The lack of short selling in Indian markets is causing potential market distortions.

Unless we make shorting of stocks easy in the Indian markets, price discovery will be impaired. India has been a structurally long-only market with almost no shorting activity, because borrowing stock to short is really hard and is an offline process.

Because of this long-only bias, there’s probably very little short-selling talent as well, even if large funds want to start shorting. The only real way to short stocks until now was to use futures, maybe options. But there are only 224 F&O stocks, which means you can’t short the vast majority of the problematic stocks. Also, these contracts expire every month, and the cost of rolling over these contracts is significant (only the 1st month contract is liquid).

Unless this changes, there will always be weird distortions in the prices of Indian markets. Short sellers, although they have a bad reputation, are massively underrated. Think of them as janitors; they clean up all the garbage in the markets and make them more efficient.

Securities lending and borrowing (SLB) is still an offline process, and most brokers don’t offer an online option. Like everyone, we at Zerodha offer it, but you’ll have to call us to borrow or lend, and there’s a process, which means it’ll never scale. Hopefully, we will have an online platform by the end of the year, and stock lending and borrowing will become much simpler.

Go to link →