Short selling rules under review as Sebi targets liquidity and market safeguards

The Securities and Exchange Board of India (Sebi) is reviewing the framework governing short selling and securities lending and borrowing (SLB) to improve market liquidity and price discovery, while strengthening safeguards against the misuse of trading terminals.

Sebi chairman Tuhin Kanta Pandey announced the proposed review on Saturday while addressing the 16th International Capital Market Convention organised by the Association of NSE Members of India (Anmi) in Mumbai.

“We are reviewing short selling and securities lending and borrowing to improve liquidity and price discovery,” he said.

Short selling involves selling a security that an investor does not own at the time of the trade, with the expectation of buying it back at a lower price. The SLB mechanism allows investors to borrow securities for delivery, facilitating short selling within the regulatory framework.

Notably, the review comes against the backdrop of Sebi’s ongoing case against Jane Street, which the regulator accused of manipulating the Bank Nifty index through trades in cash equities, futures and options, including building short positions in index options.

Sebi is also looking to streamline its supervisory processes by integrating inspection portals into a single digital workflow, aimed at making oversight faster and more consistent. It is exploring an artificial intelligence (AI) sandbox to enable innovators to test new tools in a controlled environment, offering greater regulatory clarity while maintaining safeguards. It is also finalising guidelines for the responsible use of AI, based on a tiered approach.

The proposed framework will provide for clear accountability, data controls, kill switches and human oversight, in line with the toolkit developed by the International Organization of Securities Commissions, Pandey said.

Separately, Sebi is developing a market-making framework to improve secondary-market liquidity in corporate bonds. It is also considering graded compliance requirements for stockbrokers, calibrated to their scale, client exposure and dependence on technology.

Highlighting the growing risks posed by technology-driven trading, Pandey said algorithms accounted for an increasing share of market transactions, while AI was reshaping investment practices. Cyber threats and system outages could disrupt trading and undermine investor confidence, he warned.