Published on: February 20, 2023

Short selling

Short selling

Why in news? Supreme Court to set up a committee to examine Hindenburg Research’s report on the Adani Group that is accused for short selling


What is short selling ?

  • Short selling involves borrowing stock you do not own, selling the borrowed stock, and then buying and returning the stock only if and when the price drops.
  • It’s completely opposite to a bullish transaction and is mostly done to earn in a falling market in the case, the investor is bearish on the markets.

What is naked short selling ?

  • Under the times of panic, more people could dump their holdings, without any obligation to fulfil their settlements, thereby pushing the prices of the stock further down.

Ex: If an investor has sold a number of shares she borrowed from a broker, she must, sooner or later, ‘close’ the short by buying back the same number of shares.

  • After the 2008 Global Financial Crisis, the Securities and Exchange Commission (SEC) prohibited naked short selling.

What are the advantages of short selling for retail investors?

  • Allows investors to make profits in bear markets
  • Provides portfolio diversification by investing in both long and short positions, reducing their overall risk.
  • Enhances liquidity by adding more buyers and sellers to the market.
  • Can be used to hedge against losses by offsetting losses in one position with gains in another.
  • Helps to identify overvalued stocks by shorting a stock.

Is short selling legal in India?

  • Securities market regulators in most countries, particularly in all developed securities markets, recognise short selling as a legitimate investment activity.
  • The International Organisation of Securities Commissions (IOSCO) has also reviewed short selling and securities lending practices across markets and has recommended transparency of short selling, rather than prohibiting it.
  • “India follows this policy of regulated short selling and has framed its regime accordingly,” detailing the framework for regulating short selling in Indian capital markets.
  • Even during turbulent times such as at the start of the Covid pandemic when Nifty fell by around 26 per cent in 13 trading days in March 2020, SEBI did not ban short selling despite demand.

What did Hindenburg short in Adani Group?

  • Hindenburg Research’s report also alleged that the Adani Group has used offshore shell companies linked to Adani’s family to drive up share prices.

What were  views on ‘short selling’?

  • It is noted that the believers of short selling consider it as a desirable and an essential feature of a securities market.
  • The restrictions on short selling distort efficient price discovery, ‘gives promoters the unfettered freedom to manipulate prices, and favours manipulators than rational investors.