Naked short selling is not permitted in the Indian securities market. All investors must meet their obligations to deliver securities at settlement. According to SEBI norms, short selling shall be defined as the sale of shares the seller does not own at the transaction time. All investors, retail and institutional alike, should be allowed to short sell.

Securities traded in the F&O Segment shall be eligible for short sales. SEBI may, from time to time, review the list of stocks suitable for short selling.

Institutional investors should disclose in advance whether the transaction is a short sale transaction when placing an order. However, retail investors are allowed to make similar disclosures until the close of trading on the trading day.

Brokers are supposed to collect details of short positions in stocks, collate the data and upload it to the stock exchange before trading starts on the next trading day. The stock exchange compiles this information weekly and publishes it on its website for public reference. The frequency of such disclosure may be reviewed from time to time with the approval of SEBI.

After the market crash, short-selling came to the fore, and Adani Group shares plummeted. Markets watchdog SEBI will likely investigate short-selling in Indian equities over the past few days.

According to a SEBI discussion paper, short selling of securities that the seller does not own is a long-standing market practice that has often been the subject of debate and divided opinion in most securities markets globally.

Proponents of short selling consider it an outstanding and fundamental feature of the securities market. On the other hand, critics of short selling firmly believe that short selling poses potential risks and can quickly destabilise the market. In an efficient futures market, the relationship between the spot price of the underlying asset and the futures price is governed by cash arbitrage and reverse arbitrage. The latter requires traders to be able to sell the underlying security short if enough traders own the security and can sell cash to take advantage of too-low futures prices.

It is worth noting, however, that despite conflicting schools of thought, securities market regulators in most countries, and especially in all developed securities markets, recognise short selling as a legitimate investment activity. These jurisdictions also have active equity derivatives markets, including equity futures. Some jurisdictions even recognise the usefulness of naked short sales in certain circumstances. Instead of banning short sales, regulators allow them to take place within a regulated framework.

The International Organisation of Securities Commissions (IOSCO) also examines short selling and securities lending practices in various markets and recommends greater transparency in short selling rather than a ban on short selling.

In 2022, US prosecutors were considering racketeering charges in a broad investigation into hedge funds and research firms that shorted stocks, according to media reports.

Media reports said the Justice Department had issued subpoenas to dozens of companies as part of a sweeping investigation focused on potentially manipulative trading around adverse reports on public companies issued by some investors.