SEBI Plans to Nearly Double Stocks Eligible for Short Selling

The Indian stock market has grown rapidly over the last decade. Total market capitalisation has crossed $5 trillion. Millions of new retail investors have entered the market. However, a major portion of trading volume has moved toward the complex derivatives market.

In May 2026, the number of active investors in the cash market dipped 4% month-on-month to 1.09 crore. To fix this imbalance, the Securities and Exchange Board of India (SEBI) is planning a major overhaul. The regulator wants to make the cash market more attractive.

To achieve this, SEBI plans to nearly double the number of shares that investors can borrow and short. This move will provide more choices to traders who want to profit from falling stock prices. By expanding the SEBI short selling list, the regulator wants to create a healthier and more balanced trading environment in India.

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Key Takeaways

• Major Expansion: The market regulator plans to nearly double the number of stocks available for short selling through the Stock Lending and Borrowing Mechanism (SLBM).
• Current Status vs. Proposed Goal: Right now, only 176 out of about 2,600 stocks listed on the National Stock Exchange (NSE) are eligible. The new plan will significantly increase this number to cover most liquid shares.
• Lower Costs: The regulator is looking to cut down the high collateral requirements. This move will make borrowing shares cheaper for traders.
• Shift from Derivatives: The main objective is to boost the cash equity market and move retail investors away from high-risk futures and options (F&O) trading.
• Timeline: The final details and revised guidelines are expected to be ready by the end of this year.

Understanding Short Selling and How it Works in India

To understand this new plan, we must first understand what short selling means. In regular investing, you buy a stock first. You wait for the price to go up and then you sell it to make a profit. This is called going “long.” Short selling is exactly the opposite. In short selling, you sell a stock first and buy it back later.

You do this when you expect the stock price to drop. How can you sell something you do not own? This is where the Stock Lending and Borrowing Mechanism comes into play. You borrow shares from an investor who owns them. You sell those borrowed shares in the open market at the current high price.

Later, when the price falls, you buy the same number of shares back at a lower price. You return the shares to the original lender. The difference between your selling price and your buying price is your profit. If the stock price goes up instead of down, you suffer a loss.

In Western markets, institutional investors often borrow shares directly from brokers in private deals. However, India has strict rules to prevent scams. In the early 2000s and between 2017 and 2020, India tightened its cash market rules.

Because of this, all stock lending and borrowing must happen through authorized stock exchange platforms. You cannot do it privately through a broker. This system ensures high transparency but limits the number of stocks available.

Why is SEBI Expanding the Pool of Stocks?

The National Stock Exchange has more than 2,600 listed companies. Out of these, only 176 stocks are currently available for borrowing and lending. This means traders have very few choices if they want to short a stock in the cash market.

If a trader wants to short a company outside this small list, they are forced to use the futures and options market. It is also to be noted that the National Stock Exchange accounts for close to 95% of the cash equities market in India. By adding more companies to the official SEBI short selling list, the regulator wants to give traders a direct alternative.

SEBI hopes that including the majority of liquid shares will shift volumes from derivatives back to the cash market. Transactions in the cash market are fully backed by actual shares and proper collateral. This makes the cash market much safer than the derivatives segment.

The Big Shift: Moving Investors Away from Derivatives

The growth of India’s derivatives market has become a major concern for policymakers. Today, the capital deployed in derivatives is about three times larger than the cash market. Even more shocking is that the gross value of derivative contracts is nearly 500 times larger than the cash market. This ratio is much higher than what we see in other major global financial markets.

Exchange data reveals that as of June 2026, the combined average daily notional turnover in the equity derivatives segment across NSE and BSE amounted to around Rs 492 lakh crore, as against Rs 1.32 lakh crore in the cash market .A huge number of retail investors trade in options every day. Many of them treat it like a game of chance.

What this Really Means

Studies conducted by the market regulator show that nearly 90% of retail investors lose money in the derivatives segment. Because options trading involves high leverage, losses can accumulate very fast. In many cases, small traders lose their entire life savings. In FY25 alone, individual traders in the equities options segment lost Rs.1.05 lakh crore.

Also, during the period December 2024 to May 2025, 91% of individual derivatives traders lost an average amount of Rs.1.1 lakh per person. This sum is over a month’s salary for most Indians. The government and the regulator have been trying to control this speculative bubble.

Over the past 18 months, they have introduced higher taxes and stricter rules to make derivatives trading more expensive. Now, they are focusing on the other side of the problem. Instead of just penalising derivatives trading, they want to make the cash market more functional.

A broader SEBI short selling list will give institutional investors and sophisticated traders the tools they need to hedge their risks without rushing into speculative options contracts.

Easing the Eligibility Criteria for Stocks

How does a stock get selected for short selling? Currently, SEBI uses three main criteria to decide which companies can enter the borrowing and lending market:

1. Liquidity: The stock must be easy to buy and sell without causing huge price swings.
2. Trading Volume: The stock must have an average monthly trading turnover of at least ₹100 crore ($10.5 million) over the previous six months.
3. Derivatives Market Size: The stock must be large enough to support a market-wide derivatives exposure of at least ₹100 crore.

There are also strict rules regarding how many shares must be held by the general public. To double the number of eligible companies, the regulator’s internal working group is actively deliberating on relaxing these thresholds. Easing these parameters will allow mid-cap companies and highly traded new-age firms to join the institutional SEBI short selling list.

Reducing the High Cost of Collateral

Apart from increasing the number of stocks, the regulator is also planning to cut down collateral requirements. Right now, short selling in India is a costly affair.

When a trader borrows shares, they must provide collateral that can go as high as 130% of the total value of the borrowed shares. In comparison, developed markets like the United States and Europe require collateral of around 100%.

High collateral requirements make short selling capital-intensive for Indian traders. It reduces their overall returns and discourages participation. By lowering these margin requirements, the regulator will significantly reduce the cost of trading. This will encourage more institutional players to participate in the stock lending system.

What this Move Means for Different Market Participants

An expanded SEBI short selling list will bring significant changes to the entire financial ecosystem:

• For Retail Investors: Regular investors will see better price discovery. When short selling is restricted, stock prices can sometimes rise way above their actual fundamental value due to pure speculation. Short sellers help bring these inflated prices back to reality.
• For Institutional Investors: Mutual funds, insurance companies, and foreign portfolio investors (FPIs) will benefit the most. They hold large portfolios of shares for the long term. They can now lend their idle shares to earn a steady rental income. This extra income can boost the overall returns of mutual fund schemes.
• For Market Volatility: Many people believe that short selling increases market crashes. However, global research shows that healthy short selling actually reduces extreme volatility. It provides liquidity when the market is crashing because short sellers must buy back shares to close their positions, creating a natural floor for falling prices.

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Conclusion

The proposal to nearly double the number of stocks eligible for borrowing and lending is a massive step forward for Indian capital markets. It shows that the regulator is moving toward a more mature market structure. By relaxing eligibility criteria and reducing high collateral costs, the new framework will breathe new life into the cash equities segment.

While the final guidelines will be locked in by the end of this year, the message is clear. The regulator wants a safer, more transparent market where investors can hedge risks efficiently without relying on dangerous leverage. It will be interesting to see which companies make it to the new SEBI short selling list when the final policy is rolled out.