India To Let Institutional Investors Go Short

MUMBAI - India’s securities regulator has opened the door for institutional investors, including foreigners, to sell stocks short.

Short selling, a bet that a stock will decline in price, is currently only allowed for retail investors. The Securities and Exchange Board of India said it would put in place a securities lending and borrowing scheme for institutional investors. It did not say when it would implement the changes.

With Indian stocks experiencing a torrid rise amid strong foreign fund inflows, short-selling should provide more balance to the market.

However, institutional investors will not be allowed to engage in short selling on an intra-day basis.

“This is a move along expected lines, and it makes for a better market. There is unlikely to be an impact on inflows--foreign or domestic--but it will make trading more efficient. Short selling should be part of the market,” said Shriram Iyer, head of research at Edelweiss Capital.

Futures and options will also be eligible for short selling. Institutional investors will need to disclose when they place orders whether a transaction is a short sale. But retail investors can make the disclosure at the end of trading hours on a transaction day.

The stock exchanges will issue guidelines on short selling and put in place systems to operationalize it. On Friday, the Bombay Stock Exchange and the National Stock Exchange were closed for Eid.

The Bombay Stock Exchange's benchmark Sensitive Index has risen over 40% this year on record foreign inflows. In October, the market regulator moved to restrict investment by foreigners, banning the sale of so-called participatory notes to unregulated entities.