SEBI has doubled the number of stocks eligible for short selling under the Securities Lending and Borrowing Mechanism (SLBM) and lowered collateral needs to 100%. This reform aims to balance trading activity between the cash and derivatives markets, though the complexity of the mechanism may limit its use primarily to institutional investors.
The Securities and Exchange Board of India (SEBI) has announced a significant update to its short-selling framework, doubling the number of stocks available for trading under the Securities Lending and Borrowing Mechanism (SLBM). In addition to increasing the number of eligible stocks, the regulator has reduced the collateral requirement for short sellers from 130% to 100% of the borrowed value, aiming to align Indian standards more closely with global practices.
Aiming for a Balanced Market
This policy shift is intended to bridge the gap between India’s cash and derivatives market segments. Currently, the disparity in trading activity is massive, with the combined average daily notional turnover in equity derivatives on the NSE and BSE reaching approximately Rs 492 lakh crore, while the cash segment sees only about Rs 1.32 lakh crore. By making it easier to borrow and lend stocks, SEBI hopes to encourage more activity in the cash market and provide investors with more ways to hedge their positions without relying solely on the derivatives segment.
Understanding the Mechanism and Risks
Despite the expansion of eligible stocks, the practical impact for individual investors remains limited by the design of the SLBM framework. Under the current rules, the market operates as an exchange-traded system with central clearing. While this provides security, it lacks the flexibility of over-the-counter models found in international markets, where customized agreements are common. Additionally, the process involves lending fees and specific margin requirements that can be complex for those unfamiliar with advanced trading strategies.
Historical data suggests that even among the 176 stocks previously eligible for SLBM, only about 38 to 46 stocks see active borrowing on any given day. Market observers note that simply increasing the list to roughly 350 stocks might not drive significant change unless there is a broader shift in how institutional and retail participants approach these tools.
What Investors Should Track Next
For investors, the primary monitorable will be whether these changes lead to a measurable increase in liquidity within the cash segment or if the derivatives market continues to dominate trading volumes. Institutional participation will likely be the first area of growth, as these entities are better equipped to navigate the technical requirements of the SLBM. Retail investors should be cautious, as the mechanism is inherently different from standard cash buying and selling, and its effectiveness as a long-term hedging tool will depend on how market participants utilize the new, lower collateral requirements in the coming quarters.