Examine the evolution of SEBI's regulatory approach toward short selling in India since the early 2000s.

Q. Examine the evolution of SEBI's regulatory approach toward short selling in India since the early 2000s. (15 marks, 250-350 words)

Short selling — sale of securities the seller does not own — is operationalised through the Securities Lending and Borrowing (SLB) mechanism. Since the early 2000s SEBI has shifted from scam-induced prohibition to a screened, calibrated liberalisation, without ever conceding on settlement discipline.

Phase I — Restrictive legacy (early 2000s) - Stock market scam scandals exposed settlement and manipulation risk, prompting tighter cash-equities rules [5]. - Lending remained confined to the Securities Lending Scheme, 1997, with clearing corporations acting as Approved Intermediaries [2].

Phase II — Legitimisation (2007–08) - The December 2007 circular permitted short selling by all classes of investors, retail and institutional [1]. - Naked short selling was barred: delivery at settlement made mandatory; institutions must disclose the short upfront and cannot square off intra-day [1]. - A screen-based SLB platform was created, with order matching and tenure up to seven days [2].

Phase III — Consolidation and caution (2017–20) - The November 2017 review circular strengthened SLB operations [3]. - Collateral was retained at up to 130%, against roughly 100% in the US and Europe — a deliberately conservative buffer [5]. - Eligibility was tethered to the F&O segment: minimum average monthly turnover of ₹1 billion and market-wide derivatives exposure of ₹1 billion, leaving only 176 of NSE's ~2,600 listed companies eligible [5].

Phase IV — Codification and re-liberalisation (2024 onwards) - SEBI's Framework for Short Selling (January 2024) consolidated scattered norms into a single code [4]. - SEBI is now deliberating a near doubling of eligible stocks to about 350 and a cut in collateral, to deepen the cash market and draw retail investors away from the riskier derivatives segment [5].

The trajectory shows a regulator that legitimised short selling as a price-discovery tool while ring-fencing it against default risk. Going forward, widening the lendable universe on liquidity-based rather than derivatives-linked criteria, paired with strong surveillance and investor awareness, can deliver a deeper, fairer cash market — the balance between market development and investor protection that SEBI's founding mandate envisages.

(~315 words)

Sources: 1. SEBI, "Short selling and securities lending and borrowing", Circular MRD/DoP/SE/Dep/Cir-14/2007 (20 Dec 2007) — short selling permitted for all investor classes; naked short selling prohibited; institutional disclosure and no intra-day squaring off 2. SEBI, Annexure — Broad framework for securities lending and borrowing — Securities Lending Scheme 1997, Approved Intermediaries, screen-based platform, seven-day tenure 3. SEBI, "Circular on Review of Securities Lending and Borrowing Mechanism", CIR/MRD/DP/122/2017 (17 Nov 2017) — 2017 strengthening of the SLB framework 4. SEBI, "Framework for Short Selling", SEBI/HO/MRD/MRD-PoD-3/P/CIR/2024/1 (5 Jan 2024) — consolidated short-selling framework 5. Business Standard, "Sebi plans to nearly double stocks eligible for lending and borrowing" (6 July 2026) — early-2000s tightening; 176 of ~2,600 NSE stocks eligible; ₹1 billion turnover and derivatives-exposure thresholds; 130% vs ~100% collateral; proposed expansion to ~350 stocks