RAMAKANTH
17-11-2007, 01:56 AM
MUMBAI: SEBI has amended the regulations governing mutual funds to enable domestic fund houses to engage in short-selling of securities and lending & borrowing of securities, a move that has been on the cards for a while now. The changes however will not come into effect immediately with the SEBI still putting the new framework in place.
In market parlance, “short-selling” happens when an investor or a trader sells a stock he does not own at the time of the trade. Traders short-sell when they feel that a stock’s price is headed down. They buy back the stock at lower rates to make a quick profit.
Currently, SEBI rules specify that a seller should necessarily deliver the stocks at the settlement. Individual traders, though, at times “short-sell” and buy back the same stock during the same trading session, squaring off their transaction. Even this intraday “short-sales” is prohibited for institutions like mutual funds and FIIs if they don’t previously own a stock.
SEBI has now allowed MFs to make short sales. But, it comes with a caveat. The MF will have to borrow and deliver the shares it has short sold, a practice followed world over. The regulator is now putting in places rules for stock lending for purposes of short sales.
This far, SEBI had banned short-selling as it feared a speculative sell off could depress the markets. Short selling was banned nearly five years ago, in the aftermath of the Ketan Parekh scam. Experts had then argued that the market was tilted in favour of speculative buyers or the bulls while bears were short changed. SEBI’s latest move brings back the balance.
‘‘The move will be positive for MF unit holders as it will allow two-way arbitrage. The lending and borrowing of securities will also allow passive funds to generate more income,’’ said Rajan Mehta, ED, Benchmark MF.
In market parlance, “short-selling” happens when an investor or a trader sells a stock he does not own at the time of the trade. Traders short-sell when they feel that a stock’s price is headed down. They buy back the stock at lower rates to make a quick profit.
Currently, SEBI rules specify that a seller should necessarily deliver the stocks at the settlement. Individual traders, though, at times “short-sell” and buy back the same stock during the same trading session, squaring off their transaction. Even this intraday “short-sales” is prohibited for institutions like mutual funds and FIIs if they don’t previously own a stock.
SEBI has now allowed MFs to make short sales. But, it comes with a caveat. The MF will have to borrow and deliver the shares it has short sold, a practice followed world over. The regulator is now putting in places rules for stock lending for purposes of short sales.
This far, SEBI had banned short-selling as it feared a speculative sell off could depress the markets. Short selling was banned nearly five years ago, in the aftermath of the Ketan Parekh scam. Experts had then argued that the market was tilted in favour of speculative buyers or the bulls while bears were short changed. SEBI’s latest move brings back the balance.
‘‘The move will be positive for MF unit holders as it will allow two-way arbitrage. The lending and borrowing of securities will also allow passive funds to generate more income,’’ said Rajan Mehta, ED, Benchmark MF.