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Sebi seeks clarifications on short-selling tax waiver
June, 04th 2007
The Securities and Exchange Board of India (Sebi) has approached the Reserve Bank of India (RBI) and the Central Board of Direct Taxes (CBDT) for clarifications on lending and borrowing of securities under the proposed short-selling mechanism.
 
The Sebi wants such lending and borrowing not to be treated as transfer of securities and, hence, feels it should not attract capital gains tax under the Income Tax Act. Sources said the CBDT was looking into Sebi's suggestions. The introduction of short-sales, which has been cleared by the Sebi board, proposes to bring in a crucial ingredient into the market.
 
Short-selling involves the sale of shares by an investor when one does not own them at the time of trade. Short-sales will provide more depth and level playing field to all participants.
 
According to the proposed short-selling mechanism, institutional investors can sell securities even when they do not own them. But they are required to deliver the securities sold by borrowing them from the market. There will be a mechanism for lending and borrowing of securities where investors, who have securities but do not want to sell them in the near future, can lend them to those who have taken up a short position (who intend to short-sell). The investors, who lend the securities, end up earning some returns.
 
According to sources, the RBI seems to have a problem with short-selling as no foreign entity can leverage on its existing positions in the equity market under the existing Foreign Exchange Management Act (Fema).
 
In other words, a foreign entity cannot lend its securities to others and receive a monetary benefit out of it. Therefore, the Sebi has asked the RBI for necessary clearances under the Fema to allow foreign institutional investors to engage in lending and borrowing of shares for short-selling.
 
The market regulator is in favour of a full-fledged lending and borrowing mechanism, where clearing houses Bank of Indian Shareholding and National Securities Clearing Corporation will act as approved intermediaries (AI).
 
An AI is an entity registered with the Sebi with whom a lender and a borrower enter into an agreement to deposit shares for lending and borrowing during the settlement of trades. Shares of companies are the only instruments allowed for lending and borrowing.

Anindita Dey
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