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SEBI allows short selling by institutions

Capital market regulator SEBI formally declared that Foreign Institutional Investors (FIIs), Mutual Funds and other institutions will be allowed to short-sell in the spot market. The decision comes less than a month after Finance Minister P. Chidambaram's announcement in the Budget for FY08 in this respect. This is a big move that the market, especially the institutions, have been waiting for, and is likely to lend more depth and liquidity to the usually volatile spot market. However, for the move to take its full effect, a comprehensive stock lending and borrowing mechanism has to be in place. Till now, institutions were allowed to go short only in the Futures and Options (F&O) segment of the market, even as retail investors were free to sell short in the spot market, that too without adhering to a proper lending and borrowing process. Short-selling allows one to make a profit by selling a stock in anticipation of a fall in the price of the particular scrip. In case, one doesn't have the stock one has to borrow from others at a cost. Meanwhile, at its Board meeting on March 22, SEBI also tightened the norms for Initial Public Offerings (IPOs) by real estate companies, by asking real estate developers to declare the ownership of the land bank to claim a high premium. Among the other measures announced by SEBI Chairman M. Damodaran in Mumbai included making PAN mandatory for preferential allotment, facilitating easier listing by PSUs and compulsory IPO grading. SEBI has also amended the listing agreement to allow companies to send abridged annual reports besides capping ad valorem fees to lower transaction costs on large deals and IPOs.

Cash crunch hits money market

Call money rates shot up to 10-year high of 60-70% range as desperate banks rushed to garner funds to meet a shortfall triggered by outflows of Rs300bn towards advance tax payments. In addition, the market was worried about an impending strike called by the workers of public sector banks between March 28 and March 30. Most banks, including those who are usually on the lending side, resorted to heavy borrowing in the overnight call money market in order to provide for funds for next week. However, the bank unions were persuaded to call off the strike, which could have affected banking operations across the country for as many as seven days due to public holidays. Also, the Reserve Bank of India (RBI) came to the rescue saying that funds borrowed via repurchase auctions (repo auctions) can be used for inter-bank lending. The central bank also pumped money through the daily repo auctions to help banks tide over the temporary crisis and avoid defaulting on the SLR and CRR requirements. As a result, call rates eased off to 10% levels by the end of Thursday. In currency markets, the rupee had its biggest weekly gain in more than 15 months after call rates zoomed to 70% amid severe cash strain. However, with liquidity easing the partially-convertible Indian currency too lost steam and declined to around 43.70 levels by Friday. Increased RBI intervention, coupled with short-covering of dollars and month-end demand from oil companies also played a part in softening the rupee. The currency reached the highest in 19 months this week as the cash shortage forced banks to buy rupees for their lending and spending needs. The rupee rose 1.2% this week to 43.58 against the dollar. That's the best weekly gain since the five-day period through Dec. 16, 2005.