India's market regulator, SEBI, is planning to make it easier for investors to short stocks, potentially by almost doubling the number of shares eligible for lending and borrowing and reducing collateral requirements. This move aims to draw investors away from the higher-risk derivatives market, where nearly 90% of retail investors incur losses, and towards the cash equities market. Currently, only 176 out of 2,600 companies listed on the National Stock Exchange (which accounts for about 95% of India's cash equities market) are eligible for borrowing and lending. By increasing this number, authorities hope to include most liquid shares.
The proposed changes stem from concerns about the rapid growth and excessive leverage in India's derivatives market. A SEBI study found that retail traders lost $33 billion in derivatives over the four years leading up to March 2025. The Reserve Bank of India has also warned about the risks of excessive leverage sparking a market shock and has curbed lending to stockbrokers and proprietary traders. This has led to a significant drop in derivative volumes.
Key criteria for stock eligibility for borrowing and lending include an average monthly trading turnover of at least 1 billion rupees ($10.5 million) over the previous six months and the ability to support derivatives exposure of at least 1 billion rupees across the market. While collateral requirements for borrowing and lending are currently as high as 130% in India, compared to around 100% in the U.S. and Europe, it is unclear by how much these might be cut. Deliberations are ongoing, and the details are expected to be finalized by the end of this year.
The regulatory push also involves SEBI's efforts to develop the cash equities market and encourage responsible use of leverage. While the regulator is considering expanding financing options for leveraged cash trades, it remains cautious about overusing leverage. Indian regulations are unique, as stock lending and borrowing must occur on exchange platforms, a stance SEBI is unlikely to change to ensure liquidity pooling. This overall strategy seeks to enhance hedging and price discovery for both retail and institutional investors.
