Securities lending and borrowing refers to the facilitation of lending or borrowing shares for a pre-defined duration through an Exchange and Clearing corporation support mechanism. Stock Lending and Borrowing Mechanism (SLBM) is a facility that allows an investor to lend stocks/scrips lying idle in his Demat account & earn market discovered price (rent) from his / her idle shares & a trader (who has short sold such shares/scrip), to borrow shares that he/she do not already own.
The SLBM is facilitated by the National Securities Clearing Corporation of India (NSCCL) in case transactions on NSE and by Indian clearing Corporation Limited(ICCL) in case of transaction on BSE. All the borrowing and lending transactions are cleared, settled & guaranteed. The Exchanges provide the necessary price discovery mechanism.
The lending period is predefined vide the monthly settlement date and reversal of transactions is also ensured by the respective clearing corporations.
Benefits of participating in securities lending & borrowing
Lender’s Benefit
- The lender earns a lending fee on stock lending, thereby the lender earns an incremental return on their idle portfolio.
- Dividends and Bonuses are transferred to the lender even when the stock is lent out.
- Lending does not incur short term capital gain tax.
- Lending through an Exchange platform is secure, wherein the respective clearing corporation acts as a guarantor.
- The lender may recall securities at any time within the normal market settlement cycle.
Borrower’s Benefit
- To cover a short position: avoidance of settlement failure.
- Through hedging or offsetting, the trader will have increased liquidity & can protect another investments or portfolio.
- Borrow to reap benefits of the market sentiment/momentum or a contrarian position.
How does it work?
Lending
1. Lender places an order with intermediary mentioning the stock, quantity to lend, time period and expected lending fees. Lending fees are quoted on a per-share basis, e.g. XYZ 4000 shares to lend at Rs 4/share for duration till a specific settlement date.
2. Lender has to place the order through dealer terminal. The clients/branches/franchisees cannot directly place the orders.
3. Order matching on the lending fees takes place in a fashion similar to trading on an exchange.
4. The lender is required to make an early pay-in of the security on the same day. NSCCL allows pay-in of securities on T+1 day, provided 25% of stock value is paid as margin.
5. It is compulsory to make an early pay-in of lent securities on T-day itself. No additional margin is required if early pay-in of security is made.
6. The lending fee is credited to the ledger of the lender on T-day.
Borrowing
1. Borrower places an order mentioning the stock, time period, quantity and the lending fees.
2. The borrower has to place the order through dealer terminal. The clients/branches/franchisees cannot directly place the order.
3. Borrower is asked to bring in 125% of the stock value as margin, and also the lending fees over and above the margin.
4. Daily MTM on the value of the stock borrower is charged to the borrower. At the end of the contract, the lender gets back the stock and borrower’s margin is released.
5. The borrower is obliged to return the borrowed stocks either on demand of the lender or at the end of any agreed term and also has an option of early return.
You may contact your stockbroker to understand how to apply for SLB.
