign Exchange Management Act (FEMA), FIIs are not allowed to open accounts in India on their own which was necessary for lending and borrowing securities and participate in short selling.

The Central Board of Direct Taxes had clarified that lending and borrowing of shares for short selling in equities would not attract capital gains tax.