The new short-selling mechanism, the so-called stock lending-borrowing scheme (SLBS) that came into force last week, is likely to take a while to catch on. There are several holes in the current structure.
The SLBS received less attention than it would in most weeks. First, there was the settlement and second, there are the stream of FY 2007-08 results. Third, institutional investors are currently focused on the modalities of the new cash-margining system.
But the return of a short-selling lending borrowing mechanism has the potential to alter market-dynamics. For several years, in fact ever since the excellent ALBM (automated lending-borrowing mechanism) was shut down, the market has been inured to the lack of a shorting mechanism outside the F&O segment.
The SLBS doesn't change that immediately since it's currently F&O-focused. Within F&O itself, the absence of stock delivery on futures positions can lead to large arbitrage opportunities when there is heavy shorting.
In order to arbitrage a higher cash-price to lower futures-price situation, the trader must go long futures (no problem) and short in cash (major problem except with a prior stock-holding). The SLBS may help if its costs are lower than possible arbitrage profits.
The cash margin for institutional investors(IIs) is unusual and the official explanation is that it's intended to provide a level playing field vis-a-vis retail investors. Let me confess I'm a cynic. It's more likely to have been imposed due to some visceral fear of (II) defaults.
The reasons don't matter