NATIONAL STOCK EXCHANGE OF INDIA LIMITED

CAPITAL MARKET OPERATIONS

CIRCULAR

Circular No.: NSE/CMO/064/2007

Download No. NSE/CMTR/9953

Date: December 24, 2007

 

Dear Members,

 

Sub: Short Selling of Securities

 

The Exchange is in receipt of a SEBI circular no. MRD/DoP/SE/Dep/Cir-14/2007 dated December 20, 2007, regarding “Short Selling of Securities”. The copy of SEBI circular is enclosed as Annexure.

 

Members are requested to take note of the above.

 

Further details in this regards shall be intimated by the Exchange through subsequent circulars.

 

 

For National Stock Exchange of India Ltd.

 

 

Suprabhat Lala

Asst. Vice President (Capital Market)

Annexure

Chief General Manager

Market Regulation Department-Division of Policy

E-mail: mdrao@sebi.gov.in

MRD/DoP/SE/Dep/Cir- 14 /2007

December 20, 2007

 

 

1.      The Executive Directors/Managing Directors/Administrators

of all Stock Exchanges

2.      The Chairman and Managing Director, NSDL

3.      The Managing Director & CEO, CDSL

 

Dear Sir / Madam,

 

Sub:- Short selling and securities lending and borrowing

 

1.      Pursuant to the recommendations of the Secondary Market Advisory Committee (SMAC) of SEBI and the decision of the SEBI Board, it has been decided to permit all classes of investors to short sell subject to the broad framework specified in Annexure-1.

2.      In order to provide a mechanism for borrowing of securities to enable settlement of securities sold short, it has also been decided to put in place a full-fledged securities lending and borrowing (SLB) scheme for all market participants in the Indian securities market under the over-all framework of “Securities Lending Scheme, 1997” of SEBI specified by SEBI vide circular No. SMD/POLICY/SL/CIR-09/97 dated May 07, 1997. Such a regulatory framework shall be subject to the broad framework specified in Annexure-2.

3.      The Stock Exchanges shall issue the necessary guidelines in this regard and shall put in place systems to operationalise the above mechanisms for short selling and SLB. The stock exchanges shall also ensure that all appropriate trading and settlement practices as well as surveillance and risk containment measures, etc. are made applicable and implemented in this regard.

4.      The Stock Exchanges and the Depositories are advised to put necessary systems in place so as to distinguish the lending and borrowing transactions executed in the framework specified in the annexure from the normal market transactions in the demat system.

5.      The date of implementation of this circular will be communicated by SEBI subsequently.

 6.      The Stock Exchanges and the Depositories are also advised to :

6.1.  test the necessary software/systems and remove any glitches in its operation well before the commencement date to avoid any problems in the live environment.

 

6.2.  make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision.

 

6.3.  bring the provisions of this circular to the notice of the member brokers/clearing members, depository participants and also disseminate the same on their website.

 

6.4.  communicate to SEBI, the status of the implementation of the provisions of this circular in the Monthly Development Report.

7.      This circular is being issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 and Section 19 of the Depositories Act, 1996, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

 Yours faithfully,

  

S V Murali Dhar Rao

 

Encl:

Annexure-1 – Broad framework for short selling,

Annexure-2 – Broad framework for securities lending and borrowing

Annexure 1

Broad framework for short selling

 

1. “Short selling” shall be defined as selling a stock which the seller does not own at the time of trade.

 

2. All classes of investors, viz., retail and institutional investors, shall be permitted to short sell.

 

3. Naked short selling shall not be permitted in the Indian securities market and accordingly, all investors would be required to mandatorily honour their obligation of delivering the securities at the time of settlement.

 

4. No institutional investor shall be allowed to do day trading i.e., square-off their transactions intra-day. In other words, all transactions would be grossed for institutional investors at the custodians’ level and the institutions would be required to fulfill their obligations on a gross basis. The custodians, however, would continue to settle their deliveries on a net basis with the stock exchanges.

 

5. The stock exchanges shall frame necessary uniform deterrent provisions and take appropriate action against the brokers for failure to deliver securities at the time of settlement which shall act as a sufficient deterrent against failure to deliver.

 

6. A scheme for Securities Lending and Borrowing (SLB) shall be put in place to provide the necessary impetus to short sell. The introduction of a fullfledged securities lending and borrowing scheme shall be simultaneous with the introduction of short selling by institutional investors.

 

7. The securities traded in F&O segment shall be eligible for short selling. SEBI may review the list of stocks that are eligible for short selling transactions from time to time.

 

8. The institutional investors shall disclose upfront at the time of placement of order whether the transaction is a short sale. However, retail investors would be permitted to make a similar disclosure by the end of the trading hours on the transaction day.

 

9. The brokers shall be mandated to collect the details on scrip-wise short sell positions, collate the data and upload it to the stock exchanges before the commencement of trading on the following trading day. The stock exchanges shall then consolidate such information and disseminate the same on their websites for the information of the public on a weekly basis. The frequency of such disclosure may be reviewed from time to time with the approval of SEBI.

 

Annexure-2

Broad framework for securities lending and borrowing

 

1. The stock exchanges shall put in place, a full fledged securities lending and borrowing(SLB) scheme, within the overall framework of “Securities Lending Scheme, 1997” (the scheme), that is open for all market participants in the Indian securities market.

 

2. To begin with, the SLB shall be operated through Clearing Corporation/Clearing House of stock exchanges having nation-wide terminals who will be registered as Approved Intermediaries (AIs) under the SLS, 1997.

 

3. The SLB shall take place on an automated, screen based, order-matching platform which will be provided by the AIs. This platform shall be independent of the other trading platforms.

 

4. To begin with, the securities traded in F&O segment shall be eligible for lending & borrowing under the scheme.

 

5. All categories of investors including retail, institutional etc. will be permitted to borrow and lend securities. The borrowers and lenders shall access the platform for lending/borrowing set up by the AIs through the clearing members (CMs) (including banks and custodians) who are authorized by the AIs in this regard.

 

6. The AIs, CMs and the clients shall enter into an agreement (which may have one or more parts) specifying the rights, responsibilities and obligations of the parties to the agreement. The agreement shall include the basic conditions for lending and borrowing of securities as prescribed under the scheme. In addition to that, AIs may also include suitable conditions in the agreement to have proper execution, risk management and settlement of lending and borrowing transactions with clearing member and client. Given the nature of the client base, while the major responsibility of ensuring compliance with

“Know Your Client” (KYC) norms in respect of the clients rests with CMs, the exact role of AIs/CMs vis-à-vis the clients in this regard needs to be elaborated in the aforesaid agreement between the AI/CMs/clients. In this regard, there would be one master agreement with two individual parts to the same. The first part of the agreement would be between the AIs and the CMs and the second part of the agreement would be between the CMs and the clients. There would be adequate cross referencing between the two parts of

the agreement so that all the concerned parties, viz., the AIs/CMs and the clients agree completely and are aware of all the provisions governing the SLB transactions between them. However, there shall be no direct agreement between the lender and the borrower. The CM will attach a certified copy of the first part of the agreement signed with the AI in the second part of the agreement signed with each client. The model agreements in this regard would be devised by the stock exchanges.

 

7. The AIs shall allot a unique ID to each client which shall be mapped to the Permanent Account Number (PAN) of the respective clients. The AIs shall put in place appropriate

systemic safeguards to ensure that a client is not able to obtain multiple client IDs.

 

8. The tenure of lending/borrowing shall be fixed as standardised contracts. To start with, contracts with tenure of 7 trading days may be introduced.

 

9. The settlement cycle for SLB transactions shall be on T+1 basis. The settlement of lending and borrowing transactions shall be independent of normal market settlement.

10. The settlement of the lending and borrowing transactions shall be done on a gross basis at the level of the clients i.e. no netting of transactions at any level will be permitted.

 

11. AIs would frame suitable risk management systems to guarantee delivery of securities to borrower and return of securities to the lender. In the case of lender failing to deliver securities to the AI or borrower failing to return securities to the AI, the AI shall conduct an auction for obtaining securities. In the event of exceptional circumstances resulting in non-availability of securities in auction, such transactions would be financially closed-out at appropriate rates, which may be more than the rates applicable for the normal close-out of transactions, so as to act as a sufficient deterrent against failure to deliver securities.

 

12. Position limits at the level of market, CM and client shall be decided from time to time by AIs in consultation with SEBI. To begin with (a) the market–wide position limits for SLB transactions shall be 10% of the free-float capital of the company in terms of number of shares (b) No clearing member shall have open position of more than 10% of the market-wide position limits or Rs. 50 crore (base value), whichever is lower (c) For a FII/MF, the position limits shall be the same as of a clearing member (d) The client level position limits shall be not more than 1% of the market-wide position limits.

 

13. There shall be no lending/borrowing activity during the periods of corporate action in the security and shall be disclosed by AI to the market.

 

14. Any borrowing/lending and return of securities would not amount to purchase/disposal/transfer of the same for the purpose of compliance with the extant FDI/FII limits and the norms regarding acquisition of shares/disclosure requirements specified under the various Regulations of SEBI.

 

15. Adequate systems shall be put in place by the stock exchanges/Depositories to distinguish the SLB transactions from the normal market transactions in the demat system.

 

16. AIs shall provide suitable arbitration mechanism for settling the disputes arising out of the SLB transactions executed on the platform provided by them.

 

17. AIs shall disseminate in public domain, the details of SLB transactions executed on the platform provided by them and the outstanding positions on a weekly basis. The frequency of such disclosure may be reviewed from time to time with the approval of SEBI.