Know All About Stock Lending and Borrowing

Know All About Stock Lending and Borrowing

Securities lending and borrowing (SLB) is a temporary lending of securities executed by a lender to a borrower of securities, for a stipulated duration, at a certain fee. SLB mechanism is very popular globally as it provides liquidity in the equity market  which in turn increases the market efficiency.

In most of the countries Securities lending and borrowing is an OTC (over the counter) product, whereby the custodians facilitate transactions of borrowing and lending among institutions. In India, however, SLB is an Exchange traded product.

Investors who are holding certain stocks in their Demat account and are not looking to sell them in near future can take an advantage of SLB segment and lend for all the stocks for a certain fee and a stipulated duration (determined on the basis of the contract entered into), whereas traders who are looking for short term opportunities can borrow the shares and possibly gain from the price movement in the stock.

Features of SLB

1)      Transactions carried out under SLB segment are guaranteed by Clearing Corporations and hence do not carry any counter party risk.

2)      More than 370 stocks are available on NSE SLB platform, as of 20 Aug, 2018 (this list is updated by NSE on a monthly basis).

3)      Contracts are available with a duration starting from one month to twelve months.

4)      STT and SEBI turnover fees are not applicable.

Benefits for Lenders

1)      Lenders can earn additional income from the idle portfolio held as they receive a certain fee to lend the stock, depending upon the demand and time value.

2)      There is no limitation  of minimum quantity that a lender could lend.

3)      Lenders are entitled for all the corporate action like dividend, bonus etc. that takes place during the lending period.

4)      No counter party risk as all the transactions are guaranteed by the Clearing Corporations.

5)      Transactions done in the SLB segment will not be treated as Transfer, based on clarification from Income Tax vide their circular no. 2/2008, dated 22 Feb, 2008 and Section 47(xv) of the Act. Thus there is no additional implication of Capital Gain Tax.

Benefits for Borrowers

1)      Borrowers can carry out short selling of securities, which are not available in derivatives segment (once the borrowing is done from SLB segment).

2)      SLB enables borrowers to meet the obligation in case of shortage in delivery and avoid an auction (seller shortage) in Cash segment.

3)      SLB enables arbitrage opportunity for borrowers if there is price difference in the Cash and Derivatives market.

4)      SLB enables borrowers to meet the obligation arising out of physical settlement under the derivatives segment.

SLB thus is a prudent way for investors to make an additional income by lending their idle stocks at a certain fee, for stipulate duration. Traders, on the other hand, can borrow the stocks and can then benefit from arbitrage opportunity or meet the exchange obligation of pay-in of stocks.

Market regulator Sebi has placed several safeguards for the platform including reliable settlement system. “Unlike many other countries, SLB is an exchange-traded product in India, settled by the clearing corporations, which means there is no counterparty risk,” said Sriram Krishnan, head of securities services, Deutsche Bank. “Investors should ideally lend out stocks and make an additional return as every penny counts. While yields are a function of the demand, we have seen attractive lending fee levels in the past 18-24 months, in many stocks.”

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