RBI allows FIIs to short sell, lend, and borrow equity shares
Current · Source: Reserve Bank of India · RBI/2007-08/219 · issued 31 Dec 2007 · ~1 min read
Quick answerRBI now permits SEBI-registered FIIs and their sub-accounts to short sell, lend, and borrow equity shares of Indian companies, subject to conditions including FDI policy compliance and cash-only margin.
The rule, in the simplest words
FIIs (foreign investors) can now sell shares they don't own yet (short sell), and also lend or borrow shares, but only if they follow all rules.
FIIs cannot short sell shares that are on RBI's ban or caution list (a list of risky shares).
FIIs can borrow shares only to deliver them into a short sale (they can't borrow for any other reason).
When FIIs borrow shares, they must keep cash as a safety deposit (margin), and the bank cannot pay them interest on that cash.
Banks that hold FIIs' shares (custodian banks) must report every short sell, lend, or borrow trade with a special note like 'short sold' or 'lent' so RBI can check.
How it plays out — a real example
A forex & trade-finance officer in Indore, Priya, works at a custodian bank. She gets a report from an FII client who wants to short sell shares of a company not on the caution list. Priya checks the FDI rules, confirms the client will keep cash margin, and flags the trade in her daily report with the remark 'short sold' so RBI can monitor it.
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
❓ Common questions
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.
📜 Read the original circular — full text as issued by RBI
RBI/2007-08/219
A. P. (DIR Series) Circular No. 23
December 31, 2007
To,
All Authorised Dealer Category - I banks
Madam /Sir,
Permission for Short selling of Equity Shares by SEBI registered FIIs
Attention of Authorised Dealer Category - I (AD Category - I) banks is invited to A. P. (DIR Series) Circular No.53 dated December 17, 2003 wherein SEBI registered FIIs / sub-accounts of FIIs were permitted to buy / sell equity shares / debentures of Indian companies. In terms of para 5 of the Annex to the circular, FIIs are not allowed to engage in short selling and are required to take delivery of securities purchased and give delivery of securities sold.
2. It has now been decided in consultation with Government of India and SEBI, to permit Foreign Institutional Investors (FIIs) registered with SEBI and sub-accounts of FIIs to short sell, lend and borrow equity shares of Indian companies. Short selling, lending and borrowing of equity shares of Indian companies shall be subject to such conditions as may be prescribed in that behalf by the Reserve Bank and the SEBI / other regulatory agencies from time to time.
3. The above permission is subject to the following conditions:
(i) The FII participation in short selling as well as borrowing / lending of equity shares will be subject to the current FDI policy and short selling of equity shares by FIIs shall not be permitted for equity shares which are in the ban list and / or caution list of Reserve Bank.
(ii) Borrowing of equity shares by FIIs shall only be for the purpose of delivery into short sale.
(iii) The margin / collateral shall be maintained by FIIs only in the form of cash. No interest shall be paid to the FII on such margin/collateral.
4. The designated custodian banks shall separately report all transactions pertaining to short selling of equity shares and lending and borrowing of equity shares by FIIs in their daily reporting with a suitable remark (short sold / lent / borrowed equity shares) for the purpose of monitoring by the Reserve Bank.
5. Necessary amendments to the Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000 ( Notification No.FEMA.20/2000-RB dated May 3, 2000 ) are being issued separately.
6. AD Category – I banks may bring the contents of this circular to the notice of their constituents and customers concerned.
7. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law..
Yours faithfully,
(Salim Gangadharan)
Chief General Manager
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2007-08/219 · issued 31 Dec 2007. The plain-English explanation above is BankPulse’s own independent summary.
Maintain cash-only margin/collateral for FII borrowing and lending activities, with no interest paid on such margins.
💻 IT / Systems
Update internal systems to flag and report FII short selling, lending, and borrowing transactions with appropriate remarks.
📜 Compliance
Ensure FII clients comply with FDI policy and do not short sell shares on RBI's ban or caution list.
Inform AD Category-I bank constituents and customers about these new permissions and conditions.
Grouped from the action items above — a single circular may involve more than one team.
Worked example & action-note template
Example: if you are an IT/Systems lead at a bank this circular applies to (AD Category-I banks, SEBI-registered FIIs and their sub-accounts, Designated custodian banks, Indian equity market participants), your first concrete step on “RBI allows FIIs to short sell, lend, and borrow equity shares” is: “Update internal systems to flag and report FII short selling, lending, and borrowing transactions with appropriate remarks.” (RBI issued this 31 Dec 2007).
Circular: RBI/2007-08/219 -- RBI allows FIIs to short sell, lend, and borrow equity shares
Issued: 31 Dec 2007
Action required: Update internal systems to flag and report FII short selling, lending, and borrowing transactions with appropriate remarks.
Action required: Ensure FII clients comply with FDI policy and do not short sell shares on RBI's ban or caution list.
Action required: Maintain cash-only margin/collateral for FII borrowing and lending activities, with no interest paid on such margins.
Action required: Inform AD Category-I bank constituents and customers about these new permissions and conditions.
Owner: ____________ Target date: ____________
Board/committee approval needed? Y / N
Evidence filed in compliance register on: ____________
Built only from this circular’s own published fields — not legal advice; always confirm against the official RBI source.
💬 Banker Discussion
Discuss this circular with fellow bankers — reply, upvote what helps, report what doesn’t belong. Be professional; no client data. Views are the commenter’s own, not BankPulse’s.
BankPulse Compliance Evidence Pack — generated 05 Aug 2026 · status cross-checked against RBI’s official withdrawal register (refreshed weekly). Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=3990&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.
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