For the record, Pakistan stopped all sales of securities below a floor level in August when the index fell beyond 'tolerable' limits. The SEC has made various attempts to ban short selling even though it accounted for only 2-4% of trades and it is now clear that the stocks on which bans were placed suffered more than the ones on which there were no such prohibitions. See an academic study. The nature of short selling is so poorly understood even amongst financial regulators, it is sad. In fact, it would not be an exaggeration to say that we would have fewer bubbles like the present one, if shorts were allowed to puncture such bubbles in time (they are not allowed to do so in dozens of countries because of wrong perceptions). I would recommend as required reading for all regulators a judgment by Justice Posner (now even more famous with his blog on law and economics) called Sullivan vs. Scattered 47 F.3d 857 (it should be available in public domain).
Perhaps we just need to call some FIIs and behead them, so as to make an example of people who are selling 'too many' securities. Does that sound like a perfect recipe for inviting further inflows of capital, which we now so badly need? My two bits are that SEBI is pushing FIIs out by intimidating them at this time - there is nothing whatsoever wrong with shorting onshore or offshore, and if we think we can become prettier by breaking the mirror, not only will be not be prettier, we'll get some shrapnel of flying glass.
See my previous blogs criticising the SEC actions and other posts relating to short selling. 'America's SEC fights dirty' and 'Jury out on US short selling rule'. See the Economist article also criticising the US move.
Update (20 Oct): My assumption above in the second line is accurate. See PR of SEBI of today and also NDTV interview of SEBI Chairman, CB Bhave.
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