Centre, SEBI will regulate short selling, Solicitor-General tells Supreme Court

New Delhi, January 3, 2024 

Hindenburg Research took short position in Adani group; SEBI says short selling is needed to provide liquidity and correct prices in over-valued stocks; warns that restrictions will favour manipulators over investors 

The Supreme Court judgement records a statement made by Solicitor General Tushar Mehta that the Union government and the Securities and Exchange Board of India (SEBI) will take measures to regulate short selling.

A Bench led by Chief Justice of India D.Y. Chandrachud set down in writing the Solicitor General’s statement in its judgment in the case on Hindenburg Research’s allegations against the Adani group.

The judgment explained that “short selling is a sale of securities which the seller does not own but borrows from another entity, with the hope of repurchasing them at a later date with a lower price, thus, attempting to profit from an anticipated decline in the price of the securities”.

In its report published in January 2023, Hindenburg Research had admitted to taking a short position in the Adani group through U.S.-traded bonds and non-Indian traded derivative instruments.

Short selling is desirable: SEBI
SEBI had submitted that short selling was a desirable and essential feature to provide liquidity and to help price correction in over-valued stocks. Short selling is recognised as a legitimate investment activity by securities market regulators in most countries.

In India, short selling is regulated by a circular notified by SEBI in December 2007.

SEBI had submitted that any restrictions on short selling may distort efficient price discovery, provide promoters unfettered freedom to manipulate prices, and favour manipulators rather than rational investors. The International Organisation of Securities Commission recommends that short selling be regulated but not prohibited, with the aim of increasing transparency.

[The Hindu]