What is Stock Lending & Borrowing (SLBM)?

SLBM enables investors to lend their idle shares to borrowers and receive a rental income in return. The lender is the owner of the shares during the lending period and still enjoys corporate benefits like dividends and bonuses. The mechanism is carried out by the recognised stock exchanges NSE and BSE under the regulatory framework of SEBI. SLBM transforms a static portfolio into a productive one.

How Stock Lending & Borrowing Works?

In India, the stock lending & borrowing process includes the following steps:

• Placement of Orders: A borrower (in need of shares) and a lender (with idle shares) can place their respective orders on the SLBM platform via Dhan.
• Matching & Execution: These orders are matched by the exchange depending on the price the borrower is ready to pay (Lending Fee) and the duration of the contract.
• Settlement (T+1): After the trade has been executed, the shares of the lender are transferred to the Clearing Corporation, which in turn transfers them to the borrower. The Clearing Corporation charges 100% or more collateral from the borrower.
• Completion & Return: On the expiry date, the borrower returns the shares to the Clearing Corporation. The shares are then debited back to the demat account of the lender, along with the lending fee.

Key Benefits of SLBM

SLBM offers distinct benefits to both investors who lend their shares and those who borrow them.

Benefits to Stock Lenders

• Additional Income: Lenders can earn an additional income from their idle stock portfolios by renting them and charging a fee to borrowers, potentially earning up to 35% per annum in some cases.
• Retaining Ownership: Lenders retain beneficial ownership of their shares, i.e., they continue to enjoy the benefits of price appreciation and dividends, even when the shares are lent out.
• Low-Risk Environment: SLBM transactions are guaranteed by the Clearing Corporation, which is a financial guarantor of the transactions, thus reducing counterparty risk.
• Benefit from Demand Spikes: If lenders hold a significant quantity of in-demand stocks, they can lend them during times of high demand to maximise your returns.

Benefits to Stock Borrowers

• Enables Short Selling: Borrowers can use securities lending & borrowing to engage in short-selling strategies, making profits from anticipated price decline by selling borrowed stocks and buying them back at a lower price.
• Arbitrage Opportunities: SLBM allows borrowers to take advantage of price variations across different markets or derivatives segments, which can generate arbitrage profits.
• Meet Delivery Obligations: SLBM allows traders to meet delivery obligations without incurring penalties when they are short.
• Cost Efficiency and Hedging: SLBM may result in cost efficiencies and is useful in hedging strategies, enabling them to reduce potential losses in their portfolios.

What are the Risks of SLBM?

Although the SLBM mechanism is highly secure, the market participants must be informed about the following risks associated with SLBM:

• Liquidity Risk: After lending the shares, the lender cannot sell these shares until the SLBM contract has expired or a successful Recall has been carried out.
• Market Risk: Lending shares do not protect the lender from a decline in the stock market price of the shares. The investment value is still prone to market volatility.
• Tenure Lock-In: If a lender's rent-out stock share price spikes suddenly and they wish to book profits, they will have to wait for the contract to end or go through a recall process.

Key Things to Check Before Participating in SLBM

Before participating in SLBM, market participants should keep the following things in mind:

• Eligibility: The SLBM is usually eligible for highly liquid, popular, frequently traded stocks in the Futures & Options (F&O) segment.
• Contract Series: SLBM contracts have fixed monthly tenures, with the tenure ranging from 1 month to 12 months.
• Market-Determined Fees: The lending fee is market-driven; it is dependent on the demand and supply of the particular scrip in the market.
• Transaction Costs: SLBM comes with some fees, such as brokerage, DP charges, and GST.

Frequently Asked Questions