Alan Burr, Principal Consultant at Etheios, comments on the recent announcement by the Securities and Exchange Board of India (SEBI) to create the opportunity for institutional investors to undertake short-selling strategies.
'SEBI's move will be welcomed by the hedge fund community. Currently hedge funds are operating actively in India but have to use other products to achieve market access including such products as Participatory Notes and contracts for differences. This more complex access mechanism comes with a greater level of cost.
"The ability to short sell however will enable hedge funds to gain the market access they desire but first the market will need to provide certain infrastructure measures to accommodate this. This will require banks, prime brokers and custody providers to set up an effective stock lending and borrowing facility.
'Once short selling is in place we expect that cash market liquidity will deepen and the effect of this will also be felt in the listed derivatives markets. The stock market in India as demonstrated by the Nifty index has been among the best-performing in the world over the past three years.
This initiative is one of a number of SEBI's plans for the Indian market in 2007. We have understood since late last year that India is seeking to attract hedge fund activity as it amends its rules governing foreign portfolio investors."