Short selling in the Indian stock market was banned by the Securities and Exchange Board of India (SEBI) in March 2001. The ban was instituted partly because of a crash in stock prices and allegations that Anand Rathi, the then-president of the Bombay Stock Exchange (BSE) used confidential information acquired by BSE's surveillance department to make gains and contribute to volatility (Rathi was later absolved of any wrongdoing by the Securities and Exchange Board of India).
What Is Short Selling?
Short selling is the sale of a security that is borrowed (not owned) by the seller with the promise to buy back the shares at a later date. Short selling is motivated by the belief that a security's price will decline, enabling it to be purchased in the future at a lower price to make a profit.
Is Short Selling in India Still Banned?
Shortly after the ban, only retail investors were allowed to short sell in the marketplace. In 2005, the Securities and Exchange Board of India (SEBI) recommended that institutional investors such as mutual funds be allowed to short-sell shares in the market, as well.
SEBI issued short selling guidelines for institutional investors in July 2007; those investors were allowed to start short selling shares the following year. However, one thing that remained banned in India was naked short selling. All investors are required to honor their obligation of delivering the securities at the time of settlement.
As part of the new framework, institutional investors are required to disclose upfront at the time the order is placed whether the transaction is a short sale. Retail investors must make a similar disclosure by the end of trading hours on the day of the transaction.
(For more on short selling, read our in-depth tutorial on Short Selling.)