The Securities Lending and Borrowing facility on NSE/BSE offers investors an opportunity to earn regular income on their Demat holdings in addition to dividends and without risk! This facility is one of the lowest risk ways that households internationally earn (apart from writing covered calls which is fraught with risk) “rent” on their holdings and is slowly gaining currency in India.
All the securities traded in F&O segment are eligible for SLB activities. Similar to F&O therefore, each lending cycle is also monthly and you may choose the month of choice for which you wish to lend. Currently most SLB action happens only in the current expiry but this will chance once participation deepens.
How does SLB work
Lets say you have 100 shares of stock A which someone is willing to borrow from you for 1 month at Rs 2. This is almost equivalent to earning Rs 24 per year (24% annualized) and if its without risk, why not lend? Before you do this however, you need to sign an additional document called the SLB Rights and Obligations Form.
You would then instruct the broker (If you are a PL Customer, just send in your mail request for lending to firstname.lastname@example.org with subject SLB indicating the quantity, limit / market price , client code and securities or ask your relationship manager- by default, only current expiry month would be put) to put an order in the system for lending your shares.
So who will be the typical borrower? Stock borrowing is mostly done by institutions and traders who want to hedge their positions in the futures and options (F&O) segment. Traders, derivative fund managers and other such aggressive institutions can also use the stock borrowing route to short sell a stock.
SLB takes place on an automated screen-based order-matching platform set up by the clearing corporations, who also become the central counterparty guaranteeing settlements and collect margins for the same.
Since the facility is counterguaranteed by the exchanges, they also ensure that all appropriate safeguards are in place including most importantly, very high margins and penalties for not honoring commitments so that the lender doesn’t suffer.
The settlement cycle for SLB transactions shall be on T+1 basis meaning the lender gets the fees and the borrower his shares on the day subsequent to the trade.
Once the expiry of the trade is over, the first Thursday of each month, or the client “recalls” his shares, the trade is annulled and the stocks travel back to the original lenders account automatically. If there were any corporate action benefits to the shares lent, they continue to belong to the original lender – as the trade is not seen as a capital transfer but a temporary lend. For the same reason, as per the Income Tax authorities, these trades and related earnings are not seen as capital gains but as “Other Income”.
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To hear our webinars recording, please visit www.plclients.com>products>SLB if you are a PL client
Download the NSE’s brochure at https://www.nseindia.com/invest/content/SLB_brochure.pdf
To see the current market rates on SLB securities, please visit https://nseindia.com/products/content/equities/slbs/slbs.htm