It is a system in which a trader can borrow shares that they do not already own or can lend the stocks that they own.
Stock lending transaction is a temporary contract of loan of securities between Lender & Borrower.
It describes the market practice by which, for a fee (Lending Fees), securities are transferred temporarily from one party, the lender, to another, he borrower. The borrower is obliged to return them either on demand or at the end of any agreed term.
SEBI has permitted all categories of Investors viz. Retail and Institutional to participate in SLB. Applicant can participate in the SLB segment either as Lender or as Borrower. Any registered client can participate as Borrower or as lender.
As per the clarification from Income Tax vide their circular no. 2/2008, dated 22-2-2008 transactions done in the SLB shall not be regarded as transfer. For further details, please refer circular no. 2/2008, dated 22-2-2008 of the income tax department. Therefore, the transactions of lending and borrowing are not liable to Securities Transaction Tax (STT).
A Lender participates in SLBM because it provides;
> Incremental return to the idle portfolio
> Risk-free Income without any Capital Gain Tax Implications
> Protection of all rights as owner,
> Guaranteed Settlement of all transaction,
> Low costs of participation and
> Improves the portfolio performance.
A borrower participates in SLBM in order to;
> To support a trading strategy, financing strategy or simply fulfilling a settlement obligation at the Exchange. Some strategies where securities can be borrowed are listed below:-
As a Lender you have idle stock in your demat account and you are, willing to lend your stock for a shorter period of time and earn incremental returns, on your idle portfolio, in the form of Lending fee which the borrower is ready to pay, you can lend the your stock through SLB Mechanism.
You are required to transferred stock temporarily from your demat account to exchange clearing house through your broker. The exchange transfers the stock to the borrower; the borrower is obliged to return them either on demand or at the end of any agreed term.
The lender does not get the benefits of fall in price but retains the benefits of rise in the price of the stock as ultimately the stock will be returned back to him when the contract ends.
As a Borrower, if you have a bearish view on particular stock and want shares for a shorter period of time and if ready to pay required Lending fee, you can borrow the stock through SLB Mechanism.
For example, you have a negative view on the price of a stock. You can borrow shares from SLB and sell them. You can buy them back if and when the price falls. Your profit is the difference between the selling price and the buying price, after deducting the interest rate.
Let’s say stock price of Company Z is trading at Rs. 200. You decide to short sell 100 shares of Z for a total value of Rs. 20,000.
Suddenly, disappointing quarterly profits cause the share price of Z to fall to Rs. 190. You can now buy 100 shares of Z for value of Rs. 19,000.
You then return the shares of Z to the lender who accepts the return of the same number of shares lent, regardless of the fact that the shares prices have fallen.
You make and retain a profit of Rs. 1,000 difference (minus lending fees and other transaction costs).
The screen based trading terminal will display the per share lending fees as quote price. Borrower quote will be displayed as buy rate and similarly the lender quote will be displayed as sell rate.
Lending fee may be quoted based on the annualized yield expected by the lender or the cost which the borrower expects to pay. For e.g. If the lender is lending shares for a period of 180 days he could quote lending fee per share which is based on the rate of return expected by the lender.
There is no counter party risk to either Borrower or Lender as the clearing corporation of the stock exchanges as central counterparty provides financial settlement guarantee for all SLB transactions. Under the robust risk management system of the clearing corporation and collection of adequate margins from participants, the counterparty risks is zero.
In the event of fund shortages by the borrowers the SLB transactions will be financially closed out and accordingly, the securities shall be returned to the lenders along with the lending fees.
In the event the lender fails to deliver securities, the transaction is closed out as per the below procedure.
The transaction is closed out with value computed by higher of:
> 25% of closing price of the security on T+1 day (closing price for the security in the capital market segment of NSEIL), or
> (Maximum trade price of the security in the capital market segment of NSEIL from T to T+1 day) - (T+1 day closing price of the security in capital market segment of NSEIL)
In the event the borrower fails to return the securities, exchange will conduct a buy-in auction in the Capital Market segment of NSEIL. And the borrower account will be debited with Auctioned value as per normal auction procedure.
In the event of no offer in buy in auction/ failure to give delivery for offer in auction market on the settlement date, the transaction is closed out as per the below procedure.
The transaction is closed out with value computed at higher of:
> The maximum traded price in the Capital Market segment of exchange from reverse leg settlement date – 1day to settlement date of reverse leg, or
> 25% above the closing price of the security in the capital market segment on the reverse leg settlement date.
Securities on which derivatives are available in the F&O segment, approved Non F&O securities and approved Index ETF’s are eligible for transactions in SLB. Presently 300+ securities are included in the approved list.
Securities lending and borrowing is permitted in dematerialized form only.
Securities in which there are corporate actions are subject to either foreclosure of transactions or adjustment depending on the type of corporate action.
The eligible securities for early recall/repayment are announced by exchanges along with the list of eligible securities for SLB.
Yes. A client having an existing borrow position can make early repayment of the securities. On receipt of securities the margins levied on borrower are immediately released.
At any given time, the exchange will list contracts with multiple standardized stock return days:
> First Thursday of the month
> One (1) Thursday prior to the last Thursday of the month
> Additional three (3) stock return days such that there are stock return days in the first five (5) consecutive Thursdays.
If the stock return day is a holiday, then the return will take place on the immediately following trading day.
Yes. A client having an existing position can recall/repay shares by entering a recall order.
Yes. Limit applicable on the open positions are as follows
Yes. The borrower can further lend the securities for the balance period of the tenure. For this the borrower needs to enter a repay order on the trading terminal by selecting order type as “Repay”. The borrower shall quote the fee he expects to receive for the balance period. In case the order is matched successfully then the settlement of the early repay transaction shall happen on a T+1 basis. After successful completion of pay-in the position of the borrower shall cease to exist. Repay orders can be entered up to 3 days prior to the respective reverse leg settlement day. The orders can also be entered for partial quantity.
Margins are collected from the collaterals in the any one of the following form
> Cash
> Bank Fixed deposits or Bank Guarantees assigned in favor of RWSPL
> Equity Share permitted as collaterals in demat form.
> Government securities
Application for activation SLB Facility is to be given by any registered client. No additional documentations are required for the activation.
Following terminology is used which you must be aware while dealing in SLBM
> "Lender" means a person who deposits the securities registered in his name or in the name of any other person duly authorized on his behalf with an approved intermediary for the purpose of lending under the scheme.
> "Borrower" means a person who borrows the securities under the SLB Platform through an approved intermediary.
> "Lending Fees" refers to the actual price at which the transaction is executed. Lending fee per share is at market determined rate. Lending fee = lending fee per share * quantity of shares borrowed/lent. For e.g. If a transaction is executed at Rs. 6 per share for 100 shares of Security "X" then the total lending fee obligation for the borrower for security "X" will be Rs. 600.
>"First Trade Day" is the day when a listed contract is open for trade i.e. lenders and borrowers can enter into transactions.
>"Stock Return Day" is the reverse leg settlement date, which means the day on which the Borrower will return the securities to the Lender and the contract will come to an end.
>"Last Trade Day": For any given stock return day, the last day to borrow and lend will be the third business day prior to the stock return day. For e.g. for a contract with Stock Return Day as July 8, 2010, the Last Trade Day would be July 5, 2010, assuming there are no trading holidays.
> "Recall" means the lender is interested in recalling the security lent, prior to the stock return day of the contract.
> "Early Return" means the Borrower is interested in returning the securities borrowed to the Approved Intermediary/Clearing House before the expiration date of the contract.