Short selling and securities lending and borrowing (SLB): notes for bank exams

At a glance

Short selling means selling shares you do not own, hoping to buy them back cheaper later. In India every short sale must be backed by delivery at settlement, so a seller who does not own the shares has to borrow them, usually through the exchange-run Securities Lending and Borrowing (SLB) mechanism. SEBI allows covered short selling to improve liquidity and price discovery but bans naked shorting.

Key facts

Regulator: SEBI (Chairman Tuhin Kanta Pandey)
Short-selling framework: SEBI circular of December 2007; institutional short selling from 2008
Latest consolidated framework: SEBI circular of 5 January 2024
Naked short selling: not permitted
Eligible stocks: those traded in the F&O segment
Institutional investors: must disclose upfront at order time that a sale is a short sale; cannot square off intraday (no day trading)
Retail investors: may disclose by the end of the trading day
Reporting: brokers upload scrip-wise short positions to the exchange before trading starts the next day; exchanges publish them
SLB launched: 21 April 2008, with the clearing corporations as Approved Intermediaries
SLB tenure: up to 12 months (raised in January 2010)

How it works

Covered vs naked. A covered short seller has arranged to borrow the shares before selling; a naked short seller has not. Naked shorting can lead to delivery failures, so India requires delivery at settlement and treats failure as a default.

SLB step by step.

A lender (often a long-term holder or institution) offers shares on the exchange's SLB platform and earns a lending fee.
A borrower (often a short seller) borrows them, pays the fee and posts margin with the clearing corporation.
The borrower sells in the market and later buys back the shares.
On the reverse-leg date the borrower returns the shares; the clearing corporation guarantees both legs.

Why SEBI allows it. Short sellers add liquidity, help prices reflect bad news and let investors hedge. Lenders earn extra income on idle holdings. The risks are price manipulation and pile-ons in falling markets, which is why SEBI requires disclosure and can ban shorting in stressed times.

Timeline

2007: Short-selling framework announced (December)
2008: Institutional short selling allowed and the full SLB scheme launched (21 April)
2010: SLB tenure extended to up to 12 months
2024: Revised short-selling circular (5 January) reiterating the naked-short ban and disclosure rules

Recent developments

24 Oct 2026: SEBI Chairman Tuhin Kanta Pandey said the short-selling and SLB frameworks are being reviewed to improve liquidity and price discovery, and that SEBI is building a market-making framework for corporate bonds (about ₹61 lakh crore outstanding).
19 Aug 2026: SEBI said the SLB and short-selling frameworks were under review to deepen the cash market; ideas reported include widening the list of eligible stocks and easing collateral.

Exam traps

Naked short selling is banned; covered short selling is allowed.
Institutions must disclose upfront; retail investors may disclose by end of day.
Short selling is allowed only in stocks in the F&O segment, not in all listed stocks.
SLB is run by clearing corporations (e.g. NSE Clearing) as Approved Intermediaries, not by depositories.
Short selling dates from 2007–08, not from the 1992 SEBI Act.

Quick check

Q: Is naked short selling allowed in India? A: No.
Q: What is the maximum tenure of an SLB contract? A: 12 months.
Q: When must an institutional investor disclose a short sale? A: Upfront, at the time of placing the order.

Sources

In the news

Every time this topic has appeared in our current affairs, newest first:

25 October 2026SEBI reviews short-selling and securities lending rules, plans bond market-making framework