Rules for FIIs and DIIs to invest/trade

[Prayag]

This article explains it briefly -

Stop FPIs from short-selling stocks, Sebi tells custodians

If you are interested, you can refer to SEBI’s Operational Guidelines for FPIs which goes into much more detail.

Also, Nithin answered a similar query a long time back -

@nithin

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.

Since that answer, Mutual Funds (which are part of DIIs) have had some rule changes -

Sebi issues norms for mutual funds investments in derivatives

MFs, PMS in commodity derivatives soon: SEBI