SEBI Plans to Nearly Double Short Selling Eligible Stocks Under SLBM

The Securities and Exchange Board of India (SEBI) is working on a major overhaul of the Securities Lending and Borrowing Mechanism (SLBM) that could significantly increase the number of stocks available for short selling, according to a Reuters report citing sources familiar with the discussions.

The proposed changes are aimed at making India's cash equity market more efficient and improving participation in the securities lending ecosystem.

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Eligibility Rules May Be Relaxed

Currently, only 176 of nearly 2,600 companies listed on the National Stock Exchange (NSE) are eligible under the SLBM framework, representing about 7% of all listed stocks.
To qualify today, companies must meet several conditions, including an average monthly trading turnover of at least ₹100 crore over the previous six months, a minimum market-wide derivatives exposure of ₹100 crore, and specified public shareholding requirements.

SEBI is now reviewing these conditions and is considering easing some of the eligibility norms. If approved, a much larger pool of liquid stocks could become available for lending and borrowing. The proposals are expected to be finalised by the end of 2026.

Lower Collateral Requirement Under Consideration

The regulator is also evaluating whether collateral requirements for short sellers can be reduced.

At present, investors are required to provide collateral worth as much as 130% of the value of borrowed shares. This is considerably higher than the roughly 100% collateral requirement seen in several developed markets, including the United States and Europe.

Reducing this requirement would lower the cost of short selling and improve capital efficiency, making the SLBM platform more attractive for institutional and other market participants.

Why Is SEBI Looking at These Changes?

India's securities lending framework has traditionally been more conservative than those in many other markets. Regulations were tightened after market irregularities in the early 2000s and strengthened further between 2017 and 2020 to safeguard investors.

However, the Indian equity market has expanded rapidly over the past decade. NSE's market capitalisation has grown from around $1 trillion to more than $5 trillion, giving the regulator greater confidence that the market can support a broader short-selling framework.

Another reason behind the proposed reforms is the growing imbalance between the cash and derivatives segments.

Over the years, derivatives trading has expanded much faster than the cash market. Capital deployed in derivatives is estimated to be about three times larger than that in the cash segment, while the gross contract value is nearly 500 times higher.

SEBI has also highlighted that nearly 90% of retail traders in the derivatives market incur losses, largely because of the leverage involved. By making short selling easier in the cash market, the regulator hopes investors will have an alternative to expressing bearish views without relying heavily on futures and options.

Exchange-Based Model Likely to Continue

One aspect that is unlikely to change is the way securities lending transactions are executed.

Unlike several overseas markets where such transactions can be arranged directly through brokers, India requires all stock lending and borrowing to take place through recognised exchanges.

Although some foreign investors have sought greater flexibility, SEBI is expected to retain the existing structure, as it believes exchange-based trading improves transparency and keeps liquidity within a centralised marketplace.

What Happens Next?

The proposals are being examined by a SEBI working group set up to review the SLBM framework. While the broad direction of the reforms has emerged, the regulator has not announced an official implementation schedule.

According to Reuters, SEBI did not comment on the proposals, and the extent of any reduction in collateral requirements is still under discussion.

Wider Regulatory Context

The proposed changes also fit into a broader regulatory strategy.

Over the past 18 months, the government has introduced measures that have increased the cost of derivatives trading. Expanding the SLBM framework could complement those efforts by encouraging greater activity in the cash market instead of highly leveraged derivative contracts.

Conclusion

If implemented, the proposed reforms would mark one of the biggest changes to India's securities lending framework in recent years. Expanding the list of eligible stocks and reducing collateral requirements could improve market liquidity, strengthen price discovery, and make short selling in the cash market more accessible. While the proposals are still under review, investors and market participants will be watching closely for SEBI's final framework and implementation timeline.