Short selling, lending and borrowing of equity shares of Indian companies should be subject to such conditions as may be prescribed in that behalf by the Reserve Bank of India and the Sebi/other regulatory agencies from time to time.

Subject to FDI policy

FII participation in short selling as well as borrowing / lending of equity shares will be subject to the current FDI policy, the Reserve Bank of India said in a notification on its web site on Tuesday.

Short selling of equity shares by foreign institutional investors would not be permitted in shares which are in the ban list and/or caution list of the central bank. The Reserve Bank of India also said that the borrowing of equity shares by FIIs should only be for the purpose of delivery into short sale. The margin/collateral should be maintained by FIIs only in the form of cash, and no interest should be paid to the FII on such margin/collateral, it added.

The designated custodian banks should separately report all transactions pertaining to short selling and lending & borrowing of equity shares by FIIs in their daily reporting with a suitable remark (short sold/lent/borrowed equity shares) for the purpose of monitoring by the Reserve Bank of India. It may be recalled that capital market regulator Sebi, last month announced the framework for short selling and a securities lending and borrowing (SLB) scheme for all market participants.

However, SEBI did not specify a date for the implementation of short selling. All market participants would be allowed to short sell, but institutional investors cannot undertake naked short selling and intra-day squaring up of trades, according to the regulator.

This means that institutions who do not own a stock can sell it short, but will have to deliver the stock by borrowing it. Naked short selling is where the sale is not backed by delivery of shares.

Sebi also said that the stock exchanges should issue necessary guidelines for allowing institutions to undertake short selling and put in place appropriate systems to operationalise the mechanisms for short selling and SLB.