What changed
Earlier, FIIs were barred from short selling and had to take/give delivery of securities. Now, RBI has allowed FIIs to short sell, lend, and borrow equity shares, with conditions like no short selling of banned/caution list shares and borrowing only for delivery into short sales.
What it means for you
Banks acting as custodians must report all short selling, lending, and borrowing transactions by FIIs with specific remarks. This opens new revenue streams for custodian banks through transaction handling and margin management, but requires strict monitoring to ensure compliance with FDI and regulatory conditions.
What you must do
- Update internal systems to flag and report FII short selling, lending, and borrowing transactions with appropriate remarks.
- Ensure FII clients comply with FDI policy and do not short sell shares on RBI's ban or caution list.
- Maintain cash-only margin/collateral for FII borrowing and lending activities, with no interest paid on such margins.
- Inform AD Category-I bank constituents and customers about these new permissions and conditions.
Who it affects
AD Category-I banks, SEBI-registered FIIs and their sub-accounts, Designated custodian banks, Indian equity market participants
Can FIIs short sell any equity share?
No, FIIs cannot short sell equity shares that are on RBI's ban list or caution list. They must also comply with current FDI policy.
What form must margin or collateral take for FII borrowing?
Margin or collateral must be maintained only in cash, and no interest shall be paid to the FII on such margin or collateral.
How should custodian banks report these transactions?
Custodian banks must separately report all short selling, lending, and borrowing transactions in their daily reporting with a suitable remark like 'short sold', 'lent', or 'borrowed' equity shares.