Nithin Kamath, the co-founder and CEO of stock broking platform Zerodha, warned that the lack of short selling in Indian markets is causing potential market distortions.
According to Kamath, the Indian stock market‘s structurally long-only nature not only impairs the price discovery but also hampers the development of short-selling talent.
“Unless we make shorting of stocks easy in the Indian markets, price discovery will be impaired,” Nithin Kamath said in a post on the social media platform X on Monday, July 14.
The Problem with Long-Only Bias
Explaining the reason behind the lack of short sellers in the Indian stock market, Kamath said it is a cumbersome activity as borrowing a stock to short is really hard and is an offline process.
Short selling allows investors to bet against overvalued or fundamentally weak stocks. But in India, most investors must rely on the Futures and Options (F&O) market if they wish to short sell, but that too has severe limitations.
“The only real way to short stocks until now was to use futures, maybe options. But there are only 224 F&O stocks, which means you can’t short the vast majority of the problematic stocks. Also, these contracts expire every month, and the cost of rolling over these contracts is significant (only the 1st month contract is liquid),” Kamath said.
This structure is far from ideal for investors or funds looking to manage risk through short positions.
Short Sellers: The Unsung Market Cleaners
Nithin Kamath equated short sellers with janitors, and said they are massively underrated. “Short sellers, although they have a bad reputation, are massively underrated. Think of them as janitors; they clean up all the garbage in the markets and make them more efficient,” he said. Unless this changes, there will always be weird distortions in the prices of Indian markets, Kamath warned.
The Need for a Scalable SLB System
India does have a Securities Lending and Borrowing (SLB) mechanism, but it’s still offline and clunky. Even Zerodha, one of India’s largest brokerage, offers SLB only via phone-based requests. This makes it impossible to scale. Kamath hopes that a fully online SLB platform could be ready by the end of the year, which would be a major step forward in simplifying short selling.
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