The securities markets of India have undergone a slow but significant change in the regulation of short selling and derivatives trading, especially following the grand scale scams in the market and the growing integration with international financial markets. The paper presents a critical legal and regulatory overview of the framework regulating these instruments particularly the role of the “Securities and Exchange Board of India (SEBI)” as the overall market regulator. It follows the history of development of regulation, starting with the abolishment of the badla system and the creation of exchange-traded derivatives in the early 2000s and culminating in the ultimate legalization of short selling by SEBI in 2007 and subsequent amendments. The paper also discusses the current statutory and regulatory framework, such as the main provisions of the “Securities Contracts (Regulation) Act, 1956, the SEBI Act, 1992”, and some of the important SEBI circulars, which regulate securities lending and borrowing, disclosure requirements, margin requirements and enforcement mechanisms. Besides this, it also examines the regulatory reactions by using the chosen case studies and enforcement measures with special emphasis on how SEBI aims to thwart naked short selling, market manipulation, and unsuccessful settlements. The paper concludes that the regulatory framework in India generally aligns with international standards, but further reform is needed to deal with new risks that emerge as a result of algorithmic trading in India and increasing retail involvement on the trading floor.