SLBM Charges in India: What Costs Should Investors Know?

To lend shares using the Securities Lending and Borrowing Mechanism (SLBM) in India, one must have a basic understanding of SLBM charges. The lending fee quoted in SLBM transactions does not indicate the amount that the lender receives. The net amount that the lender receives is subject to the transaction and intermediary related charges, brokerage, processing, GST, depository and other applicable charges.

For investors, SLBM provides the opportunity to generate an additional income flow by lending securities at a fee. However, such an opportunity may require the investor to hold the securities for an undefined period. Furthermore, such investment would attract costs, taxes and the securities may remain unavailable for sale during the period they are lent.

This report focuses on the key SLBM charges in India, what borrowers and lenders need to review, a simple example of net income calculation and explains the key differences between the charges of different intermediaries.

What Is SLBM?

Securities Lending and Borrowing (SLB or SLBM, for short) is a regulated service provided by an approved intermediary and an exchange/ clearing corporation mechanism through which securities can be temporarily lent and borrowed. The borrower is obligated to return the same securities of the same type and class, in accordance with the applicable settlement terms.

Regarding the trading, clearing and settlement services, SEBI framework relies on the clearing corporations. The framework also establishes that fees and charges related to lending should be defined through appropriate agreements and arrangements with the intermediaries. You can find the detailed version of the SEBI Securities Lending Scheme here.

For lenders, the primary economic benefit is the lending fee. Lenders set or take market determined lending fee, and borrowers pay the fee and provide the required margins and collateral as per the SLBM framework.

Why Do SLBM Charges Matter?

You may think that a higher quoted lending fee will yield a profitable transaction for a lender, but that is not entirely accurate.

The quoted lending fee, in isolation, fails to capture a lender’s effective net income.

For example, if an investor lent 1,000 shares at a lending fee of ₹4 per share, then the gross lending fee would be:

1,000 shares × ₹4 = ₹4,000 gross lending fee

If the intermediary charges a processing or brokerage fee calculated as a percentage of the lending fee, and GST is applicable to that service charge, then the amount credited to the lender will be less than ₹4,000. Other applicable depository or transaction charges will also have an adverse effect on the economics.

It is therefore important to look at net lending income and not just quoted SLBM lending rates.

SLBM Charges in India: Main Costs to Understand

There is no uniform retail SLBM charge applicable to every investor. The total cost will depend on the exchange mechanism, the participant or broker, the account structure, and the transaction and statutory framework applicable. Some of the key elements to look at are explained below.

1. Lending Fee

The lending fee is the most significant element in an SLBM transaction. This is normally quoted on a per share basis and is dependent on the demand and supply for the security and contract.

For example, if the lending fee is ₹3 per share and 2,000 shares are lent, then the gross lending fee is ₹6,000 before charges and taxes are applicable.

The fees for lending stocks and contracts vary based on market factors and investor demand. A stock lent that is in high demand by market borrowers commands a higher lending fee compared to a stock that has a low borrowing demand.

NSE states that the lending fee for securities is determined by the market and adds an exchange based SLBS facility for eligible securities. More information on the NSE Securities Lending and Borrowing can be found on the current framework.

2. Brokerage or Processing Charges

The intermediary sets brokerage or processing charges for SLBM services. Such charges may be a percentage of the loan or credit fee, a transaction fee, or another permitted fee.

Brokerage cannot be charged at a specific percentage across all brokers in India. For instance, a processing fee which is expressed as a percentage of the lending fee may be publishing by one intermediary, while another intermediary may have different charges.

Investors need to review the current tariffs or the SLBM pricing for each intermediary to understand how the charges are calculated (i.e. on the gross lending fee, transaction value, etc.).

3. GST on Applicable Services and Fees

GST is applicable on taxable services on securities lending and intermediary services or charges. The tax authorities have addressed the securities lending services.

In relation to the securities lending scheme, the CBIC 119/38/2019-GST states that the lending of securities is a service which is subject to GST, while the intermediary services incurring a commission or a charge are also taxable services. The exact implications of the reverse charge would depend on the nature of the transaction.

For a retail investor, the quote lending fee is not the fee after GST is added. Check the contract note, tax invoice, or intermediary's current SLBM charge schedule to find out which GST component applies to your transaction.

The official CBIC GST circular on securities lending provides the relevant tax clarification.

4. Depository Participant Charges

Given the dematerialized nature of SLBM, depository participants may charge for services related to debit, credit or settlement.

Broker and depository participant charges may differ. Some brokers have indicated the specific depository participant charges for SLBM settlement. In such cases, it is likely that other brokers have different arrangements.

Investors should verify if DP charges apply to the lender, borrower or settlement, and if the DP service attracts GST.

5. Exchange, Clearing and Regulatory Levies

Costs related to a transaction, both clearing and regulatory levies, may be a part of the overall cost of a transaction.

The transaction cost, and therefore the charge, may differ based on the transaction and the tariff of the exchange as well as the intermediary. For specific SLBM transactions, investors should refer to the statement or the contract note for the charge.

Secuities lending is a separate market and has an independent settlement and fee structure from equity delivery and trading, and therefore should not be treated in the same manner.

6. Statutory Taxes and Duties

Investors must review applicable statutory taxes and duties for the SLBM transaction. Certain charges like stamp duty, exchange levy, regulator fees, and other statutory charges, are determined by the transaction and the applicable laws.

For market charge information, NSE provides a current reference for SEBI turnover fees, STT and other levies. Investors must not assume that all levies appearing on the general equity market charge page are applicable to SLBM transactions. The current contract note and intermediary schedule must be referred to in order to ascertain the applicable charges.

Are SLBM Charges the Same for Lenders and Borrowers?

No. The economics of the lender and borrower are different.

The table is a conceptual guide, not a universal tariff. Current broker, clearing corporation and statutory rules should always be checked before a transaction.

How to Determine Net SLBM Income

An SLBM opportunity can be assessed by starting with the gross lending fee and subtracting associated costs.

Net SLBM Income = Gross Lending Fee − Applicable Brokerage or Processing Charges − Applicable Taxes on Services − Applicable DP and Other Charges

Suppose an investor lends 2,000 shares at ₹5 per share.

• Gross lending fee = 2,000 × ₹5 = ₹10,000

• For illustration, if an intermediary levies a 15% processing fee on the lending fee = ₹1,500

• GST on that processing fee at 18% = ₹270

• Other applicable charges = assumed ₹100 for illustration only

• The net SLBM income = ₹10,000 - ₹1,500 - ₹270 - ₹100 = ₹8,130

The above is a hypothetical example, and the 15% processing fee and ₹100 other-charge assumption aren’t applicable SLBM charges. Actual charges vary and should be verified before use.

There is an important principle to remember, a ₹5 lending fee does not necessarily mean an investor’s net income will be ₹5 per share of the security lent.

Does a Higher Lending Fee Always Mean Better Returns?

Not always, a higher lending fee will yield a greater gross income, but the contract duration, demand for the security, liquidity and the requirement of the shares, associated charges, and the inability to sell shares during the lending period should be taken into consideration.

An example of this is the fee for strong borrowing demand security. The investor may be looking at a higher fee. An interested investor may find it challenging to sell the shares while the securities are on loan. The investor may sell the shares only after the securities are returned or an applicable early recall mechanism has been completed.

The temporary illiquidity disclosure made by SEBI is an example of a securities lending risk. It illustrates the risk associated with the possibility that shares lent out may not be available for sale until they are returned or recalled through the applicable mechanism.

What About Early Recall Charges?

SLBM has early recall and early repayment mechanisms and frameworks. Investors will have to check if they believe early recall will not have any costs associated with it or if they will not have to worry about a change in the economics of a loan.

According to NSE’s SLBS framework, early recall and early repayment will happen at a market determined cost. Hence, the proper treatment and any intermediary costs must be checked before a recall is initiated.

When considering potential selling needs, this could be more important than any increased lending potential.

What Happens to Dividends and Other Corporate Benefits?

Lending shares doesn’t necessarily mean giving up all potential benefits associated with the securities. In the SLBM framework, corporate actions are dealt with through certain mechanisms.

For instance, under the applicable settlement procedure, dividends are calculated and recovered from the borrower and are then owed to the lender. A stock split would lead to an adjustment in the borrowed position, and certain other corporate actions may lead to an early exercise or other treatment, as per the contract and exchange rules.

Investors should refer to the current SLBM terms as the treatment of corporate actions may be different based on the event and the contract series.

Do You Pay Brokerage When Lending Shares?

It depends on the broker. There are brokers who charge a percentage of the lending fee as brokerage, while others use different pricing methods.

This is often one of the first things that need to be checked when you compare SLBM opportunities across brokers. A lower headline lending rate with a lower intermediary fee can have a different net economy compared to a higher headline lending rate with a higher processing fee.

For a practical comparison, ask the broker for the complete cost structure rather than only asking, "What is the SLBM lending rate?"

SLBM Charges vs Normal Equity Trading Charges

Because SLBM has a separate market structure, investors should use the broker's dedicated SLBM tariff rather than assuming the charges for ordinary delivery trading apply in exactly the same way.

What Should Investors Verify Before Extending Shares on a Cash Lending Basis?

1. Gross lending fee: Confirm the lending fee for a share and the total quantity being lent.

2. Brokerage or processing fee: Determine whether the intermediary will charge a percentage or a flat rate, etc

3. GST: Confirm which components of the service are subject to GST and how it is charged.

4. DP charges: Determine whether a movement of securities will involve a charge imposed by a depository participant.

5. Other statutory charges: Determine the exchange, clearing, regulatory charges and applicable taxes/duties.

6. Contract tenure: Determine the expected date of return of the securities.

7. Early recall: Determine the pricing and any related charges.

8. Corporate actions: Determine how dividends, splits, bonuses, etc. will be treated.

9. Liquidity: Consider whether you may need to sell the shares during the lending period.

10. Contract note: After execution, review the actual charges rather than relying only on an advertised rate.

How Can Investors Determine Current SLBM Charges?

There is no single broker-independent retail fee card covering every possible SLBM cost. The most reliable approach is to combine the exchange and regulatory framework with the intermediary's current pricing document.

• Check the current NSE SLBS information for exchange-level features, settlement and margin information.

• Check the relevant SEBI framework for regulatory requirements.

• Check your broker or participant's current SLBM tariff for brokerage, processing and DP charges.

• Review the contract note and ledger after execution to verify the actual deductions.

SLBS margin information published by NSE also indicates the margin requirements for lenders and borrowers. These margins should not be treated as a normal charge: a margin requirement is not the same as a brokerage or fee, though it can impact the amount of capital or securities that is tied up in the transaction.

SLBM Charges and Taxes: Why Investors Should Keep Records

Investors should maintain records of lending transactions, contract notes, lending statements, and tax-related documents. The tax implications of securities lending will depend on the investor’s circumstances and relevant provisions under the income tax law. Investors should not expect that lending income will always be taxed as capital gains earned on the sale of shares.

Where the amount is material, investors should consult a qualified tax professional and check the Income Tax Department’s latest provisions. This article does not provide tax advice.

Common Mistakes When Looking at SLBM Charges

Focusing only on Lending Fees

The lending fee is only the beginning. You may have to pay processing fees, brokerage, GST, DP, and other charges.

Thinking that each broker charges a similar percentage

SLBM pricing is different amongst different participants. Check the current tariff of the broker or participant you actually use.

Thinking that margins and charges are equal

Margins are volatility control measures; they do not represent an amount or securities charged as a fee.

Ignoring liquidity

The stock you lent may be sold, and you may not be able to sell the stock when you need to. You should consider this along with the additional lending income.

Using outdated charge information

Packages and broker tariffs may have changed since you found the charge information. An outdated fee in an article or post may not apply.

Conclusion

Knowledge of SLBM charges in India is important to analyze if lending shares is worth it from an economic viewpoint. The headline lending fee may look attractive, however the amount the investor will ultimately receive will depend on the intermediary fees, GST, DP charges, and other transaction and statutory fees.

The best option is to compute the net expected lending fee before placing an order and then compare it to the liquidity cost and other risks of lending the securities on a temporary basis. Investors must also use current broker and exchange documentation since the operational arrangements and SLBM charges in India may change over time.

For investors building their knowledge of securities accounts and market infrastructure, the InvestEdge360 guide on how SLBM works in India describes an additional background. In addition, learn what a Demat account is and understand stock market basics before utilizing securities lending.