security lending

Security lending & borrowing: Earn extra income

As a property investor, you have two options- keep the house locked or give it out on rent. The first option fetches you the capital gains as returns, while the second option earns you regular returns in the form of rent and capital gains.

For stock investments too, you can either hold your shares and wait for them to appreciate in value or lend your securities through the Security Lending and Borrowing (SLB) scheme to earn money in the interim.

SLB is a system in which traders borrow shares that they do not already own, or lend the stocks that they own but do not intend to sell immediately. Stock borrowing is mostly done by institutions and traders who want to hedge their positions in the F&O segment. At present, more than 90% of borrowing securities takes place to meet delivery obligation under reverse arbitrage. Reverse arbitrage opportunity arises when prices in the futures market quote at a discount to spot market and arbitragers buy in the futures market and sell in the cash market. Since they need to give delivery in the cash market in a few days, they borrow the same from the SLB segment. Also, traders & hedge fund managers borrow stock to short them in a bearish market. The SLB scheme is yet to attract large-scale interest. However, volumes in the SLB segment have picked up over last five years from Rs 100 cr to Rs 2,000 cr.

SLB transaction happens at a market determined rate of interest and tenure that is fixed by the two parties entering the transaction. According to experts, normal market yields range between 5-6% p.a. However in exceptional situations returns can even shoot up to 30-40% for short periods. However, you need to note that the returns mentioned above are annualized figures and absolute returns may be less because lending mostly happens over short periods of 10-20 days.

Securities lending is relatively risk-free and is suitable for long-term investors. SEBI and stock exchanges impose heavy margin on borrowers and the entire process is managed by Indian Clearing Corporation Ltd (ICCL). There are also several other provisions to take care of the interest of investors. If you don’t deliver stocks on time after agreeing to lend or return the stocks on time, you may be penalized.

Even when you have lent out your shares you will continue to benefit from corporate actions like dividends, bonus and right issue. During the lending period, if a company declares dividend, the borrower will collect the dividends and pass it on to the lender.

In order to able to lend your shares, you need to open a demat account with a broker who has membership in the SLB segment. Thereafter you need to inform your broker about the stocks you want to lend and also the quantity. Once you reveal the stock list, your broker will alert you about lending opportunities. Every day brokers get details of the stocks that are in demand and inform their clients. Sometimes the broker asks the lender to transfer the shares to their pool account to avoid the chance of default on lending obligations.

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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

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