While allowing investors across all categories to short-sell, Securities Exchange Board of India (SEBI) reiterated that no naked short-selling will be allowed. In a circular, SEBI says institutional investors will have to disclose upfront at the time of placement of an order whether the transaction is a short sale. However, retail investors would be permitted to make a similar disclosure by the end of the trading hours on the transaction day, the market regulator says.

While SEBI has allowed all classes of investors, like retail and institutional investors, to short-sell, it has imposed certain conditions to curb foul play. "Naked short selling shall not be permitted in the Indian securities market, and accordingly, all investors would be required to mandatorily honour their obligation of delivering the securities at the time of settlement."

"No institutional investor shall be allowed to do day trading, i.e., square-off their transactions intra-day. In other words, all transactions would be grossed for institutional investors at the custodians' level, and the institutions would be required to fulfil their obligations on a gross basis. The custodians, however, would continue to settle their deliveries on a net basis with the stock exchanges," SEBI says.

Short selling refers to selling a stock the seller does not currently own at the moment of the transaction. Short selling, also known as 'shorting' or 'going short', is a trading strategy used to take advantage of markets that are falling in price.

SEBI also asked stock exchanges to frame necessary uniform deterrent provisions and take appropriate action against the brokers for failure to deliver securities at the time of settlement, which it hopes will act as a sufficient deterrent against failure to deliver. A securities lending and borrowing (SLB) scheme will be implemented to encourage short selling, it added.

"The brokers shall be mandated to collect the details on scrip-wise short sell positions, collate the data and upload it to the stock exchanges before the commencement of trading on the following trading day. The stock exchanges shall then consolidate such information and disseminate the same on their websites for the information of the public every week. The frequency of such disclosure may be reviewed from time to time with the approval of SEB," it added.

The decision comes close on the heels of the Supreme Court's judgement on petitions seeking a court-monitored investigation into alleged manipulation in Adani group stocks following the Hindenburg report.

The apex court rejected the plea but asked SEBI to investigate whether Indian investors suffered losses from the research agency's actions or if short positions were taken in the market that went against the law.

SEBI had earlier issued a master circular for stock exchanges and clearing corporations in October 2023, which has now been updated with the incorporation of the new provisions in the latest circular.