Another false dawn for securities lending?

The latest amendment to the securities lending and borrowing (SLB) framework, through a notification dated 6 January demonstrates a renewed effort by the Securities and Exchange Board of India (SEBI) in kick-starting what is presently a moribund market for SLB. SEBI’s initiatives in this area began with the introduction of the SLB scheme, 1997. However, the 1997 scheme presented major shortcomings such as prohibition on participation by institutional investors and a limited seven-day tenure for the contract. As a result, the 1997 scheme never really took off.

The issue of short sales was first deliberated by SEBI in 1996 by the BD Shah Committee. Thereafter, as a response to market volatility in 1998, SEBI temporarily banned short sales and in 2001 reintroduced this ban.

Perhaps, the key reason behind a lacklustre SLB market is SEBI’s yoyo policy towards permitting short-selling in India. SLB is a key enabler (especially in a market where the regulator, generally speaking, favours transactions in securities that are backed by delivery) to a strong and vibrant market for short-selling. A robust market for short-selling can be established only if all classes of market participants are permitted to participate, so as to generate the desired liquidity.

Prachi Loona and Suprio Bose are associates at Juris Corp, a Mumbai-based firm that specializes in banking and finance, foreign investments, private equity, direct tax, bankruptcy and restructuring, M&A, insurance, energy and infrastructure, dispute resolution and International arbitration.