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Short-selling on an upswing

Posted by Yogesh on Saturday, 18 October, 2008

MUMBAI: Did Sebi underestimate the extent of short selling that foreign funds were doing outside of India through participatory notes (P-Notes) on Indian stocks?

Short-selling on an upswing

That is the question many a brokers and dealers are asking after the market regulator on Friday released the first set of short sales data by FIIs through P-Notes, also called offshore derivative instruments.

Sebi data showed that between October 10 and October 14, total short selling by 17 FIIs who shared the data, was worth about Rs 500 crore. The regulator has also asked for outstanding short sale data till October 9.

Top officials at broking houses dealing with FIIs said there are over 50 such FII’s who also undertake broking business outside of India. And it is this particulat set who allow P-Note based short selling to their cliants, called FII sub-accounts.

“This data seems to confirm the view held in the market that very large short selling positions are being created overseas,” a top official at a local brokerage said. “In the current market scenario in which not only there are very few buyers, but also FIIs are continuously selling at distress levels, and part of this selling is not sale by actual sellers but by those who have created synthetic short selling positions,” the official added. Brokers said the cumulative short selling positions by FIIs could be in billion of dollars although no estimate by Sebi is out yet.

How does this short selling work : Short selling is facilitated by FIIs who issue P-Notes to their clients. Under P-Note transaction say an FII buys stocks in the Indian market for its client A. Since client A is unwilling to hold the shares in its name, the FII keeps the shares in its own name. Now this FII also has a client B who wants to go short on some Indian stocks. So the FII lends stocks bought on behalf of client A to client B that wants to take a short position by writing derivative contracts. This short selling affect price of the stock in which client B has created a short position.

A section of the market players have been asking Sebi to ban short selling through this route and have argued that if such a step is taken, a number of FIIs will be forced to cut their short positions by buying in the Indian market. As a result of this buying, almost immediately huge FII inflows would be seen.

Such inflows, estimated to be in billions, would help the equity market as well as the country’s reserves.

Even individuals who profit by short selling in intra-day trades would also stop such speculative activities, helping the market recover, institutional dealers said.

For a long time, however, Sebi has maintained that such short sellings were not within its jurisdictions.

Source Times of India


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