A level playing field! That's what regulator SEBI wanted to give institutional investors by approving the short selling and stock lending and borrowing scheme for them. After all retail investors were allowed to short sell. Only a few months back, the scheme had been unianimously approved, but its still not seen the light of day. Sources say that the scheme has been delayed because of the challenges thrown up by a tax tangle.

Currently all transactions in the securities market attract a securities transaction tax. Since the proposed short selling scheme for insitutions says that all trsanctions have to be settled by physical delivery of shares - the scheme would attract both STT & Capital gains tax - like any normal sale transaction. But that is just one leg of the transaction.

A scheme for stock lending and borrowing was also proposed to facilitate short selling and this emerged as a problem area. Since lending and borrowing did not tantamount to a sale-the CBDT had given an in principle approval that this leg of the transaction will attract neither the STT nor the Capital gains tax.

But the current trading software deducts the STT the minute shares move from one acocunt to another. In this case it meant that the lender of the stock would have to pay the STT. To avoid that from happening - a whole new system is being put in place. One, that distinguishes stock lending and borrowing from a regular market transaction. Depositories NSDL and CDSL have now been asked by market regulator SEBI - to put a new system in place which differentiates the 2.

That's not all the scheme also requires amendments to foreign exchange management act or FEMA to enable FIIs to short sell.