Stock Lending & Borrowing in Share Market

We at A1 Intradaytips team has tried to explained the concept of Stock Lending & Borrowing in very simple manner so that a newbie trader is able to understand the concept and can earn exta money through Stock Lending and Borrowing.

SLB ( Stock Lending and Borrowing) is a system in which any client, trader or investor can borrow shares ( Stock or Security) that they don’t already own or can Lend the stocks/ security that they own and have in their Demat account in Nse Market. Similar to a loan, An SLB ( stock lending and borrowing ), also called as SLBM (Stock Lending And Borrowing Mechanism) transaction happens at a rate of interest and has a fixed tenure that’s fixed by both parties entering into the transaction. Securities Lending and Borrowing (SLB) is a mechanism through which trader can lend or borrow shares ( Stock or Security) at a specified price and time. 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 quotes match at the exchange. SEBI has permitted all categories of Investors viz. Retail and Institutional to participate in SLB. Securities lending plays an important economic function in capital markets.

The tenure for SLB transactions is up to 12 months. 12 fixed monthly tenures with fixed reverse leg settlement dates are available for transactions in SLB. Just like futures and options contracts, SLB too has contracts that expire on the first Thursday of every month.

Securities lending is a long-established practice in capital markets that has until now been largely confined to big financial institutions, even though every owner of stocks, bonds and ETFs has the right to lend them. It brings greater liquidity and efficiency to the market, can help facilitate the settlement of certain trades, promotes price discovery and facilitates market making. When stocks rise in a bull market, demand to borrow securities wains and lending rates are lower, but you do enjoy the appreciation of your assets. On the other hand, in bear markets (when stocks depreciate) demand to borrow stocks increases and so do lending rates. This way you benefit from a new stream of income to mitigate the volatile times.

Why lend / borrow securities ?

Traders (Investors) can lend their securities to generate some additional return over and above their investment.

In Normal share market yield could range between 5-6% per annum. Depending on the stock and market situation, these yields may vary in the range of 2% to 15% per annum too. It can even shoot up 30-40% for short periods.

• Borrow share ( Securities) and sell the stock immediately or short sell if the view is that the price of stock will go down over a period of time.
  
• Take advantage of arbitrage opportunities when stock prices in futures or options segment are mispriced.
  
• To fulfil physical delivery obligations for F&O trades.
  
• Generate Additional Income / Extra Income from the idle portfolio in your demat account.
  

Documents required when opting for SLBM

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
• Send a hard copy of the Power of Attorney (POA) to Zerodha.
You can check with your broker if you need to provide any additional documents.

Eligibility criteria for lending and borrowing.

At Some Brokerage House like Zerodha, the minimum eligibility criteria to place SLB orders is as mentioned below
Lending of securities : The order value per security to lend should be atleast Rs ₹1 lakh or over than the same. Order below One lakh will not be processed.
Borrowing of securities : An order with a minimum of 500 shares must be placed.

Settlement cycle for a SLB Transaction

T Day: The Transaction is executed on T Day between the lender and borrower. T+1 day: The Lenders are required to deliver the securities for pay-in on T+1 day. Securities are thereafter transferred to the borrowing participants during pay-out 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 pay-out. 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 pay-out.

Schedule of Charges
Securities Lending & Borrowing Segment (NSCCL and/or ICCL)

The processing charges for SLB transactions are 20% of the lending/borrowing price plus 18% GST.

Example Scenario
If 100 shares of BAJAJ-AUTO are lent at a lending price of ₹13 each as shown in the image below, then the charges would be:

A. A processing fee of 20% is charged on the turnover (100×13=1300) = 20% of 1300 = ₹260.

B. 18% GST on the processing fee = 18% of 260 = ₹ 46.8

Total SLB fees: A+B = ₹ 306.8.

Where can SLB bids and offers be checked?