Sebi backs regulated short selling in stock Market

- SC hearing 2 PILs on Adani crisis

- Sebi submits a detail note

- Short selling legal in developed mkts

- Adani share price movements on Sebi radar

Securities market regulators in most countries, particularly in all developed securities markets, recognise short selling as a legitimate investment activity. Thus, in all major jurisdictions, instead of prohibiting short sales per se the regulators have permitted it to take place within a regulated framework, says Sebi

New Delhi: Market regulator Sebi has indicated to the Supreme Court that it is not in favour of banning short-selling or sale of borrowed shares, and said it is investigating allegations made by a tiny short-seller against the Adani Group as well as its share price movements.

The Securities and Exchange Board of India (Sebi) in written note before a bench headed by Chief Justice DY Chandrachud, which was hearing two PILs relating to the recent Adani Group shares crash, described what short-selling is and what the Hindenburg Research did but did not once name the Adani Group in the 20-page document. The regulator, the note said, was "already enquiring both the allegations made in the Hindenburg report as well as the market activity immediately preceding and post the publication of the report."

US-based short-seller Hindenburg in a January 24 report alleged that the Adani Group pulled "the largest con in corporate history" using offshore tax havens and stock manipulation. The allegations, which the group has repeatedly denied, roiled shares of group's listed companies which have together lost over $120 billion in market value in three weeks.

Sebi said short selling usually involves investors borrowing shares and selling them, expecting to buy them back later at a lower price before returning them to the lenders. They make profits on the difference between the higher sale price initially and the lower purchase price subsequently. "Short selling is considered by some to be a desirable and an essential feature of the securities market, as it provides liquidity and also helps price corrections in overvalued stocks. "Thus, any restrictions on short selling, per se, may distort efficient price discovery, provide promoters unfettered freedom to manipulate prices, and favour manipulators rather than rational investors," it said, adding others consider it an undesirable activity that flourishes on distressed selling and is vulnerable to its own form of manipulation.