SEBI to Review Short Selling, SLB, and Other Market Frameworks for Enhanced Efficiency

Securities and Exchange Board of India (SEBI) Chairman Tuhin Kanta Pandey announced on Friday that a working group will be formed to conduct a comprehensive review of the frameworks for short selling and Securities Lending and Borrowing (SLB).

Pandey highlighted that an active SLB scheme is vital for improving price discovery and connecting the cash and derivatives markets. He noted that the current framework, established in 2008 and since modified, is "significantly underdeveloped" compared to international standards. Short selling allows investors to profit from declining stock prices, while SLB facilitates borrowing or lending securities to settle these trades. From a borrower's viewpoint, SLB helps settle short sales, and lenders earn fees on idle securities.

Additionally, SEBI is set to introduce a closing auction framework, aligned with global practices but tailored for India. This is expected to reduce end-of-day volatility, enhance price discovery, and assist large investors in executing trades more smoothly.

The regulator also plans to undertake a thorough review of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) and Settlement Regulations. Furthermore, SEBI is open to reviewing the framework for open-market buybacks, which was phased out last year to boost transparency and protect minority shareholders.

Pandey emphasized SEBI's focus on deepening the cash equities market to spur capital formation and reiterated a data-oriented, calibrated, and consultative approach to market development.

Impact: These regulatory reviews and introductions are expected to significantly enhance market efficiency, transparency, and price discovery in the Indian stock market. By modernizing mechanisms like short selling and introducing features like closing auctions, SEBI aims to create a more robust and globally competitive trading environment. This could lead to increased liquidity, reduced volatility, and better investment opportunities. Rating: 8/10.

Difficult terms: Short Selling: A trading strategy where an investor borrows shares and sells them, hoping to buy them back later at a lower price to return to the lender and profit from the difference. Securities Lending and Borrowing (SLB): A system where investors can lend their securities to others or borrow securities to meet their obligations, earning or paying a fee. Closing Auction Framework: A trading mechanism that aggregates buy and sell orders at the end of the trading day to determine a single closing price, reducing volatility. Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015: Rules mandated by SEBI for listed companies regarding corporate governance standards and timely, transparent disclosures. Open-Market Buybacks: A process where a company repurchases its own shares from the open market.