SEBI to Review Short Selling and SLB Frameworks to Boost Market Efficiency

The Securities and Exchange Board of India (SEBI) is set to establish a dedicated working group to conduct a thorough review of its short selling and Securities Lending and Borrowing (SLB) frameworks. SEBI Chairman Tuhin Kanta Pandey announced this initiative, highlighting that the existing regulations for short selling, introduced in 2007, and SLB, initiated in 2008, have seen minimal updates and are considered underdeveloped compared to international markets. This reassessment is crucial for modernizing India's financial market infrastructure.

**SLB mechanism and its market Impact** The SLB mechanism allows investors to lend their shares from demat accounts to other market participants for a fee. This process is facilitated through stock exchanges, with a counter-guarantee from the clearing corporation ensuring secure settlements. Borrowers typically use these securities for short-selling activities or to prevent settlement failures. By enabling lenders to earn income on idle assets and improving overall liquidity, the SLB framework plays a vital role in market efficiency. SEBI is also simultaneously reviewing stockbroker, mutual fund, LODR, and settlement regulations.

Furthermore, Pandey expressed confidence in India's market resilience despite global capital flow fluctuations. He noted sustained strong confidence from Foreign Portfolio Investors (FPIs) and significant growth in domestic participation, with individual investors now holding about 18% of listed companies. He emphasized that strong domestic flows are now complementing, not just replacing, FPI investments.

**Impact** This regulatory review has the potential to significantly improve market infrastructure. By modernizing short selling rules and developing the SLB market, SEBI aims to enhance liquidity, provide better risk management tools for investors, and foster a more robust and efficient trading environment. This could lead to increased market participation and stability. Rating: 8/10

**Difficult Terms** * **Short Selling**: A trading strategy where an investor sells securities they do not own, betting that the price will fall, allowing them to buy back the securities later at a lower price and profit from the difference. * **Securities Lending and Borrowing (SLB)**: A financial market practice where investors lend out their securities (like shares) to other market participants for a fee for a specified period. * **Foreign Portfolio Investor (FPI)**: An investment made by an investor residing in a country different from the country in which the investment is made. This usually refers to passive investments in securities like stocks and bonds. * **Domestic Institutional Investor (DII)**: Indian entities like mutual funds, insurance companies, and pension funds that invest in the Indian stock market. * **Listing Obligations and Disclosure Requirements (LODR) 2015**: A set of rules issued by SEBI that specify the obligations and disclosure requirements for companies listed on stock exchanges in India.