Share Bazaar News India

After over 5 years, we are embarking on the next generation reform in the Indian Capital Markets, the last being introduction of screen based derivatives segment. And after hearing for last 3 years about the advent of short selling in the markets, short selling will finally start on April 21. Albeit on a small scale and controlled manner, nevertheless it is an important event that would help in changing the profile of the Indian secondary markets.

Why I say it to be controlled and well regulated is because it will start ONLY with the F&O scrips to begin with. There are 226 scrips under the derivatives list and this facility will initially be limited to this segment.

Some might have argued, it could have started with the NSE 500 list by market cap, but we need a begining and this is where start with. A healthy Short Selling market would require an even robust Securities Lending and Borrowing Mechanism, and to begin with all clearing members including banks and custodian will be eligible to participate in SLB. Unlike the earlier version this would be via automated screen based trading, which would allow the lender or borrower to enact a transaction on a Price-Time priority.

So, next time you want to short technology stocks close to earnings, you might have to pay a higher premium or you want to take a bet on banks close to monetary policy you will have to pay a premium as many of the banks may be under the caution list or banned list of RBI for reaching their FDI limits. Low float stocks are likely to command a higher premium as against high float stocks.

On some sense this would act as overnight call money market, purely based on liquidity demand and supply except that maximum duration of the lending or borrowing would be for 7 days and would be screen based thereby creating more transparency. The borrower will have to return the securities on T+8.

My guess is this will be a precursor to our markets moving into a T+1 mode, already some section of market works on this mode. All transaction for SLB will be completed on a T+1 mode. For a buyer of securities or borrower will have to pay-out lending fees plus the lending price. The lending price being the closing price of the transaction day. This is were the margin systems also kicks in, to start margins will be on a T+1 for institutions and subsequently it will be upfront from mid June this year.

While the margining is already upfront in the derivative markets, margining for institutions will be integrated for both the cash and the F&O from Mid June. This though, will increase the cost of transaction for institutions who used to participate in cash-future arbitrage (prop books) thereby avoiding any margin in the cash segment. But, in the long run it is a small cost to be paid for a vibrant market. All other investors will have to pay upfront margins.

Too Short a Window: While all the above is fine, there are some open ended questions. To list a few, why the SLB window is open only for 1 hour in the morning. Currently, it is open only between 10-11 am in the morning. With custodial confirmation by 2 pm and final intimation to the participation by 3:30 pm. Surely, what happens to participants who would like to go short on the certain stocks based on certain information or global cues. Ideally a 1 hour window between 2:30 pm and 3:30 pm would have been desirable allowing participants to close out there shorts or take fresh positions in the last hour.

Surely, the custodial confirmation and the subsequent participant intimation could be pushed to 5 pm, its a question of whether back-end is fully geared and operational for this purpose on the exchanges and custodian end.

Position Limits: To begin with SLB position limits of 10% of free-float equity of the company, so for a ICICI Bank the SLB marketwide would be 10% of its equity and for a Wipro that would be around 1% of the equity. For a SBI the marketwide limit would be 4.9% of equity, but will it be available to FIIs, it will not be. As the stock is perpetually under RBI Banned List for reaching its FDI Cap.

That brings me to my - second question: What happens to stocks were the FDI cap is at lower levels owing to regulatory reasons, and FDI cap becomes the limiting factor for the SLB in that stock.

I feel the exchanges will have to tweak their criteria for selection in F&O stocks and try to get stocks which do not have low FDI cap. I say this because though their would be marketwide limit for every stock, a lower FDI cap would mean the actual number of the share available for short selling for any stock under FDI cap will be much lower than the marketwide limit. Thereby, increasing the premium/lending fees and skewing the market for that stock.

BUT, that said we are entering a new era for Indian Markets, and cheers to that.

Source: Moneycontrol.com