Are fii and dii allowed to short stocks, I mean before buying them?
In futures, even u can short the stock, u does not need to be dii or fii and as far as equity is concerned rules of game are same for everybody
It depends on how the FII or DII is registered. For example a mutual fund, PMS, etc can't short any stocks. Even in derivatives or F&O, shorting can be done only to hedge and not for directional trading.
On the other hand if they are registered as a hedge fund ( Alternate investment fund - category 3), you are allowed to take short positions for directional trade. Again short positions only using derivatives. Naked shorting in equity for more than a day is not possible for anyone in India.
The only other way to short is through SLB (Stock lending and borrowing) mechanism. You can first borrow stocks through this route and then short it. Check this post. Drawback of SLB is that it is not very popular yet, and is limited to only F&O stocks.