The Government has decided to change its market regulations by giving the Nairobi Securities Exchange (NSE) a go ahead to introduce short selling in the market. This is aimed at boosting liquidity and diversifying the bourse’s services in a bid to attract more investors.
Short selling or shorting refers to the sale of a security, which is not owned by the seller at the time of the transaction but rather is borrowed or rented, only to be bought back by the seller at later time in order to repay the lender. The activity is motivated by the belief that the security’s price will decline thus allowing it to be bought back at a lower price leading to a profit for the seller.
According to Geoffrey Odundo, Chief Executive of the bourse, the move to allow short selling will be an added advantage as it will help the market to increase its turnover ratio from its current 6% to 15%. “It is good for the market,” he said.
He said that the short selling will be available and open to both the retail and institutional investors. However, a requirement was put in place for retail investors; they must have a significant position in order to participate.
On the other hand, the Capital Markets Authority (CMA) has already drafted a framework that will help to introduce the product, ensuring that no additional taxes are charged as well as protecting against the winding of companies. The framework is expected to be included this year’s budget.
“Tax neutrality will make sure that as we introduce this new product that will result in the transfers of securities we can manage the tax cost of these transfers of securities so there is no additional tax expense,” said CMA boss, Mr Paul Muthaura.
