Context:
The Securities and Exchange Board of India (SEBI) is considering easing norms for the Securities Lending and Borrowing (SLB) mechanism by increasing the number of stocks eligible for borrowing. The move aims to deepen the cash equity market and encourage investors to use regulated short selling instead of excessive derivatives trading.
Explanation:
- SEBI is the statutory regulator of India’s securities market, established under the SEBI Act, 1992, to protect investors and regulate capital markets.
- Short Selling involves selling borrowed shares with the expectation of buying them back later at a lower price, thereby earning a profit from a price decline.
- Securities Lending and Borrowing (SLB) is a SEBI-regulated mechanism through which investors temporarily lend securities to borrowers in return for a lending fee, enabling legal short selling.
- Example: A trader borrows 100 shares of a stock trading at $10 and sells them immediately for $1,000 cash. When the price drops to $6, the trader buys the 100 shares back for $600, returns them, and pockets a $400 profit.
- Only stocks meeting criteria such as liquidity, trading volume, market capitalisation and public shareholding are eligible under the SLB framework.
- Cash Equity Market involves the direct buying and selling of shares, whereas the Derivatives Market trades financial contracts such as futures and options (F&O) whose value is derived from an underlying asset.
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