Did you know that investors with idle stocks in their account managed to earn Rs 325 crore in FY19-20? They did this by lending their stocks through the SLBM – the Stock Lending & Borrowing Mechanism.
So, are you an investor with stocks sitting idle for months or years in your demat account? Would you like to earn another stream of income from it?
If the answer is yes, then read about SLBM here.
Simply put, this is a mechanism where you ‘temporarily lend / borrow’ your securities in exchange for a fee. Interested traders would then ‘borrow’ these securities to trade in the stock market.
Through SLBM, you can ‘lend’ your stocks to borrowers and earn a ‘lending fee’—just the way banks do when they lend money to someone. The best part is that you would continue to remain the owner of the shares and even earn dividends, bonus and other corporate benefits if any are declared during the lending period.
In many ways, it’s all gain and no loss. The lender gets to earn an income in the form of a lending fee without losing ownership or giving up on other gains. Moreover, there aren’t any risks involved too.
No, there aren’t any risks involved with SLBM. This is because SLBM is an Exchange Traded Product and its settlement is guaranteed by Clearing Corporation. This ensures your stocks are safe.
The Clearing Corporation maintains a detailed risk management system. This system constantly monitors and prevents any market failures.
These days, open positions in derivatives segment need to be physically settled, as per a SEBI circular dated 31st December, 2018. This is when the trader hasn’t squared off or closed their open positions by the Expiry date. They then have to give delivery of shares. At such times, these traders may borrow shares if they are falling short of the quantity needed. This is to avoid loss in auctions and honour his/her pay-in obligation.
There are also traders who may want to trade in the same securities across segments may borrow the stocks. For example, let’s say Stock X is trading at Rs 100. However, its futures contract is available at Rs 95. They may then want to sell Stock X in the cash segment and buy in the Derivatives segment to pocket the difference of Rs 5 as profit. Such trades are also called as ‘arbitrage’ trades.
Lastly, traders may borrow stocks to take up ‘pair trading’. This is when they buy a security at a lower rate and sell another security at a higher rate. The difference between the two trades can be pocketed as profit.
In any or all these situations, they may not always hold the underlying stocks needed. In such cases they may want to borrow stocks. They can opt for the SLBM facility for such borrowing.
Step 1: You sign up and opt for SLBM when you open your trading account. Alternatively, you can activate the segment by logging into your trading account. On logging into the Kotak Securities trading account, head to ‘New Products’, click on Segment Access, fill the details, and select the ‘SLBM’ check box.
Step 2: The stocks that can be given on loan or borrowed under SLBM are updated daily on the NSE page here and the BSE site here. Once you have subscribed to SLBM and find an opportunity to lend, you can get in touch with your RM, dealer or our customer service. Usually, though, our SLBM team reaches out to enrolled clients in case of any suitable opportunity.
Step 3: The lending fees differs for each stock, the length of the lending/borrowing period as well as the market conditions. Once you hear all the details, you need to agree to lend the stocks. This brings us to the most important part of the process—the lending contracts.
Every lending opportunity is in the form of contracts.
At any given point there are 12 contracts available.
Each contract expires on the first Thursday of a month. This is the date when the securities get back to your demat account.
The 12 contracts are usually for the upcoming 12 expiry dates. For example, since we are currently in the month of June, the next expiry is on 2nd July, 2020. This is called the ‘Current month’ contract. The remaining 11 contracts are for the subsequent months until June 2021.
Liquidity is generally available in the current month contract. But you can choose to lend as per any of the contracts.
It is compulsory that the borrower give back the securities one day before the date of expiry. However, the borrower can choose to give back the securities before the expiry date too.
A lot of stock traders often feel that they may attract short-term Capital Gains tax if they start the lending process in the first 1 year of buying the stocks. That is just a myth.
When you lend your stock, it is not classified as a ‘transfer’, as per Income Tax rules (circular no. 2/2008, dated 22nd February, 2008). As a result, they are not considered to be sold. So, there is no Capital Gains tax involved in this whole transaction. That said, do understand that the lending fees you earn is accountable as income from other sources or as income from a lending business.
We, at Kotak Securities, charge up to 15% of the lending fees or 0.10% per share whichever is higher. Additionally, GST will be charged.
Interested? Write to our customer service team at firstname.lastname@example.org or check with your Relationship Manager to sign up for SLBM.
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