Short selling with respect to equity market means selling any scrip, which will fall short if seller is asked to give delivery. SEBI banned short selling in March’2001 following excessive volatility domestic equity market was going through that time for institutional traders though retail traders were kept out of the regulatory clutch. Regulator is coming out with a new framework under which institutional short selling will be allowed again.
This style of trading is quite popular among market participants through out the world but regulators think different. As traders are allowed to sell without holding the scrip it often create stir in the market. Supporters argue that short selling justify the market valuation. With regulatory ban on short selling, market may get inflated excessively following any wide spread buying spree.
But regulators’ views are something different. As investors are psychological very vulnerable to price decline, unrestricted short selling can create price volatility and whole system can lead to a vicious circle.
Evil or angle whatever it may be, when market goes beyond its valuation often time we market participants feel a need for some sort of checkers and in current situation when Indian equity market is in the middle of a full fledged bull run, institutional short selling within a regulatory framework can add depth and width to the market.
