SEBI Plans To Expand Stock Lending Framework, Ease Short Selling Norms

SEBI is working on proposals to widen access to stock lending and borrowing by increasing the number of shares eligible for the mechanism and reducing collateral requirements, according to reports. The proposed changes are aimed at improving activity in the cash equities market while encouraging greater participation beyond the derivatives segment.

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As per reports, the regulator is considering nearly doubling the number of stocks that qualify for borrowing and lending. At present, only 176 stocks are eligible despite the National Stock Exchange (NSE) having around 2,600 listed companies. The proposed expansion would bring a much larger pool of liquid stocks into the lending and borrowing framework.

Eligibility Criteria Under Review

Reports indicate that SEBI is reviewing some of the conditions that determine whether a stock qualifies for lending and borrowing. The current framework requires companies to meet thresholds related to liquidity, trading volume and derivatives exposure.

One of the existing requirements is an average monthly trading turnover of at least ₹100 crore during the previous six months. Eligible stocks must also support derivatives exposure of at least ₹100 crore across the market, along with meeting public shareholding norms.

According to reports, discussions are underway to relax some of these thresholds, although the final details are yet to be decided. The proposals are expected to be finalised by the end of this year.

Focus On Cash Equities Market

The review comes as authorities look to encourage greater participation in the cash market. India’s derivatives segment has expanded rapidly in recent years and now accounts for substantially higher trading activity than the cash equities market.

SEBI has previously stated that nearly 90% of retail investors trading in derivatives incur losses. In contrast, transactions in the cash market are backed by actual shares and collateral, making them comparatively less leveraged.

The government has also introduced measures over the past 18 months to increase the cost of derivatives trading as part of broader efforts to improve market stability.

Collateral Norms May Also Change

According to reports, SEBI is also examining collateral requirements under the stock lending and borrowing mechanism. Current rules can require collateral of up to 130%, compared with around 100% in several overseas markets.

While the extent of any reduction remains undecided, the review forms part of a broader exercise initiated after SEBI set up a working group last year to assess the existing framework.

India continues to require all stock lending and borrowing transactions to be conducted through recognised stock exchanges rather than brokers. As per reports, despite requests from some foreign investors for a different structure, SEBI is expected to retain the exchange-based model, citing the need to consolidate liquidity and maintain transparency in the market.