CBDT paves way for short selling

The Central Board of Direct Taxes (CBDT) has clarified that lending and borrowing of shares for short selling in equities will not attract capital gains tax.

With this clarification one of the important hurdles in the way of permitting short selling on the stock exchanges has been cleared.

Exchanges' infrastructure for this is already in place and now only RBI's clarification is awaited for allowing the lending and borrowing by FIIs.

According to the sources, the short selling of securities will also not attract securities transaction tax (STT) as is prevalent in case of physical sale and purchase of equity shares.

This is because securities offered under lending and borrowing of securities does not amount to transfer of shares and hence it is exempt from capital gains tax.

Short selling is backed by a scheme of lending and borrowing of shares which will help in settlement of transactions through physical delivery. This is otherwise known as covered short sale.

The government and the Securities and Exchange Board of India have already ratified the scheme. Exchanges have also put in place the infrastructure to start the system.

Sources added that exemption of STT on short selling will not dissuade investors from the cash market since short selling is capped to individual limits in cash markets .

Sources added that clearances from the RBI is holding it back. This is because Sebi proposes to extend the scheme to both Indian and foreign institutional investors.

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

The reservation of RBI stems from the fact that no foreign entity can leverage on its existing position in the market. However if a FII lends its shares under the lending and borrowing scheme , it will be an earning for the FII which is negated by the existing regulations.

Meanwhile, the Sebi has already finalised the scheme under which short selling in individual company scrip will be capped at 10 per cent of the free float of shares of a company. The free float of a listed security is the proportion of shares available for purchase in the market by investors.