SEBI liquidity push: Short-selling, SLB reforms in 2026

The key message from SEBI

India’s markets regulator has indicated that any expansion of the single-stock futures list will depend on liquidity in the underlying stock. SEBI chief Pandey said the regulator wants the cash equities segment to become deeper and is examining multiple proposals around market structure and trading mechanics. The focus is on improving the ease and cost of transacting in the cash market, where liquidity often trails the derivatives segment. Industry participants have asked for more stocks to be made eligible for single-stock futures to create additional avenues for hedging and short exposure. But SEBI has signalled that strict liquidity and trading thresholds will continue to guide eligibility. Pandey also indicated that there is no immediate decision on expanding the list. The topic is expected to be examined as part of an ongoing review.

Why SEBI is prioritising cash-market depth

SEBI’s stated objective is to deepen liquidity in the cash segment rather than see short exposure and trading activity concentrate mainly in derivatives. Pandey said the regulator is reviewing the effectiveness of short selling and the Securities Lending and Borrowing Mechanism (SLBM). The broader context is that India’s derivatives market is viewed as more active than the cash market in many counters. SEBI’s approach suggests it wants the cash market to support better price discovery and smoother execution. The regulator has also acknowledged that securities lending and borrowing markets are still underdeveloped. It has flagged transaction costs as a key factor that can deter participation. In practical terms, SEBI’s review is aimed at making mechanisms such as short selling and SLB easier to use, more economical, and more relevant for market participants.

Working group to review short selling and SLBM

SEBI said it will soon form a working group to comprehensively review short-selling rules and the SLBM framework. This would be the first major overhaul in nearly two decades, as per the information provided. The working group’s remit includes examining barriers that prevent broader adoption of short selling and securities lending and borrowing. Pandey said multiple proposals are on the table, including whether the existing framework is effective in supporting liquidity. He also linked participation to the cost of transactions, noting that if transaction expenses are too high, trading activity will not happen. The stated direction indicates SEBI is looking at both regulatory design and on-ground implementation frictions. The working group is expected to cover issues raised by industry on usability and access.

Stock futures expansion: demand exists, liquidity gates stay

A recurring demand from market participants has been to expand the number of stocks eligible for single-stock futures. The argument from the industry is that a larger list can provide more ways to hedge portfolios and take short exposure. At present, a little over 200 stocks qualify for stock futures trading, according to the information provided. Pandey acknowledged the demand but stressed that eligibility is governed by strict liquidity and trading thresholds. He said SEBI would see whether there is an opportunity to revisit the criteria, but added it would likely not be expanded as much as some market participants would like. His remarks emphasised that liquidity and trading activity in a stock must be evaluated before allowing entry into the derivatives market for stock futures. He also indicated no immediate decision has been taken, and the issue would fall within the working group’s broader review.

SLB reforms: shifting short transactions from futures to lending

SEBI has been holding consultations with market participants to improve the Securities Lending and Borrowing (SLB) mechanism and lift cash-market liquidity. Ananth Narayan, a whole-time member at SEBI, said that when participants want to execute a short transaction they typically use the futures market rather than SLB, and SEBI is looking for ways to change that. The SLB framework permits investors to borrow securities they do not own, enabling short selling and supporting price discovery. But the securities lending market in India is described as having low volumes and a restricted selection of stocks. That limits the ability to execute large trades without moving prices. Narayan said discussions are still in early stages and SEBI is exploring what can be done to encourage greater use of SLB. The regulator is also looking at simplifying SLB transactions from a process and design perspective.

What investors can short today, and what limits activity

India permits only covered short selling, while naked short selling is prohibited. Both retail and institutional investors can short only stocks listed in the futures and options (F&O) segment, which currently includes about 224 stocks. Beyond that limited selection, short selling is described as virtually unfeasible under current conditions. The SLB platform is run by clearing corporations of exchanges and requires short sellers to arrange borrowings in advance or cover positions within the same trading day. Despite a market capitalisation exceeding ₹30 trillion for the eligible universe referenced, SLB volumes are described as minimal, with only a small portion of eligible shares ever lent. Eligible securities for SLB include dematerialised shares traded in the F&O segments of NSE and BSE. SEBI has previously attempted to expand the list of stocks eligible for SLB, but no significant changes were implemented.

Foreign investor reforms: registration time, costs, and netting

Pandey also said SEBI is set to implement additional reforms aimed at attracting foreign investors. The measures include expediting registration processes, lowering trading costs in the cash equities market, and simplifying short-selling procedures. Pandey called a roughly month-long registration timeline unacceptable and said the aim is to shorten it to a few days. SEBI is also contemplating the introduction of “netting,” allowing investors to offset buy and sell transactions to reduce capital requirements, especially for foreign investors. However, India’s central bank currently does not permit such netting practices. Pandey said netting for the same security may not be feasible, but it could be possible across different securities, and implementing it would be a significant advancement. These proposals position market plumbing and operational efficiency as central themes in the regulator’s agenda.

Market impact: what this could change, based on stated goals

SEBI’s stated push is aimed at improving cash-market liquidity and reducing frictions that push short exposure into futures by default. A more usable SLB ecosystem could support covered short selling and hedging strategies, as highlighted in the information provided. For derivatives, the regulator’s position signals that expansion in single-stock futures will remain tied to liquidity and trading thresholds, limiting the pace of inclusion even if demand is strong. For foreign investors, faster registration and lower cash-market trading costs could reduce onboarding and participation hurdles. The netting proposal, if progressed within regulatory constraints, is framed as a way to reduce capital requirements by offsetting transactions. Separately, SEBI has approved a beta version of T+0 settlement for 25 stocks with a limited set of brokers, in the context of India’s current T+1 settlement cycle and a proposed phased transition to T+0. Together, these measures reflect a focus on market efficiency, cost, and liquidity rather than expanding product access without liquidity safeguards.

Key facts at a glance

Conclusion

SEBI’s messaging ties product expansion in stock futures to liquidity safeguards, while placing greater emphasis on deepening the cash market through reforms to short selling and SLB/SLBM. The regulator has also signalled foreign investor-focused changes such as faster registration, lower costs, and a possible netting framework, subject to constraints including the central bank’s stance. Over the coming period, the working group’s review will be the main channel through which proposals on short selling, SLB/SLBM, and related market-structure changes are assessed. Any decision on expanding stock futures eligibility is expected to be considered within that broader review process.