STBT and why Zerodha does not allow it
STBT (Sell Today Buy Tomorrow) refers to a trading strategy in which a market participant sells equity shares today without owning them and buys them back on the following trading day, profiting from an anticipated fall in the share price overnight. In contrast to BTST (Buy Today Sell Tomorrow), which is mechanically feasible under India’s settlement system, STBT is not permitted for retail investors in India’s equity cash segment under current SEBI regulations. Zerodha, in accordance with these rules, does not provide STBT functionality on its Kite platform.
This article explains the regulatory prohibition, the mechanics that make STBT structurally different from BTST, and the instruments through which bearish overnight exposure can legitimately be obtained.
What STBT would require
For STBT to work mechanically, the following sequence would need to occur:
- Day 0: An investor sells shares they do not currently hold in their demat account (naked short sell).
- Day 1 (T+1): The investor buys the same shares from the market.
- The Day 1 purchase is used to settle the Day 0 sell obligation with the clearing corporation.
The problem is that the Day 0 settlement obligation requires delivery of shares to the clearing corporation on T+1. If the investor has not yet purchased shares (they plan to buy on Day 1), they will not have the shares to deliver on T+1. This creates a guaranteed settlement failure on the sell side unless the shares are borrowed through the Securities Lending and Borrowing (SLB) mechanism.
Why SEBI prohibits retail STBT
SEBI’s regulatory stance on short selling for retail investors in the equity cash segment is restrictive by design. The key prohibition is on naked short selling, selling shares that are not owned and are not borrowed through an approved mechanism.
SEBI’s circular on short selling (SEBI/MRD/SE/Cir-14/2007, and subsequent revisions) permits short selling in the equity cash segment only under two conditions:
- Intraday short selling: A retail investor may sell shares intraday (same-day buy and sell) on the same exchange and segment. This must be done using the MIS product code on Kite and squared off the same day.
- Securities Lending and Borrowing (SLB): A participant who has borrowed shares through the exchange-approved SLB mechanism may sell those borrowed shares. This framework is primarily used by institutional investors.
Retail investors in India do not routinely use SLB for overnight short positions. The SLB mechanism requires borrowing agreement, collateral management, and a counterparty willing to lend, processes that are operationally complex for retail participants.
Because STBT in the cash equity segment without SLB would constitute naked overnight short selling, it violates SEBI’s framework and is prohibited. No Indian retail broker, including Zerodha, offers STBT.
Institutional short selling in India
Institutional investors in India can engage in overnight short selling of equity through the SLB mechanism. An institution that borrows shares through the NSE-operated SLB platform can sell those shares short and buy them back before the return date. However, this applies to mutual funds, foreign portfolio investors (FPIs), and other Category I and II alternative investment funds, not to retail HNI accounts.
Why BTST is allowed but STBT is not
The asymmetry between BTST and STBT is a direct consequence of settlement mechanics:
- In BTST, the investor already owns shares (bought yesterday) even though they are in transit through the clearing corporation. The settlement obligation (deliver the shares) can potentially be met from the pending T+1 credit. The risk is short delivery (if the original buy fails to settle), but the position is not fundamentally naked.
- In STBT, the investor does not own shares and has no pending settlement credit. The Day 0 sell has no backing, it is a naked short. SEBI has prohibited this to protect the settlement system and prevent manipulative short selling.
Alternatives to STBT for bearish overnight exposure
Traders who wish to profit from an anticipated fall in a stock or index overnight have several legitimate options on Kite:
1. Buy put options (NRML): A put option gives the holder the right to sell at a fixed price. Buying a put option on Zerodha using the NRML product code provides bearish exposure overnight. The maximum loss is limited to the premium paid.
2. Short futures (NRML): Selling a stock futures contract or an index futures contract (Nifty, Bank Nifty) provides bearish overnight exposure with leverage. The NRML product code allows the position to be held for multiple sessions until expiry. This is the closest structural equivalent to STBT.
3. Short call options (NRML): Selling (writing) a call option gives bearish exposure if the underlying falls, though the risk profile is different from a directional short.
4. Inverse ETFs: While not widely available in India, inverse or bearish ETFs on Nifty indices exist and provide exposure to index declines through a long position in the ETF.
| Strategy | Instrument | Risk profile | Overnight permitted |
|---|---|---|---|
| STBT (notional) | Equity cash | Theoretically unlimited | No (prohibited) |
| Short futures | Stock/index futures | Theoretically unlimited (capped at zero) | Yes (NRML) |
| Buy put option | Stock/index options | Limited to premium paid | Yes (NRML) |
| Short call option | Stock/index options | Theoretically unlimited | Yes (NRML) |
| Intraday MIS short | Equity cash | Unlimited (intraday) | No (auto-squared) |
Securities Lending and Borrowing (SLB) mechanism
The NSE-operated SLB platform allows institutional participants to lend and borrow securities for a defined period (up to one year). A borrower who obtains shares through SLB can sell them short in the equity cash segment. The lender continues to hold economic exposure to the shares (dividend rights, etc. are passed through), while the borrower holds a short economic exposure.
Zerodha does not currently offer SLB services to retail clients as an integrated Kite feature. Retail investors seeking to participate in SLB lending (to earn a lending fee on idle delivery holdings) should check current Zerodha announcements, as SLB lending for eligible securities has been explored by some brokers.
Common misconceptions
“BTST proves the system allows next-day settlement manipulation.” BTST exploits a legitimate gap in the settlement timeline where shares purchased yesterday are in transit. STBT has no equivalent legitimate backing and is categorically different.
“Other countries allow overnight retail short selling.” This is correct. Markets such as the US (through Regulation SHO and broker-level short locate mechanisms) allow retail investors to short equity overnight. India’s framework is more restrictive. The comparison is valid but does not affect the current regulatory position.
“Using MIS and rolling over provides STBT exposure.” MIS short positions must be closed by 3:20 PM the same day. They cannot be rolled to the next session. Attempts to carry MIS short positions overnight result in auto-square-off.
Regulatory context
The prohibition on retail STBT flows from SEBI circular SEBI/MRD/SE/Cir-14/2007 on short selling, the subsequent amendment circular SEBI/MRD/SE/Cir-31/2008, and SEBI’s framework for securities lending and borrowing. NSE’s trading member circular series on short selling obligations elaborates on the settlement requirements. SEBI has periodically reviewed short selling regulations but has not extended overnight naked short selling to retail investors as of 2024.
References
- SEBI circular on short selling, SEBI/MRD/SE/Cir-14/2007.
- SEBI amendment on short selling framework, SEBI/MRD/SE/Cir-31/2008.
- NSE circular on SLB mechanism, NSE/MEM/2008 series.
- Zerodha support article: “Can I do STBT on Zerodha?”, support.zerodha.com.
- SEBI master circular on short selling and SLB, SEBI/HO/MRD/2023 series.