A Quick Take on Stock Lending and Borrowing Mechanism

Securities or stock lending and borrowing mechanism (SLBM) is a process in which an investor can borrow or lend shares to other market participants.

Investors with a long-term stock portfolio gain an opportunity to earn risk-free additional returns on their portfolio of stocks by lending via the process of SLBM.

The Securities and Exchange Board of India (SEBI) acts as the regulator of the SLBM process. Basically, it requires an agreement between the lender and borrower, along with specifications of the terms and conditions of the transaction.

Stock lending can provide an additional source of income on the existing portfolio, without taking market or counter-party risk, which is mitigated as the trades are guaranteed by the approved intermediary such as NSE Clearing Ltd (NCL) or Indian Clearing Corporation Ltd (ICCL)).

A majority of stocks, which are part of the futures and options (F&O) segment of the National Stock Exchange (NSE), can be borrowed or lent through SLBM.

The client remains the beneficial owners of their shares and will be entitled to all the corporate benefits such as dividends, bonuses, rights, and stock splits.

On the other hand, the lender will receive a lending fee, which will be determined based on the prevailing market conditions.

Typically, the lending orders under SLBM are executed via a screen-based, order-matching platform provided by the NSE.

The tenure of lending and borrowing ranges from one month up to a maximum of a year.

Similarly, the return of securities by the borrower is scheduled on the respective reverse leg settlement day, which is the first Thursday of every month.

Besides, through the ‘early recall’ facility, the investor also enjoys the liberty to withdraw from lending in case they wish to sell the stock.

In addition, a rollover facility in SLBM is available, which shall be allowed for a period of three months, that is the original contract plus two rollover contracts.

Furthermore, the Central Board of Direct Taxation (CBDT) has issued a circular stating that lending and borrowing under SLBM will not be treated as a ‘transfer of securities’ under Section 2(47) of Income-tax Act (ITA), 1961, in the hands of the borrower, so the capital gains will not be generated in the hands of the assessee.

However, investors need to reach out to their tax advisors to know more about the tax implications of transactions.

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