The stock market is viewed by many as something of a wild horse and that’s not necessarily false. Many a time, stock market traders and investors have burnt their hands trying to trade in the market.
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SLB is a legally approved platform for lending and borrowing of securities which was established by the Securities and Exchange Board of India (Sebi) in 1997, and later modified in 2012.
“Security lending and borrowing is the mechanism in which an owner of shares or bonds – which are approved by the Securities and Exchange Board of India (Sebi) – temporarily transfers them to a borrower, who in exchange transfers money to the lender as collateral, while also paying a borrowing fee,” said Rachit Chawla, founder and CEO, Finway, a diversified financial services company.
The Sebi has permitted all valid stock market participants, except Qualified Foreign Investors, but including retail investors to use the SLB platform. But for using this platform, an investor can do it only through authorised intermediaries (AI).
NCL (NSE clearing limited) and BOISL (BSE Clearing Corporation) are the only two authorised intermediaries at the moment.
You have to check with your respective stock broker on whether they allow SLB trading. If they do, then all you have to do is ask them for a segment enablement form, and then fill it up, sign it, and then submit it.
“Retail investors can participate in SLB. First of all, a retail investor needs to open a trading and demat account with a stockbroker who is offering SLB investing. If a broker is offering SLB services for Investment then you have to tick for SLB option. Brokers will check your eligibility for Investing in SLB Scheme, and a Participant – Client Agreement for Securities Lending and Borrowing will be executed after Broker approval on your application,” says Vijay Lathwal, head of finance, at PayMe India.
Securities lending and borrowing is a mechanism through which investors can borrow or lend shares to other market participants.
“In SLB, the lender temporarily loans out his securities, share or bond to a third party or the borrower. In exchange, the borrower provides collateral in the form of other shares, bonds or cash, which secures repayment of the loan,” adds Chawla.
There is a dedicated SLB marketwatch page at NSE wherein you can view the exact live present yield on different stocks eligible for SLB. Click here to know more.
If a lender of share wishes to lend his stocks, then he should place an order mentioning all the necessary details, and then the borrower will place his own order mentioning his willingness to pay the amount of lending fees and other details. Then both the orders would be matched by the stock exchange.
“The lender places an order with the participant mentioning the stock, quantity to lend, time period, and lending fees that he is expecting. Lending fees are quoted on a per share basis, so in the Titan example, it could be 1,000 shares to lend at Rs 3 per share. The borrower places an order with the participant mentioning the stock, time period, quantity and the lending fees he is ready to pay. Order matching on the lending fees takes place similar to trading on an exchange,” adds Lathwal.
To maintain a fair and harmonious SLB market, the lender too has certain conditions to fulfil and rights to claim.
Conditions: The lender of securities is asked by stock exchanges to bring in 25 per cent of the value of stock he wishes to lend immediately after he gives his consent to lend.
“The lender is asked for 25 per cent of the total amount of stock he is lending immediately to ensure that he doesn’t default after saying yes to lend. This margin is released as soon as the stock moves out of his demat account to the participant,” adds Lathwal.
Rights: At any point of time, the lender of securities can recall his securities from the borrower by paying some fees.
“When the stocks are offered by the owner in SLB, they are locked in the SLB system, and hence cannot be sold by him. But there is an option to recall i.e., asking the borrower to return the shares before the end of contract period. The lender, if opting for recall, has to pay some charges for this, which varies from stock to stock and is driven by the market,” says Bharat Shah, head, institutional business, Ventura Securities Ltd.
Since the borrower of the shares does not actually own the shares as he is merely renting it out from the lender, there are certain obligations he needs to fulfil.
“The borrower is obligated to return the borrowed share or bond whenever the lender demands, or by the end of the contract, and the lender gets back the ownership rights of the security. The borrower also pays a certain borrowing fee during the period he is keeping the security,” adds Chawla.
In order to make sure that the borrower does not default on the shares borrowed, he is asked by stock exchanges to bring in 125 per cent value of the stock he wishes to borrow via SLB.
For instance, let’s assume the borrower wants to hedge his derivative position by buying Reliance in SLB and shorting it in the cash market. Suppose Reliance is currently trading at Rs 2,623 and the borrower wishes to buy 20 shares of it. So, he will need to deposit Rs 2,623*20*125 per cent= Rs 65,575 for buying 20 shares of Reliance.
“Borrower is asked to bring in 125 per cent of the stock value he is borrowing as margin, and also lending fees over and above the margin. Out of the 125 per cent asked, once he borrows, he can sell the stock effectively blocking only 25 per cent. But he would have to bring in 125 per cent while entering the transaction. Also, to ensure a risk-free trade daily MTM (market to market) hit on the margin is monitored to ensure that no borrower defaults on their obligation,” adds Lathwal
