Is Now the Time to Double Down on Short-Selling in Indian Markets?
Indian markets are flashing mixed signals—bulls cling to hope while bears sharpen their claws. Short-selling could be the play, but timing is everything.
Volatility spikes as regulatory whispers and global tremors rattle traders. The RBI's hawkish tilt isn't helping.
Pros see blood in the water. Retail investors? They're still buying the dip—because past performance totally predicts future results.
One thing's clear: In a market where 'fundamentals' are just another meme, short-sellers either feast or become the main course.
Long-only market
India has been a structurally long-only market with almost no shorting activity because borrowing stock to short is really hard and is an offline process. Securities Lending and Borrowing (SLB) is still an offline process, and most brokers don’t offer an online option, he rued.
Short-selling has been recognised as a legitimate investment activity by regulators of many securities markets across the world, which also have an active market for equity derivatives, including stock futures. “Another feature that is common to most securities markets is a vibrant market for lending and borrowing of securities, which not only complements short-selling in securities but also enables investors to earn returns on their idle securities,” SEBI had said in a consultation paper in 2005.
Subsequently, in 2007, the market regulator came out with a ‘Short Selling and Securities Lending and Borrowing’ circular that allowed short-selling with some conditions. The introduction of a full-fledged SLB scheme should be simultaneous with the introduction of short-selling by institutional investors, it said. To begin with, the securities traded in the F&O segment should be eligible for lending and borrowing under the scheme, SEBI said.
Key tweaks
Since then, there has been no major structural change in the regulation despite the market having evolved and developed multi-fold, though SEBI did come out with two important changes in the disclosure norms in 2024. Accordingly, SEBI mandated that institutional investors must disclose upfront if a transaction is a short sale and retail investors by the end of the trading day. Brokers and exchanges must publish weekly scrip-wise short-sale positions. The stock exchanges are required to take action against the brokers for failure to deliver the securities at the time of settlement.
Disclosing “shorts” upfront will put institutional investors in a somewhat disadvantageous position. Those who remember how a group of retail investors on various social media platforms joined hands to short-squeeze institutional investors will understand the risk. Asking brokers to track retail investors’ short sales will also put non-depository brokers on the backfoot.
No doubt, short-selling is one of the key features in stock market trading and an important tool for price discovery. SEBI may consider widening the ambit to include at least the top 500 stocks by market cap. Institutions could also be allowed to keep short positions undisclosed up to a threshold—say 5 per cent of floating stock—with disclosure triggered only upon breach.
Published on August 1, 2025
