SEBI Pushes Market Boom: Nearly Doubling Shortable Stocks and Slashing Collateral Requirements

SEBI Pushes Market Boom: Nearly Doubling Shortable Stocks and Slashing Collateral Requirements​

India's market regulator, the Securities and Exchange Board of India (SEBI), is reportedly planning major reforms aimed at boosting the cash equities segment. According to sources with direct knowledge of the plans, SEBI intends to significantly ease regulations around stock shorting by nearly doubling the number of eligible stocks for lending and borrowing.

These proposed changes are designed to drive investment into the safer cash market, encouraging investors away from the rapidly growing but high-risk derivatives market. The regulatory shift is a response to strict requirements implemented after past stock scams in India.

Bridging the Gap: From 176 Stocks to Market Majority​

Currently, while there are approximately 2,600 companies listed on the National Stock Exchange (NSE), only 176 stocks qualify for lending and borrowing. This significant disparity exists because of strict eligibility criteria related to liquidity, trading volume, and supporting derivatives exposure.

SEBI is actively considering relaxing two key thresholds determining this eligibility. By expanding the pool of shortable shares, Indian authorities hope to include the majority of liquid stocks in the market. Details on these crucial changes are expected to be finalized by the end of this year.

Understanding Stock Lending Eligibility​

The criteria for a stock's eligibility are robust and involve specific financial metrics. For instance, a stock must maintain an average monthly trading turnover of at least ₹100 crore over the preceding six months. Furthermore, it must be sufficiently large to support derivatives exposure valued at at least ₹100 crore across the market.

These measures ensure that only stable and highly active shares are available for institutional lending and shorting activity. The regulator's move aims to professionalize and deepen the liquidity within India's cash equities trading environment.

Cash vs Derivatives: A Tale of Two Markets​

India has seen immense growth in both its domestic economy and financial markets. The market value of NSE shares has surged from about $1 trillion a decade ago to over $5 trillion now, reflecting increasing investor interest.

However, the derivatives market remains massive and is characterized by higher risk. Capital deployed in derivatives is estimated to be roughly three times that of the cash market, with gross contract value nearly 500 times larger than in major global markets. SEBI has previously noted that nearly 90% of retail investors who trade derivatives incur losses.

Collateral Requirements and Regulatory Stance​

The planned reduction in collateral requirements is set to ease participation for investors. In India, the current maximum collateral required under borrowing and lending rules can reach up to 130%. This contrasts with international markets like the US and Europe, where this requirement generally hovers around 100%.

A key operational difference exists in Indian markets: stock lending and borrowing must be executed exclusively through exchange platforms, rather than solely by brokers. Despite lobbying from some foreign investors to change this mandate, SEBI is expected to maintain this structure. This commitment ensures that all trading activity occurs via exchanges to effectively pool liquidity.