A short-selling ban could make problem worse for Street, say experts

Mumbai: As the free-fall in the stock market continues, there is a growing clamour to restrict bets on share declines, popularly known as short-selling. In India, the practice of borrowing shares and selling them is virtually nonexistent. Most of the bearish bets on stocks and indices are done through futures and options segment on the NSE.

While various market participants are seeking restrictions on such bearish bets, past experiences show that bans or restrictions on short-selling have not prevented further market routs. In fact, in majority of the cases, markets fell steeper after the ban on short-selling than prior to the ban. The recent ban on short-selling by Italy, France, Spain, the United Kingdom and South Korea did not stop slide in their equity markets.

An ET study showed, out of the 13 times countries have put restrictions on short-selling in the past 20 years, benchmark indices have fallen in 12 instances after the ban.

“None of the measures will help during the panic selling other than change of opinion or sentiments,” said Raamdeo Agrawal, chairman, Motilal Oswal Financial Services. “Short selling ban may or may not bring temporary relief to the market but with evaporated volumes, market would remain extremely illiquid and choppy if short-selling is banned”.

In the recent bans, Italy’s benchmark index fell on an average 8.5% post ban since 13 March as against 5% declines prior to ban. The UK benchmark declined 6.37% post ban compared to a 4% fall pre-ban.

While the ban on short-selling equities may support share prices for a day or two, it may not be enough to prevent a further sell-off in equities, said experts.

“Short-selling is a legitimate market practice which helps stock markets function effectively” said Vijay Chandok, CEO, ICICI Securities. “Short-selling is one of the many products market regulator allowed after through research and it contributes to efficient price discovery, increases market liquidity and facilitates hedging”.

Short-selling in the Indian stock market was suspended temporarily by the Sebi on March 8, 2001 after the crash in stock prices amid allegations that some brokers used confidential information acquired by BSE‘s surveillance department to make gains. After seven years, short-selling was allowed again from February 1, 2008.

NSE and brokers will be most impacted if restrictions on futures and options are introduced.

When short-selling was banned in India in March 2001, the Nifty fell 15% within 15 days after the ban compared to a 6% fall in the two week period prior to the ban.