The Reserve Bank of India has cleared some regulatory hurdles in foreign institutional investors' (FIIs) foray into short selling and utilising the stock lending and borrowing mechanism (LBM). This is set to hasten the entry of all categories of investors into short selling and LBM.
The RBIs notification on Tuesday has lifted foreign exchange curbs on FIIs for such transactions, albeit with some conditions. It is for the stock exchanges and depositories to gear up for handling such trades now, so that the Securities and Exchange Board of India (SEBI) can fix the date for kick starting the mechanism.
"It has now been decided in consultation with the Government of India and SEBI, to permit FIIs registered with SEBI and sub-accounts of FIIs to short sell, lend and borrow equity shares of Indian companies," RBI said.
The conditions include, that the trades will be subject to the Foreign Direct Investment (FDI) policy in force; short selling will not be permitted in 'banned' or 'caution' list of the RBI; borrowing of shares should only be for the purpose of delivery into short sale; and that the margin paid by FII will be in cash and would not earn any interest.
Short sale is a mechanism where one can sell a share without holding it. Earlier the stock exchanges had to auction some holdings of the brokers to meet their commitment towards short sale. Now they will be in a position to borrow shares at an interest and reimburse after they buy the respective shares.
"Allowing short selling by FIIs and their participation in LBM will lead to better price discovery and boost volumes on the exchanges. It will also save brokers from the bitter experience of auction of shares against their short selling commitments," said Amit Majumdar, Head-Operations and Risk Management of Angel Broking.
SEBI has announced its intent on December 20, 2007, to allow all categories of investors into this process and asked the stock exchanges and depositories to gear up for the same at the earliest.