**Executive Summary:**
This circular, issued by SEBI on January 5, 2024, clarifies the framework for short selling as outlined in the Master Circular No. SEBI/HO/MRD2/PoD2/CIR/P/2023/171. It reinforces existing regulations based on the rescinded SEBI Circular No. MRD/DoP/SE/Dep/Cir-14/2007, and specifies obligations for investors, brokers, stock exchanges, and clearing corporations. Brokers are required to collect and upload short sell data to stock exchanges daily, while exchanges must disseminate this information weekly.
**Key Points / Main Content:**
**Definition of Short Selling:**
* Short selling is defined as selling a stock not owned by the seller at the time of the trade.
**Eligibility and Restrictions:**
* All investor classes (retail and institutional) are permitted to short sell.
* Naked short selling is prohibited; all investors must honor delivery obligations.
* Institutional investors are not allowed to engage in day trading (intraday square off). Transactions will be grossed at the custodian level, requiring institutions to fulfill obligations on a gross basis, while custodians settle deliveries on a net basis with exchanges.
**Securities Lending and Borrowing (SLB):**
* A Securities Lending and Borrowing (SLB) scheme is essential to support short selling.
* The introduction of a full-fledged SLB scheme must coincide with the introduction of short selling by institutional investors.
**Eligible Securities:**
* Securities traded in the Futures and Options (F&O) segment are eligible for short selling.
* SEBI may periodically review the list of eligible stocks.
**Disclosure Requirements:**
* Institutional investors must disclose upfront if a transaction is a short sale.
* Retail investors can disclose short sale transactions by the end of the trading day.
**Broker and Exchange Responsibilities:**
* Brokers must collect scrip-wise short sell positions, collate data, and upload it to stock exchanges before the next trading day.
* Stock exchanges must consolidate and disseminate this information on their websites weekly. The frequency of disclosure is subject to SEBI review.
* Stock exchanges shall frame necessary uniform deterrent provisions and take appropriate action against the brokers for failure to deliver securities at the time of settlement.
**Impact Analysis:**
**Stock Exchanges:**
* *Impact:* Required to frame deterrent provisions against brokers failing to deliver securities and disseminate short selling data.
* *Action Required:* Implement deterrent measures, consolidate, and publish short selling data weekly on their websites.
**Clearing Corporations:**
* *Impact:* Continued role in the settlement process, particularly net settlement for custodians.
* *Action Required:* Ensure systems are aligned with the updated framework.
**Depositories:**
* *Impact:* No specific new actions mentioned but should be aware of the framework to support securities lending and borrowing.
* *Action Required:* Monitor the framework and its implications.
**Brokers:**
* *Impact:* Mandated to collect and report short sell positions daily. Subject to deterrent provisions for failure to deliver securities.
* *Action Required:* Collect scrip-wise short sell data and upload it to exchanges daily.
**Institutional Investors:**
* *Impact:* Must disclose short sale transactions upfront and cannot engage in day trading.
* *Action Required:* Disclose short sale orders upfront.
**Retail Investors:**
* *Impact:* Permitted to short sell and disclose transactions by the end of the trading day.
* *Action Required:* Disclose short sale transactions by the end of the trading day.
Key Entities Referenced
Securities and Exchange Board of India (SEBI): Regulatory body for securities market in India.
Stock Exchanges: Recognized entities for trading securities.
Clearing Corporations: Recognized entities responsible for clearing and settlement of trades.
Depositories: Organizations holding securities in dematerialized form.
Securities Lending and Borrowing Scheme (SLB): A scheme to facilitate lending and borrowing of securities.
Securities and Exchange Board of India Act 1992: Act of Parliament establishing SEBI and defining its powers.
Securities Contracts Regulation Stock Exchanges and Clearing Corporations Regulations, 2018: Regulations governing stock exchanges and clearing corporations.
Depositories Act, 1996: Act of Parliament regulating depositories in India.
CIRCULAR
SEBI/HO/MRD/MRD-PoD-3/P/CIR/2024/1 January 05, 2024
To
All Recognized Stock Exchanges
All Recognized Clearing Corporations
All Depositories
Sir/Madam,
Subject: Framework for Short Selling
1. SEBI vide Master Circular No. SEBI/HO/MRD2/PoD-2/CIR/P/2023/171 dated October
16, 2023 issued the Master Circular for Stock Exchanges and Clearing Corporations.
Paragraph 10 of Chapter 1 of the Master Circular contains the framework on ‘Short
Selling and Securities Lending and Borrowing Scheme’.
2. The broad framework for short selling is specified in ‘Annexure 3’ of Chapter 1 of the
said Master Circular. In this regard, it is mentioned that the contents of ‘Annexure 3’ of
Chapter 1 of the Master Circular dated October 16, 2023 shall be read as under (which
are in line with the provisions of rescinded SEBI Circular No. MRD/DoP/SE/Dep/Cir-
14/2007 dated December 20, 2007):
“Annexure 3: Broad Framework for Short Selling
1. “Short selling” shall be defined as selling a stock which the seller does not own at
the time of trade.
2. All classes of investors, viz., retail and institutional investors, shall be permitted to
short sell.
Page 1 of 33. Naked short selling shall not be permitted in the Indian securities market and
accordingly, all investors would be required to mandatorily honor their obligation of
delivering the securities at the time of settlement.
4. No institutional investor shall be allowed to do day trading i.e., square-off their
transactions intra-day. In other words, all transactions would be grossed for
institutional investors at the custodians’ level and the institutions would be required
to fulfill their obligations on a gross basis. The custodians, however, would continue
to settle their deliveries on a net basis with the stock exchanges.
5. The stock exchanges shall frame necessary uniform deterrent provisions and take
appropriate action against the brokers for failure to deliver securities at the time of
settlement which shall act as a sufficient deterrent against failure to deliver.
6. A scheme for Securities Lending and Borrowing (SLB) shall be put in place to
provide the necessary impetus to short sell. The introduction of a full-fledged
securities lending and borrowing scheme shall be simultaneous with the
introduction of short selling by institutional investors.
7. The securities traded in F&O segment shall be eligible for short selling. SEBI may
review the list of stocks that are eligible for short selling transactions from time to
time.
8. The institutional investors shall disclose upfront at the time of placement of order
whether the transaction is a short sale. However, retail investors would be permitted
to make a similar disclosure by the end of the trading hours on the transaction day.
9. The brokers shall be mandated to collect the details on scrip-wise short sell
positions, collate the data and upload it to the stock exchanges before the
commencement of trading on the following trading day. The stock exchanges shall
then consolidate such information and disseminate the same on their websites for
the information of the public on a weekly basis. The frequency of such disclosure
may be reviewed from time to time with the approval of SEBI.”
Page 2 of 33. This circular is issued in exercise of the powers conferred under Section 11(1) of the
Securities and Exchange Board of India Act 1992 read with Regulation 51 of the
Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations)
Regulations, 2018, Section 26(3) of the Depositories Act, 1996 and Regulation 97 of
Securities and Exchange Board of India (Depositories and Participants) Regulations,
2018 to protect the interests of investors in securities and to promote the development
of, and to regulate the securities market.
4. This circular is available on SEBI website at www.sebi.gov.in at “Legal Framework -
Circulars.”
Yours faithfully,
Hruda Ranjan Sahoo
Deputy General Manager
Tel no.: 022-26449586
Email: hrsahoo@sebi.gov.in
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