While a scheme allowing short-selling of securities is expected to come into force from July, exchanges and depositories are finalising a mechanism for lending and borrowing of securities, without which the scheme cannot be implemented.
Exchanges and depositories are considering separate sessions on both the stock exchanges -- the National Stock Exchange and the Bombay Stock Exchange -- for lending and borrowing of shares.
These sessions may precede the short-selling as the idea is to ensure that the short-selling volume does not exceed the securities available for trade.
Once the exchanges submit the scheme, the Securities and Exchange Board of India (Sebi) is expected to take it up at its board meeting next week.
Short-selling means selling of securities without possessing them. Since the Sebi is not in favour of naked short-selling, short-sellers will have to borrow the securities and settle the deal. Short-selling will be allowed only for institutional investors.
The settlement session may be planned in the morning between 9 and 10 am where investors, including individuals, will offer their shares for lending.
Those who want to short-sell can borrow first and short-sell later in the day or the next day. The short-seller will have to inform the exchanges about his intention at the time of selling.
Exchanges are of the view that if lending and borrowing precede short-selling, the possibility of a default in delivery can be avoided. The NSE is understood to have suggested pay-in and pay-out for the lending and borrowing of securities and it will be on a T+1 basis.
When securities are offered for lending, its settlement will happen the next morning. The auction if the shares are not delivered will take place on the same day after the settlement.
This is being contemplated to make sure that when the settlement of the short-sold shares happens, the sellers have the shares deposited in their account.
A suggestion on running the lending and borrowing session simultaneously with the normal trading session is being discussed. The lender can express his intention to lend and, based on this, depository participants can ask the depository concerned to block the shares.
These intentions can be shown on the screen, which will ensure enough information on the quantity that is available for lending. Exchanges and depositories have also discussed that the shares so borrowed will be returned to the lender in seven working days.
The borrower can repeat the whole deal, if he wants to continue his short position. The interest rates for lending will depend on the demand for securities and can differ from securities to securities.
The exchanges will soon send their final proposal to the Sebi, based on which the market regulator will issue the final circular to the exchanges.
Sebi may do a feasibility study of the proposal and, if required, may ask the exchanges to rework the scheme. In that case, the scheme may be slightly delayed.