Hello folks, if someone shorts the shares just before ex dividend date and lets say it was worth RS 1000 and the dividend announced was Rs 600 and just after the report date share fell to Rs 400(1000-600) then the person can square off his position making clean profit of Rs 400 per share. So at this time the dividend will belong to whom? (I guess the one to whom he short sold the stocks) and if it is true then no one will lend the stock just before ex dividend date as otherwise he will not get dividend and his share price will also get reduced. Am I right in my assumption?
You can’t carry over short cash positions in Indian exchanges. You can short the futures of the underlying but the future’s price will always almost price in the dividend payout (except small marginal deviations).
Assuming NSE/BSE allows short selling as in the case of US markets, the one who is short will be liable to payout the dividend to the one who bought it from you. Say you sold 100 shares of AAPL and AAPL pays a dividend of 1cent then you as a short holder will be liable to pay 1 dollar from your account.
I think you are looking for some arbitrage trade during dividends but the market will most likely price in such events (in most cases).
So suppose X shorted 1 stock which he took from Z for Rs 100 and Y purchased that stock post ex dividend day the stock price falls to Rs 40 as dividend announced was Rs 60 so this Rs 60 will need to be paid by X to Z. And as the stock is with Y he will receive the dividend from the corporate. Am I right?
Assuming this is non-Indian scenario and X borrowed from Z before ex-div date, then X would pay Z the dividend of 60rs. ideally speaking the shorting cannot be done from individual share borrowing but from the pool of shortable shares (either at exchange or broker level). So the broker will make sure the ledger accounts are updated on x and z. Hope it helps.
I think you mean when Z buy/borrow it from X (for sorting) before ex dividend date instead of X buying it from Z. And the amount of dividend should be Rs 60 right?
Sorry the previous post has been edited now.
@Guruprite @pnsudesh You can refer to the Security Lending and Borrowing Scheme. Using this scheme wherein we simply borrow securities from others and sell them and at a later date buy the same securities and return it to the lender.
So, I think we can carry short positions in cash segment too in Indian Exchanges using SLBS.
With respect to the dividend or any other corporate action, lender is the ultimate beneficiary and there is a system in place to give such benefits to the lender. So I think even if the borrower received the dividend, it will be only temporary and will eventually be returned to the lender at the time of close of the lending contract.
As far as the arbitrage in relation to the difference in stock price on ex date and record date, even I have a doubt whether it would work or not. Have you tried encash the arbitrage, If so please let me know the details.
thanks @ValueIQ i did not realize that there is a possibility to use SLB as it’s something I have never used. Having looked at the SLB process, it looks like someone can borrow shares from others to short it. But I am not entirely clear on broker charges and lending fees, etc. So I can’t be sure whether it can be used in real world to do arbitrage trade. But I have done this on US markets where it works like a breeze.