Adani Hindenburg Case: SC Verdict on Short Selling

Context: Recently, the SC has pronounced its verdict on short selling related to the Adani Hindenburg Case.

• SC has ordered Centre and SEBI to investigate whether the Hindenburg report on Short Selling violates any laws, and if so, to take appropriate legal action. 

What is Short Selling?

• Short selling is an investment or trading strategy speculating on a stock’s decline or other security’s price.
• It occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money.
• Short sellers bet on, and profit from a steep drop in the share prices. However, long-term investors seek a rise in the share prices over time. 
• Purpose: Large investors use short positions to hedge their portfolio when there is a risk of stock prices going down. Other investors also use it for speculation, expecting an exceptional return. 
• Possible returns: Theoretically, the possible profit can equal the stock price, but the loss can be infinite when share price rises. On the other hand, in a long position, the loss can be equal to the price of the stock, and profit can be infinite. 
• Pros: It improves market efficiency, liquidity and price discovery. It also promotes investor skepticism and critical thinking as short sellers have a vested interest in exposing corporate malfeasance.

• Types of Short Selling

  • Naked Short Selling: When traders sell shares before actually obtaining them.
  • Covered short selling: Where the seller has made arrangements to borrow the securities before the sale.

• Rules Against Short Selling in India

  • Naked short selling is not allowed in India and USA
  • Only securities that have been allowed by the exchanges to offer futures and options (F&O) contracts are eligible for short selling. 
    • Only stocks in 183 out of more than 2000 listed companies are allowed to be shorted.

• Recent Amendment by SEBI: 

• • All institutional investors would have to disclose upfront whether the order they are placing involves short selling. 
  • Retail traders will also disclose their short trades, but they will have until the end of the trading session to do so. 

Source: Business Line

DOWNLOAD PDF