There is a vast majority of traders who buy stocks for a long period of time in anticipation of gaining through appreciation in the price of the securities. But are these stocks meant only for capital appreciation and fetching you dividends every year? Is there any way through which the securities lying idle in your demat account can earn you something extra? I know most of you must have never thought on these questions. But after reading these questions, if you are thinking on the possibility of earning extra, then the happy news is that yes, you can earn additional money by lending and borrowing shares. But before we delve in to the process and shortcuts of earning this additional money, let us first understand the concept of securities lending and borrowing.
What is SLB?
SLB is a legal way of lending and borrowing securities and it is governed by the regulations framed by SEBI, as per modifications made in November, 2012. All market participants in the Indian securities market are allowed to lend or borrow securities through Authorized Intermediary. However, qualified foreign investors are an exception to the permitted market participants. At present, there are only two authorized intermediaries, viz. NSC Clearing Corporation (NSCCL) and BSE Clearing Corporation (BOISL). Even out of these two authorized intermediaries, NSCCL is the most preferred intermediary and it enjoys the maximum number of transactions.
HOW YOU CAN MAKE MONEY FROM?
If you intend to hold the shares of a company for a long period of time then in the short run, you can lend these shares at a place where there is a demand for them. This way, you can get additional return on the shares in the form of lending fees. Here, NSCCL and BOISL will act as guarantors.
Who can be the lenders?
Retail, banks, HNI, mutual funds and insurance companies can be the lenders.
What is the benefit to borrowers?
Securities borrowers usually look for one out of the two things: one, an opportunity to arbitrage the price of the stock between 2 exchanges and two, an opportunity to reverse arbitrage when they witness that futures are at a discount to stock. This is done so as to cover for any possible settlement failures and mispricing in options. Therefore, as a matter of arbitrage or hedging strategies, you can borrow from the lender by paying fees to SLB.
Who can be the borrowers?
Arbitrageurs (in cash and derivatives), short sellers, retail traders and market makers can be the borrowers.
How to get started?
You can start lending and borrowing by making use of the forms. There are two types of forms – form A and form B. Form A represents an agreement between ISSL and NSCCL. ISSL (ILFS securities services ltd.) has the largest contribution in total trading volume which is generated in SLB). Form B is for an agreement between ISSL and you. Both these forms need to be signed and submitted along with relevant proofs. Once this has been done, you can start lending and borrowing within 2 weeks.
Process of lending and borrowing
As a next step, an order will be placed by the lender with the participant (say, ISSL). While placing the order, lender will have to define the stock, quantity that is available for lending, time period and expected lending fees. The moment, borrower will place an order with the participant (say ISSL) mentioning the details like stock, quantity, time and fees he is ready to pay, an order matching process will take place.
In such a case, lender is asked to deposit the amount equivalent to 25% of the total stock amount that he wants to lend. This deposit is asked to avoid any sort of denial to lend by the lender. Once the stock is moved from the lender’s demat account to the participant, the deposit is paid back to the lender. On the other side, a borrower is required to deposit 125% of the value of the stock he wants to borrow. At the end of the tenure, the stock is given back to the lender and the margin money of borrower is released.
However, it should be noted that only stocks that are traded on F&O segment are allowed to be lend or borrowed at SLB segment. The contract period entered for borrowing and lending can be for a period of 1 month to 12 months.
The advantage of SLB segment is that a mechanism of early repayment and early recall is also present in it. The margin acts as a cover for the risk. However, the only risk a lender can face is close out risk.
So, you should not just simply hold the stocks, rather lend or borrow and earn.