What is Securities Lending and Borrowing (SLB)?

What is Securities Lending and Borrowing (SLB)?

Securities lending and borrowing is a mechanism through which investors can borrow or lend shares to other market participants at a specified price and time.

The tenure for SLB transactions is up to 12 months. However, the SLB contract will expire within a month and can be extended by rolling over in the next month.

PROCESS OF SLBM:

Here, lenders and borrowers can quote a lending fee and quantity at which they want to lend or borrow, and the order will be executed if the quotes match at the exchange by a screen-based anonymous trade matching mechanism.

On T Day: The transaction is executed on T Day between the lender and borrower.
On T+1day: The lenders are required to deliver the securities for pay-in on T+1 day. Securities are thereafter transferred to the borrowing participants during payout on T+1 day. The borrower shall bring the lending fee on T+1, which shall be passed on to the lender in the funds payout.
On the reverse leg settlement date: The borrower needs to deliver the securities at the time of pay-in, which shall be returned back to the lender during the payout.

Thus, when an SLB order is executed, the shares are debited from the lender’s account and credited to the borrower’s account. At the end of the contract, the lender gets back the stock, and the borrower’s margin will be released.

BENEFITS OF BORROWING SECURITIES THROUGH SLBM: -

Borrowers in SLB are usually short-sellers, i.e. traders who want to sell shares that they don’t own.
The platform provides a viable alternative to derivatives market for purposes of hedging
To take advantage of arbitrage opportunities when futures or options are mispriced or arbitrage in stock price between 2 exchanges.
To fulfill physical delivery obligations for F&O trades and to avoid settlement failure.

BENEFITS OF LENDING SECURITIES THROUGH SLBM:

Lenders, on the other hand, are those investors who have bought shares for long-term purposes and such shares are lying idle in their demat accounts. It provides an incremental return on an idle portfolio.

IS SLBM SAFE?

The security lending and borrowing can only be carried out with approved intermediaries (AI) and are guaranteed by them; hence, they do not carry any counterparty risk.
The clearing and settlement of trades are handled and guaranteed by Indian Clearing Corporation Limited (ICCL).
To know more about SLBM, visit here NSE’s document.

RELATED FACTS:

At Jainam, there is no minimum eligibility criteria to place SLB orders for both the lenders and borrowers. Orders can be placed between 9 AM and 5 PM at Jainam through offline mode. DDPI or POA is mandatory to be provided when placing SLB orders.

The lender will be eligible for all corporate actions and will get all benefits of any corporate action even though he will not be holding stocks in his demat.to know more, see Who will be eligible for corporate actions during SLB tenure?

Only securities that are eligible for SLB can be lent and borrowed. Majorly, securities traded in the F&O segment are eligible for lending & borrowing under the scheme. Also see, Where can the list of approved securities be found for SLB?

A processing fee of 20% on the lending and borrowing fee is charged by Jainam for completed orders. Also see,What are the Jainam's charges for SLB transactions? Relevant depository charges of Jainam will be applicable for debiting shares from the lender's demat account. Depository charges will be collected from the borrower's demat both when he sells the borrowed shares in the market and when he has to give it back to the lender.

As lending doesn’t mean selling, hence no capital gains tax would be applicable. But if the transaction goes to close-out mode, STCG would apply. Also see,What are the tax implication of SLB transaction?

Recall is a facility for the lender to place an early recall request for the securities lent. Repay is a facility for the borrower to make an early repayment of securities and further relend them. Also see, How to recall and repay SLB positions at Jainam ?

Pledged shares cannot be lent under SLB.