“The lack of short selling in Indian markets is causing potential market distortions. Unless we make shorting of stocks easy in the Indian markets, price discovery will be impaired,” Kamath said.
The billionaire businessman lamented the fact that borrowing the stock for shorting was very hard and an offline process.
“India has been a structurally long-only market with almost no shorting activity, because borrowing stock to short is really hard and is an offline process,” he said.
“Because of this long-only bias, there’s probably very little short-selling talent as well, even if large funds want to start shorting. 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.
In his view, this needs to change to mitigate weird distortions in the prices of Indian markets.”Unless this changes, there will always be weird distortions in the prices of Indian markets. 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,” Kamath said.Also Read: Nithin Kamath on why Zerodha has intentionally held back on enabling AI-driven order placement
Securities lending and borrowing (SLB) is still an offline process, and most brokers don’t offer an online option.
While Zerodha offers this service, investors need to call to borrow or lend the stocks.
“Like everyone, we at @zerodhaonline offer it, but you’ll have to call us to borrow or lend, and there’s a process, which means it’ll never scale. Hopefully, we will have an online platform by the end of the year, and stock lending and borrowing will become much simpler,” Kamath said.
Kamath has been tweeting lately on different aspects of functioning of the markets including Zerodha’s own takes on adoption of technology.
Kamath recently said that design tricks used in financial apps and websites are made to deliberately nudge users to do things which are not in their best interests. Referring to these tricks as ‘Dark patterns’ Kamath said that the financial services business is often skewed towards what is good for business and not for the customers.
Read More: Nithin Kamath slams ‘Dark Patterns’ in finance apps, tells how Zerodha remains clean
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
