Planning to hold you portfolio for the long term? Great, because long term holdings are the [perfect route to building wealth. But, do you know that, while you are holding, you could still benefit through lending them on the NSE or BSE.
Yes, both the BSE and NSE have a window for Securities Lending and Borrowing (SLB). The SLB scheme is facilitated by the National Securities Clearing Corporation of India (NSCCL), the clearing corporation of the National Stock Exchange of India (NSE), through a screen based exchange‐traded system called SLB‐NEAT. It has a centralized anonymous order book and all the borrowing and lending are cleared, settled and guaranteed. The expected lending fee is quoted as price and the tenures are available up to 12 months.
Securities available for transactions in SLB, include all derivative stocks and an additional number of highly traded stocks.
Stock Lending & Borrowing (SLB) is a product launched by the stock exchanges within the overall framework prescribed by SEBI. SLB is a temporary loan of stock for a fee. This activity through the exchanges has grown steadily after 2010. Participants can lend or borrow at NSE / BSE wherein NSCCL / BOISL are approved clearing house for such transactions.
At NSE it is facilitated by NSCCL through a screen based exchange traded terminal SLB‐NEAT. At BSE it is facilitated by BOISL through FOW. NSCCL / BOISL acts as the central counter party providing financial settlement guarantee for SLB transactions. Both retail & institution clients can participate in this segment.
So as an investor how do you participate in SLB? In case of lending and borrowing clients should enter an agreement with their broker as prescribed. The broker is also required to obtain a UCI code for the client after which the client can lend and borrow in SLB.
So, Is there any Counterparty risk involved in SLB transactions at NSCCL? No. NSCCL acts as a central counterparty providing financial settlement guarantee for SLB transactions. NSCCL has a robust risk management system and collects adequate margins from participants to cover counterparty risks.
Incidentally, the lender also enjoys all rights to any corporate action that may be announced, including bonus, rights, dividends etc; this because the lender continues to remain the owner of the shares. Moreover, 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 up to 3 days prior to the respective reverse leg settlement day.
Clearly, it is a safe route and long term investors must consider this route to further advantage themselves.
FAQs for Securities lending & borrowing (SLB) scheme
Is there any Counterparty risk involved in SLB transactions at NSCCL?
NSCCL acts as a central counterparty providing financial settlement guarantee for SLB transactions. NSCCL has a robust risk management system and collects adequate margins from participants to cover counterparty risks.
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.
What is the tenure for SLB transactions?
The tenure for SLB transactions is up to 12 months. 12 fixed monthly tenures with fixed reverse leg settlement dates are available for transactions in SLB. The fixed settlement dates are the first Thursday of the respective month and the date is displayed on the NEAT SLB trading screen at the time of order entry. Each month is assigned a series to it with January having series as 01 up to December having series as 12.
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.
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.
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.
What action is taken if the borrower fails to bring securities at the time of reverse leg settlement?
If the borrower fails to deliver the securities NSCCL conducts a buy‐in auction to acquire the securities on the reverse leg settlement date. If securities are not available in auction then the transaction is financially closed out at the below mentioned close out rate i.e. higher of
- Maximum trade price in the capital market segment of NSEIL from (reverse leg settlement day – 1 day) to reverse leg settlement day, or
- 25% above the closing price of the security in the capital market segment on the reverse leg settlement day.
What action is taken in case of Corporate Actions?
In case of Corporate Actions other than dividend and stock split, transactions are foreclosed 2 days prior to ex‐date or as prescribed by NSCCL from time to time.For dividends the dividend would be collected from the borrower and passed on the lender at the time of book closure/record date. In respect of stock split the borrower's obligation would be revised as per the proportionate spilt and would be passed on to the lender during the reversal leg.
It has been observed that in last 6 months around 100 stocks have participated in SLB segment giving decent yield. The annualized yields have at times been greater than 20%*.
The table below gives number of days where stocks have annualized yield of more than 12% and 24% in last few months.