What is Naked Short Selling? Is it allowed in India ?

Naked short selling is when a trader sells shares without actually borrowing them first or confirming that they can be borrowed.

This is different from regular (covered) short selling, where the shares are borrowed before being sold.

Is Naked Short Selling Allowed in India?

No, naked short selling is not allowed in India.

The Securities and Exchange Board of India (SEBI) strictly prohibits naked short selling to maintain market stability and avoid manipulation.

Why Naked Short Selling is Banned in India?

Naked short selling is not allowed in many countries, including India

To prevent market manipulation

Create fake selling pressure

To reduce systemic risk

To protect retail investors from extreme volatility

To maintain market transparency

What is Allowed in India?

Covered short selling only: Traders must borrow shares or ensure availability before shorting.

Only intraday short selling is allowed for retail traders (must square off the position the same day).

Institutional investors can short sell under more controlled mechanisms, including using stock lending and borrowing (SLB) system.

SEBI (Securities and Exchange Board of India) has defined short selling as selling a security or a share that a seller does not own

SEBI Guidelines Highlights:

All short sales must be backed by delivery (except intraday).

Penalties apply if traders fail to deliver securities by the settlement date.

SLB mechanism is available for borrowing shares for short selling.

In the U.S. during the 2008 crisis, some hedge funds were accused of naked shorting bank stocks, contributing to price crashes and loss of trust.

The SEC later banned naked short selling on certain stocks temporarily.

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