The Sebi, through an announcement on December 20, 2007, allowed short-selling by all classes of investors in the Indian stock market. After a long wait of over six years, the institutional investors will be able to short-sell shares in the market. Along with short-selling, the Sebi also proposes to introduce the SLB scheme, which will allow traders to borrow stocks to honor the sales. The market regulator is yet to decide on the date of implementing short-selling but it has asked the stock exchanges and depositories to put a fool-proof system in place. It is widely felt that short-selling will provide liquidity and depth to the market apart from helping price corrections in overvalued shares. The analysts feel that short-selling will make the market more efficient and will ensure less volatility in stocks.
Short-selling, which is considered as an essential feature of the developed market, refers to the selling of a security that an investor does not own. To be more specific, it is the sale of a security that is not owned by the seller, but with a promise to deliver the same. The short-seller presumes the price of the security to go down, so that he will be able to buy the stock at a lower price than the price at which he sold short. Once the stock prices go down, he buys it and settles the transaction. Hence, an investor sells short when he feels that the prices are overvalued and that the prices of shares he has sold will come down.
To Speculate: This is the most obvious reason and it aims at making a profit from an overvalued stock or market. The investors short-sell with the hope that the price of the stock will come down and they can buy back the stock at a lower price level. To Hedge: The investors can protect their long positions by offsetting short positions. They can prefer to go short on the cash market when the spot price of a stock is higher than the future (derivatives) prices.
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