The Kenya Govt through the ministry of Treasury has finally allowed the Nairobi Stock Exchange (NSE) to introduce short-selling, a long awaited move that is expected to boost liquidity and diversify the exchange’s services to in a bid to attract more investors.
Treasury has through a gazette notice authorised stock lending and short selling, but restricted their adoption by limiting them to licensed market participants.
Short selling, which allows investors to make gains in a falling market by borrowing a stock they don’t own, selling it and agreeing to buy it back at a lower price, plays a critical role in developed capital markets since it makes price discovery more efficient and smoothens volatility while providing investors with a host of risk-management tools.
The Capital Markets Authority (CMA) has in the past said it was consulting on the operating model and technical enhancements of the short-selling system.
Short selling is controversial because when a large number of investors decide to short a particular stock, their collective actions can have a dramatic impact on the company’s share price. Many companies will blame short sellers for sharp declines in their stock.
However, in part due to a concern about causing instability, the CMA has put some measures in order to minimize the risk associated with short selling.
The practice will only apply to a limited number of listed securities, which will be reviewed and determined by the authority. The CMA hasn’t named the initial eligible stocks.
