SEBI aims to make it easier for investors to short stocks by nearly doubling
the number of shares eligible for lending and borrowing and by
cutting collateral requirements, two people with direct
knowledge of the plans said.
The changes are aimed at boosting the cash equities market
and drawing investors away from the country’s far larger
derivatives market, which has seen explosive growth but carries
far larger risks for retail investors in particular.
Stock scam scandals led India to develop strict requirements
for its cash equities market, with rules tightened in the early
2000s and then again in the period 2017 to 2020.
That has meant that while the National Stock Exchange, which
accounts for about 95% of India’s cash equities market, has some
2,600 companies listed, only 176 are currently eligible for
borrowing and lending.
By nearly doubling that number, Indian authorities hope to
include the majority of liquid shares, the people said.
The three main criteria determining eligibility include
liquidity, trading volume and the stock’s ability to support
exposure to derivatives trading.
For example, a stock must have an average monthly trading
turnover of at least 1 billion rupees ($10.5 million) over the
previous six months and be large enough to support derivatives
exposure of at least 1 billion rupees across the market. There
are also rules relating to how much of a stock should be held by
public shareholders.
“Deliberations are on relaxing the two thresholds,” said one
of the people, without specifying which thresholds.
Details are likely to be finalised by the end of this year,
said the sources, who were not authorised to speak to media and
declined to be identified.
A representative for the Securities and Exchange Board of
India (SEBI) did not respond to a request for comment.
SEBI last year flagged that a working group has been set up
to review borrowing and lending rules, but the plans to nearly
double the pool of stocks eligible and to cut collateral
requirements have not previously been reported.
CASH VERSUS DERIVATIVES
It was not clear by how much collateral requirements might
be cut. In India, the amount of collateral needed under
borrowing and lending rules can be as high as 130%, while in the
U.S. and Europe, the amount is around 100%.
With India’s economy growing at a rapid 6-7% for the past 10
years excluding the pandemic, so too has interest in stocks.
The market value of National Stock Exchange shares has surged
from about $1 trillion a decade ago to over $5 trillion now.
But growth in India’s derivatives market — the world’s
largest — has been even bigger. Capital deployed in derivatives
is about three times that of the cash market, and the gross
contract value is nearly 500 times larger — far higher than in
major global markets.
Nearly 90% of retail investors trading derivatives make
losses, SEBI has said. Derivatives trading is seen as far more
risky as contracts are leveraged and losses can theoretically be
unlimited. In the cash market, risks are more contained as the
trading position is backed by actual shares and collateral.
The Indian government has also taken steps in the last 18
months to raise the cost of derivative trading.
India is different from Western markets in that stock
lending and borrowing must be conducted on exchange platforms
and not through a broker.
Though foreign investors have lobbied for this rule to be
changed, SEBI is unlikely to budge on this, said one of the
sources, adding that the regulator believes that all trading
activity should be done via exchanges to pool liquidity.
($1 = 95.4450 Indian rupees)
(Reporting by Jayshree P Upadhyay; Editing by Ira Dugal and
Edwina Gibbs)