SLBM Benefits: How Can You Earn by Lending Stocks in India?

SLBM benefits include the possibility for long-term shareholders to make lending fees on eligible shares held in Demat form without the need to sell their shares. With India’s Securities Lending and Borrowing Mechanism (SLBM), eligible securities can be temporarily lent through an exchange-based process and returned to the lender at the end of the agreed term. SLBM provides an opportunity to make additional earnings, but comes with a host of other considerations including liquidity risk, corporate action risk, transaction risk, and other market risks.

This document provides insight into what stock lending means in an Indian context, how lending fees are determined, the fate of the shares during the lending process, how an investor can engage in SLBM, and the kinds of risks that SLBM introduces to an investor.

What Are the Main SLBM Benefits for Shareholders?

SLBM offers a number of advantages for shareholders. First, shareholders have the opportunity to earn a lending fee, while also maintaining exposure to the security or securities. The SLBM allows shareholders to generate income, while not having to sell the investment.

• Potential additional income: The lender receives a lending fee when a lending transaction is executed.

• Use of otherwise idle holdings: Long-term investments can become idle and generate no income. SLBM, allows shareholders to earn income from these types of holdings.

• Exchange-based mechanism: SLB transactions are carried out through an automated order-matching system operated by a clearing house.

• Access to market demand: Securities can be offered for lending to market participants for purposes permitted by the securities lending framework and including, among others, short-sales.

• Treatment of corporate actions and dividends: Under the SLB framework, treatment for dividends and stock splits is provided, and other corporate actions are addressed through foreclosure or adjustment, depending on the applicable rules.

SLB enables shareholders to earn additional income, but this does not mean income is always available. There may be no borrowing demand for a given security, the lending fee may change, or shareholders may not find an attractive lending opportunity.

How Does SLBM Work in India?

SLBM is an exchange-traded securities lending and borrowing mechanism. The lender and borrower do not generally negotiate directly with each other. Instead, the transaction is facilitated through the exchange and clearing infrastructure and the investor's authorised market intermediary.

1. The investor holds an eligible security in Demat form.

2. The investor enables SLB participation through a broker or other authorised participant that provides the facility.

3. A lending order is placed specifying the security, quantity, series or tenure as applicable, and the lending fee the participant is willing to accept.

4. Borrowing and lending orders are matched electronically on the applicable platform using price-time priority.

5. The securities are transferred through the prescribed settlement process.

6. The lender receives the agreed lending fee according to the transaction and settlement arrangements.

7. At the end of the relevant tenure, equivalent securities of the same type and class are returned through the reverse-leg settlement process, subject to the applicable rules.

NSE states that its SLBS platform supports lending and borrowing orders as well as early recall and repayment orders. The current NSE framework provides multiple tenure structures, including monthly contracts and shorter-tenure R3 contracts. Investors should check the current series, settlement date and eligible-security list before placing an order because exchange parameters can change.

Who Can Lend Shares Through SLBM?

Securities lending is possible for retail clients where their broker or their broker’s authorised participant provides the facility and the security is eligible. For participation in the NSE SLBS framework, securities need to be in the dematerialised form.

Eligibility is on a security basis and not universal. Currently, NSE states that securities that are available for trading in its F&O segment are eligible for the SLBS framework, subject to the eligibility list and corporate action conditions. So just holding a listed stock would not make it eligible for SLBM.

Investors should look at the latest NSE SLB market data and eligible securities information before concluding that a certain security is eligible for SLBM.

How Is the SLBM Lending Fee Determined?

The lending fee is the price agreed to for temporarily lending the security. It is quoted on a per share basis and is determined through the order-matching mechanism rather than by fixed returns announced by the stock exchange.

For example, let us consider an investor lends 1,000 eligible shares at a lending fee of ₹4 per share. The gross lending fee obligation would be ₹4,000. Actual lending fees vary based on the security, demand, tenure, market conditions and available supply.

There can be a greater demand to borrow a particular security because there are specific market strategies or settlement requirements. Other securities may have little or no borrowing demand. Investors, therefore, cannot expect to earn SLBM income at a fixed percentage of the market value of their holdings.

What Determines Demand for a Stock in SLBM?

• Demand from market participants seeking to borrow the security.

• Availability of shares offered by potential lenders.

• Short-selling and settlement-related requirements.

• Liquidity and trading activity in the underlying security.

• Corporate events and expected changes in supply or demand.

• The specific SLB series and remaining tenure.

NSE market data can display lending-fee prices and annualised-yield information for securities where such data is available. Annualised yield is a way of expressing the lending economics on a comparable basis; it should not be confused with a guaranteed annual return.

What Happens to Your Shares During the Lending Period?

In SLBM, eligible securities are lent for a period, after which equivalent securities are expected to be returned through the reverse leg.

Since shares are involved in an SLB transaction, the investor has to understand that he/she cannot sell the shares during the lending period. This is practically the main restriction of stock lending: a potentially profitable lending transaction creates a temporary position of illiquidity.

The NSE has an early recall facility for lenders in some cases. However, recall is subject to the applicable platform rules, series eligibility, and the settlement process. Therefore, from an investor’s point of view, it is always better to find out whether a particular SLB contract can be exited before assuming that all contracts can be exited immediately.

What Happens to Dividends and Other Corporate Actions?

Certain considerations are necessary in the treatment of corporate actions due to the nature of the lender being, in the interim, the economic holder of the securities.

As regards dividends, the current SLBS information of NSE states that the dividend amount is collected by NSE Clearing from the borrower and paid to the lender. In the case of a stock split, the borrower's position is adjusted proportionately and the lender receives the revised position on the reverse leg settlement date.

Other corporate actions may be treated similarly or differently. NSE indicates that, as a general rule, foreclosure on the ex date is applicable to transactions involving other corporate actions and, therefore, investors should evaluate the current corporate action treatment of the relevant SLB series to determine the effects of corporate actions on lending around that event.

SLBM Benefits vs Risks: What Should Investors Consider?

The most important point is that the lending fee should be viewed as an additional component of the overall investment outcome, not as protection against a decline in the stock price.

Key Risks of Stock Lending in India

1. Liquidity Risk

If you lend shares, you may not be able to sell those shares immediately during the contract period. In fact, the NSE recognizes temporary illiquidity as a key risk of securities lending.

2. Lending Fee Risk

A high fee available today does not ensure the same fee will be available tomorrow. The demand for lending is market-related and a security can have periods of strong or weak borrowing interest.

3. Market Price Risk

SLBM does not eliminate the normal risks of equity ownership. If the share price falls substantially, the lending fee would be insignificant compared to the loss in the share price.

4. Corporate-Action Risk

Corporate actions can impact the settlement and treatment of an SLB position. It is advisable for investors to check the series rules before lending shares close to a dividend, split, merger, or other corporate action.

5. Operational and Intermediary Considerations

Investors have to understand the SLB conditions provided by their broker or authorized participant, including the fee charged, order conditions, settlement, and other terms and conditions.

How to Lend Shares Through SLBM: A Practical Checklist

1. Check eligibility: Confirm that the security is SLB eligible.

2. Check your holdings: Ensure the securities are available in dematerialized form and are not in any other restricted or committed status.

3. Check the SLB series: Analyze the tenure, reverse leg settlement date and corporate action treatment.

4. Check market demand: Analyze lending bids, offers and volume, and look at available market data.

5. Compare the fee: Analyze the lending fee versus the value and risk of the shares.

6. Understand recall conditions: Not every lending position can be recalled immediately.

7. Review intermediary charges: Review broker’s or participant’s fees, taxes and other charges.

8. Consider your investment horizon: Do not lend shares which you might need to sell in the near future.

Investors who are interested in knowing more about the mechanics of lending, can look at our SLBM explained guide, and our practical step-by-step guide to lending shares through SLBM.

Does SLBM Make Sense for Long-Term Shareholders?

SLBM could make sense for shareholders with a long-term outlook on a stock, no expectation of sale during the lending period, and the ability to charge a lending fee that covers costs and risks.

That said, a long-term holding shouldn’t automatically be lent. If an investor expects to need liquidity, has unrestricted share access, or considers the lending fee too small relative to the inconvenience and risks, participation would be inappropriate.

Rather than starting with the lending fee, the decision should be based on the investor’s liquidity needs and investment goals.

SLBM Benefits Are Additional Income, Not Guaranteed Returns

A strong case for SLBM is that shareholders may be able to generate additional income from securities that they already plan to hold. This alternative source of income has to be evaluated against the risk of changes in the market price, temporary illiquidity, corporate action, transaction costs, and demand for borrowing the security.

SLBM is suitable only for those investors who already understand the mechanics of the process and wish to participate in the equity markets through appropriate channels. Equity trading account provide such participation. ASLB services can be accessed through the investor's bank/broker.

Securities lending is different from selling a stock. The aim of securities lending is to temporarily give up equity titles for a fee. Investors should also refer to our SLBM charges in India article for more details on the costs involved in a SLBM transaction. Equivalent securities are expected to be returned under the applicable settlement framework.

Conclusion

SLBM benefits can provide eligible long term shareholders, who wish to hold on to their shares, an opportunity to earn additional income. However, in order to take advantage of this opportunity the investors must be aware of the borrowing demand on the shares, and whether or not they can afford to temporarily surrender their shares. While the opportunity does exist to earn an additional income, the cost of this opportunity must always be evaluated in the context of risk and flexibility.

Verify the securities eligible for SLBM, reverse-leg settlement dates, lending rates, contract series, fees and charges, reverse-leg recalls, treatment of corporate actions and other details before making a decision to participate. Market conditions and the rules of the game are always subject to change, and investors should base their decisions on the most current information.

Official market and regulatory information is available at SEBI and the NSE.