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SLBM: Stock Lending And Borrowing Mechanism

Securities Lending and Borrowing Mechanism (SLBM) is a process where investors can lend their securities to others for a fee, typically to traders who wish to short-sell those securities. This enables investors to earn additional income on their holdings and provides liquidity to the market. SLBM is regulated by SEBI in India and requires an agreement between the lender and borrower, specifying the terms and conditions of the transaction.
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  • 29 Apr 2023
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SLB or stock lending and borrowing is a system in which a trader can borrow shares that they do not already own or can lend the stocks that they own.

An SLB transaction has a rate of interest and a fixed tenure.

Why do traders do stock lending & borrowing?

Lenders – Lenders can earn extra income by lending the stocks from their portfolio.

Borrowers – Borrowers can borrow the stocks for arbitrage, for short selling or to avoid the physical delivery.

  • Additional Income- Generate additional income from the idle portfolio.

  • Multiple stocks- Securities on which derivatives are available in the F&O segment are available in slb segment.

  • Enables Short Sell- In case you have a bearish view on a stock, you can short sell the stock by borrowing the stock from SLB.

  • No Counter Party Risk- Securities lending and securities borrowing transactions are guarantee by NSCCL. NSCCL act as a financial guarantor for SLB product.

  • Avoid physical settlement- No issues of physical settlement has you can borrow the stock from slb and avoid physical settlement.

Stock lending and borrowing (SLB), also known as securities lending and borrowing is a way through which you, as an investor, can borrow or lend shares to other market participants. Similar to a loan, stock lending and borrowing happens at a rate of interest and has a tenure that’s fixed by both parties entering into the transaction. Borrowers in SLB are short-sellers, while lenders are investors who have purchased shares for long-term purpose and somehow, these shares are lying idle in their Demat accounts.

Interest Rate On Stock Lending And Borrowing

The interest rate on securities lending and borrowing is not fixed and varies from stock to stock. The interest rate is also dependent on market conditions and the tenure of borrowing. As per SEBI, the maximum tenure for which stocks can be borrowed is 12 months.

Long-term investors such as insurance companies and mutual funds act as key lenders in SLB. Stock lending and borrowing scheme is a relatively less risky option compared to options and future contracts. There are several stocks available on the SLB platform that you can borrow.

What Stock Lending Has For The Lender?

For the lender, stock lending can provide an incremental return on an idle portfolio. For example, if you have 10000 shares of a top company and wish to hold on to them for a long period, you can lend them for the short term when the demand is high to earn an additional return in the form of interest.

What Stock Lending And Borrowing Has for the Borrower?

For borrowers, it is a short-term sell in the market. When there is a negative view on the stock price, one can borrow shares from SLB, sell them and then buy them back when the price falls. The difference between the buying and selling price minus interest and other costs is the borrower’s profit.

If done well, stock lending and borrowing can be profitable for both parties.

Is Lending Or Borrowing Stocks Like Lending Or Borrowing Any Other Asset?

The answer to this question is yes and no. Yes because securities lending and borrowing entail an interest that the borrower needs to pay, and the asset must be returned before the end of the tenure. No, because the interest rate is not fixed by the lender but is a determinant of market forces, including demand and supply.

You need to provide basic documents while opting for SLBM. The documents required are:

  • PAN Card

  • Your identity documents that could include your Aadhaar Card, Passport, Voter ID Card and Driving License

You can check with your broker if you need to provide any additional documents.

To apply for privilege offline – Click here

To apply online – Follow given path - Login > New product > segment access > SLB

Frequently Asked Questions (FAQs)

Presently securities on which derivatives are available

SLB contract settles on first Thursday of every month.

Brokerage of 15% plus GST will be levied on the lending fee.

a. In case of borrower only the lending fee is levied upfront as margin.

b. In case of lender, 25% of the lending price (T-1 cash market closing price) and Mark to market (MTM) at end of day are charged to the lender. These margins are not applicable to lender in case if lender does Early Pay-in of securities.

No margins are levied on the lender.

100% of lending price, Value at Risk margins, Extreme Loss Margins (same as applicable in Cash market for buying or selling a security) and EOD MTM are levied on the borrower.

NSCCL (National Security clearing co-operation limited) act as an financial guarantor for the slb , hence the risk is cover by them.

Rollover is an option where client can rollover (shift) the current month position to next month.

Recall is an option where client can recall the shares before the end of contract.

Repay is an option used by borrowers to repay the shares before the contract expiry.

All the benefits will be forwarded to the lenders.

Shares lent will exit the lenders demat on T day itself.

Minimum Contract is for one month and maximum contract is for 12 months.

For more details kindly visit NSE SLB FAQ Page given below.

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