Anushruti Singh
There is a sudden surge in alleged “naked short selling” among microcap stocks that has enraged several management teams to the point of threatening legal action. Unanimously according to market expert, naked short selling is not permitted in the Indian securities market and all investors would be required to mandatorily honour their obligation of delivering the securities at the time of settlement.
What is naked short selling?
Investopedia defines naked short selling as an illegal activity. “Naked shorting is the illegal practise of selling shares that have not been confirmed to exist. Normally, before selling a stock short, traders must borrow it or determine that it can be borrowed. So naked shorting refers to short pressure on a stock that is greater than the market’s tradable shares” defines investopedia.
The US, Secuties and Exchange Commission, made short selling illegal following the 2008-09 financial crisis, while naked shorting continues to occur due to rule gaps and differences between paper and electronic trading systems.
Now what SEBI says
While according to SEBI norms, short selling shall be defined as selling a stock which the seller does not own at the time of trade. All classes of investors, viz., retail and institutional investors, shall be permitted to short sell.
The securities traded in the F & O segment shall be eligible for short selling. SEBI may review the list of stocks that are eligible for short selling transactions from time to time.
The institutional investors shall disclose upfront at the time of placement of order whether the transaction is a short sale. However, retail investors would be permitted to make a similar disclosure by the end of the trading hours on the transaction day.
Also Read: Union Budget FY23: Indian insurance sector wants zero-rate GST to increase penetration
The brokers shall be mandated to collect the details on scrip-wise short sell positions, collate the data and upload it to the stock exchanges before the commencement of trading on the following trading day. The stock exchanges shall then consolidate such information and disseminate the same on their websites for the information of the public on a weekly basis. The frequency of such disclosure may be reviewed from time to time with the approval of SEBI.
Why sudden its a hot topic
The issue of short selling has come to the fore following the market meltdown and the crash in Adani group stocks.
Markets regulator, SEBI is likely to probe short selling in the Indian stock markets in the last few days.
Sources said Indian markets have been under onslaught in the last few trading sessions and a probe will ascertain the role of short sellers in bringing the market down.
According to a SEBI discussion paper, short selling — the sale of a security that the seller does not own — is one of the long-standing market practices, which has often been the subject of considerable debate and divergent views in most of the securities markets across the world.
The votaries of short selling consider it as a desirable and an essential feature of a securities market. The critics of short selling on the other hand are convinced that short selling, directly or indirectly, poses potential risks and can easily destabilise the market. In an efficient futures market, the relationship between spot price and futures price of the underlying asset is governed by cash-and-carry arbitrage and reverse cash-and-carry arbitrage. The latter requires that traders should be able to sell the underlying security short unless of course there are enough traders who own the security and are able to sell it cash to take advantage of too low a futures price.
Also Read: MSMEs wish list from Union Budget 2023-24
It is noteworthy though, that despite the conflicting schools of thought, securities market regulators in most countries and in particular, in all developed securities markets, recognise short selling as a legitimate investment activity. Such jurisdictions also have an active market for equity derivatives which includes stock futures. Some of the jurisdictions even recognise the usefulness of naked short sales in certain circumstances and instead of prohibiting short sales; the regulators have permitted it to take place within a regulated framework. The International Organisation of Securities Commissions (IOSCO) has also reviewed short selling and securities lending practices across markets and has recommended transparency of short selling, rather than prohibit it.
As per media reports, in 2022, the US prosecutors considered racketeering charges in a sprawling probe of hedge funds and research firms that bet against stocks.
The US Justice Department issued subpoenas to dozens of firms as part of the sweeping probe focused on potentially manipulative trading around negative reports on listed companies published by some of their investors, media reports said.
Adani Group has said in a statement that accounting (or fraud type assertions) “investigation” by Hindenburg are devoid of facts. Of Adani portfolio’s nine public listed entity’s eight are audited by one of the Big 6.
On leverage or over leverage issue – 100 of our various companies are rated (these account for nearly 100 per cent of our EBITDA), Adani Enterprises said in a stock exchange filing.
On revenue or balance sheet being artificially inflated or managed — out nine listed companies in Adani portfolio six are subject to specific sector regulatory review for revenue, costs and capex, Adani Group said.
In relation to governance, four of our large companies are in the top 7 per cent of the peer group in the emerging markets or the sector or the world. On the LAS position do note that overall promoter leverage is less than 4 per cent of promoter holding, the group said.
