If you own FNO stoocks and are not planning to sell them – then the least you can do is to rent them out and earn money.
Remember that in 3 months time all stocks will have to be compulsorily delivered in the FnO segment and at that point in time this Stock lending and Borrowing (SLB) business will be in huge demand.
What is SLB (Stock Lending and Borrowing)?
SLB was launched to prevent shortages in deliveries and to create a transparent platform for lending and borrowing of stocks.
Though activity is low, it has started picking up and very soon, the SLB will become like a separate trading segment (of course, for those who have deliveries)!
Take a look at the Buy-Sell quotes of stocks in demand for October 2019 delivery as on Friday 23-8-19:
Remember that SLB transactions are extremely transparent and all trading is screen based. There is nothing arbitrary about the system.
Some FAQs on Stock Lending and Borrowing (SLB)
1) Is there any Counterparty risk involved in SLB transactions?
No. NSCCL with its robust risk management system acts as a central counterparty providing financial settlement guarantee for SLB transactions.
2) Will the lending/borrowing of securities under the Securities Lending Scheme will amount to
“transfer” under clause (47) of section 2 of the Income‐tax Act (Act) in the hands of the 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.
3) How shall one quote the lending fee?
Lending fee is quoted on per share basis. 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.
4) What is the 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.
5) What are the various margins applicable to the borrower & lender on T Day?
a) In case of borrower only the lending fee is levied upfront as margin.
b) In case of lender, 25% of the lending price (T‐1 cash market closing price) and Mark to market (MTM) atend of day are charged to the lender. These margins are not applicable to lender in case if lender does
Early Pay‐in of securities.
6) What margins are applicable to the borrower & lender from T+1 to Reverse leg settlement day
a) No margins are levied on the lender
b) 100% of lending price, Value at Risk margins, Extreme Loss Margins (same as applicable in Cash market
for buying or selling a security) and EOD MTM are levied on the borrower.
7) What form of collaterals can be provided towards margin requirement?
The margins are collected from the collaterals of participant/custodian. Participant/Custodian can provide
collaterals in form of cash, fixed deposit or bank guarantee.
8) What is early recall of securities by the lender?
A participant having an existing lend position can recall a position by entering a recall order on the trading
terminal. The lender shall quote the lending fee it wishes to forego for the balance period. In case the
order is matched successfully then the settlement of the early recall transaction happens on a T+1 basis.
After successful completion of pay‐in, the position of the lender would cease to exist.
Recall orders can be entered upto 3 days prior to the respective reverse leg settlement day.
9) What is early repayment of securities by the borrower?
A participant having an existing borrow position can repay the securities to NSCCL. On receipt of securities
the margins levied on borrower are immediately released. 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.
10) What action is taken if the lender fails to deliver securities on T+1 day?
The transaction shall be financially closed out at the below rate i.e. higher of
— 25% of closing price of the security on T+1 day (closing price for the security in the capital market
segment of NSE), or
— (Maximum trade price of the security in the capital market segment of NSE from T to T+1 day) ‐
(T+1 day closing price of the security in capital market segment of NSE)
Advantages of SLB
— It provides an incremental return on an idle portfolio. The lender makes money as he sleeps.
— Corporate actions such as Dividends/Bonus are transferred to Lender.
— There’s plenty of scope for this business as there are many borrowers around. Borrowers typically play with: arbitraging in stock price between 2 exchanges, reverse arbitraging when futures are at a discount to stock, covering short position for avoiding settlement failure, mispricing in options, etc.
— Lending does not incur short term capital gain tax.
So if you are interested in the Stock lending and borrowing, please enroll as my client (I am an AP of Prabhudas Lilladher). You can read more about my brokerage offer here. Do note that brokerage on SLB is higher then the regular rates – and I’ll inform you of these if you’re interested to sign up.
Call 77079 11100 or 79750 17979 on working days to know more.