SEBI’s Ban on Naked Short-Selling: Understanding the Impact on Retail Investors with the Latest Circular

SEBI's new rules: Institutional investors disclose short sales upfront, retail investors by day end. Brokers share data on short positions weekly for transparency. No day trading for big investors.
SEBI's Ban on Naked Short-Selling: Understanding the Impact on Retail Investors with the Latest Circular

On January 5, the Securities and Exchange Board of India (SEBI) made new rules for investors in the stock market. Now, if big institutional investors want to make a “short sale,” they must tell everyone immediately when placing the order. A short sale is like betting that a stock will go down. Retail investors, or regular individuals, have until the end of the trading day to say if their transaction is a short sale.

SEBI also told brokers and stock exchanges to gather and share this information on their websites. This is to make the stock market more transparent. The new rules combine the recent changes with an older circular from 2007, making the guidelines consistent. This comes after the Supreme Court’s decision not to look into claims of manipulation in Adani Group stocks. Instead, the court asked SEBI to check if Indian investors faced losses and if there were any illegal short-selling in the market.

The updated rules say that big institutional investors must say if their order is a short sale when they place it. But regular retail investors can wait until the end of the trading day to make the same disclosure. Brokers must collect information about short-sell positions for each stock, assemble it, and share it with stock exchanges before the next trading day starts. Stock exchanges will then show this information on their websites weekly for the public to see. The existing rules already allowed all investors to do short selling but with some restrictions. No investor, big or small, can make “naked” short trades, and there are extra limits on what big institutional investors can do.

One important rule is that big investors are prohibited from day trading. This means they can’t buy and sell stocks on the same day. Instead, all their transactions are considered separately, and they must fulfill their responsibilities. However, when settling the trades with stock exchanges, they can do it on a net basis. This means they can combine all their daily buys and sells and settle the difference. These rules are intended to ensure fair and transparent trading in the stock market, preventing actions that could harm investors or manipulate stock prices.

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