The move comes close on heels of the recommendations of an RBI-appointed high power committee for a new legislation christened Government Securities Act (GSA) repealing the existing Public Debt Act. The proposed act will empower the Reserve Bank to regulate the entire securities market, which is currently under the ambit of Securities Contract Regulation Act (SCRA) of Sebi.

The proposed GSA is currently lying with the ministry of finance for approval. At present, short selling or forward selling of securities is not permissible.

The proposal for removal of ban on short selling of securities listed under the securities lending scheme of Sebi is put forth by the high power committee headed by RBI deputy governor YV Reddy.

According to the working group, the SLS introducedby Sebi will go a long way in developing seecondary market in securities and other debt instruments provided the scheme is made popular.

According to officials closely associated with the working group, "This scheme could become more useful if their short selling of securities is permitted which under the present legal setup is prohibited."

This proposal is a part of the group's suggestion to revive the securities market. The securities lending scheme of Sebi, which was introduced in 1997, does not have any takers owing to the underdeveloped gilts market. "The quantum of trading in the gilts market is very small which is why the SLS of Sebi has not picked up in the last two years," a Sebi official said.

As per the scheme, lenders and borrowers enter into an agreement with approved intermediary for depositing the securities for the purpose of lending and borrowing through them. Under the scheme, there is no direct agreement between lender and borrowers for lending or borrowing of securities.

As perthe scheme, the lending of securities under the scheme through an approved intermediary and return of equivalent securities of the same type and class by borrowers will not be treated as disposal of the securities.

The working group has also called for an effective delivery versus payment system in order to regulate the payment system by dealing with the securities in the secondary market. The committee has also suggested formulation and establishment of an overdraft policy for securities processing precedures and standardisation of repo.