A few days ago, Nithin Kamath, Co-Founder and CEO of new-age stock broking platform Zerodha, raised an important issue in the stock market: Short-selling. “The lack of short-selling in Indian markets is causing potential market distortions,” he posted on his X handle.
Short-selling, the sale of a security that the seller does not own, is one of the long-standing market practices. But it has often been the subject of considerable debate and divergent views in most securities markets across the world.
“Unless we make shorting of stocks easy in the Indian markets, price discovery will be impaired,” he said.
Because of this long-only bias, there’s probably very little short-selling talent as well, even if large funds want to start shorting. “The only real way to short stocks until now was to use futures, maybe options. But there are only 224 F&O stocks, which means you can’t short the vast majority of the problematic stocks. Also, these contracts expire every month, and the cost of rolling over these contracts is significant (only the first-month contract is liquid),” he explained.
According to him, unless this changes, there will always be weird distortions in the prices of Indian markets. “Short-sellers, although they have a bad reputation, are massively underrated. Think of them as janitors; they clean up all the garbage in the markets and make them more efficient,” he further said.
Long-only market
India has been a structurally long-only market with almost no shorting activity because borrowing stock to short is really hard and is an offline process. Securities Lending and Borrowing (SLB) is still an offline process, and most brokers don’t offer an online option, he rued.
Short-selling has been recognised as a legitimate investment activity by regulators of many securities markets across the world, which also have an active market for equity derivatives, including stock futures. “Another feature that is common to most securities markets is a vibrant market for lending and borrowing of securities, which not only complements short-selling in securities but also enables investors to earn returns on their idle securities,” SEBI had said in a consultation paper in 2005.
Subsequently, in 2007, the market regulator came out with a ‘Short Selling and Securities Lending and Borrowing’ circular that allowed short-selling with some conditions. The introduction of a full-fledged SLB scheme should be simultaneous with the introduction of short-selling by institutional investors, it said. To begin with, the securities traded in the F&O segment should be eligible for lending and borrowing under the scheme, SEBI said.
Key tweaks
Since then, there has been no major structural change in the regulation despite the market having evolved and developed multi-fold, though SEBI did come out with two important changes in the disclosure norms in 2024. Accordingly, SEBI mandated that institutional investors must disclose upfront if a transaction is a short sale and retail investors by the end of the trading day. Brokers and exchanges must publish weekly scrip-wise short-sale positions. The stock exchanges are required to take action against the brokers for failure to deliver the securities at the time of settlement.
Disclosing “shorts” upfront will put institutional investors in a somewhat disadvantageous position. Those who remember how a group of retail investors on various social media platforms joined hands to short-squeeze institutional investors will understand the risk. Asking brokers to track retail investors’ short sales will also put non-depository brokers on the backfoot.
No doubt, short-selling is one of the key features in stock market trading and an important tool for price discovery. SEBI may consider widening the ambit to include at least the top 500 stocks by market cap. Institutions could also be allowed to keep short positions undisclosed up to a threshold—say 5 per cent of floating stock—with disclosure triggered only upon breach.
Published on August 1, 2025
