Are You Encashing On Your Equity Holdings Through Stock Lending?

Stock lending, in the literal sense is like having your cake and eating it, too

Do you know you could make as much as 6 – 8 % per annum on your equities by lending them through the NSE or BSE. Its safe and legal and enhances the overall value of your long term holdings in equities. It also safe guards your values in case of market downturns. Example – The markets lose 10 percent and your stock does the same. But the revenue you receive, say 12% ensures that you have a cushion that curtails depreciation till that level. In a rising market, you get both the appreciation as also the interest – a double benefit of sorts. Simply put, in a bull market it doubles as an advantage, while in a bear market it acts as a small respite.

So what is stock lending all about and how safe is it? 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.

In addition to derivatives scrips further stocks based on average monthly turnover are also available for transacting in SLB as per circulars issued by the exchange. Both retail & institution clients can participate in this segment.

Lending Opportunity

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.

Stock Lending 2

Source: PhillipCapital

Corporate Actions: Except dividends and stock splits, SLB transactions are to be foreclosed 2 days prior to the ex‐date or as prescribed by clearing corporation from time to time. Dividends collected from borrowers are passed on to the lenders where as borrower’s obligation are revised as per stock split.

Margins: No margin is levied on the lender in case of early payin. The Borrower has to pay 100% of lending price, Var + ELM (Volatility Margins) & MTM at EOD.

Taxation: The income tax circular on SLB clarifies that it’s not a transfer / sale of shares and also that STT is not levied on such transactions. Participants have the option to Recall existing lend position and also Repay existing borrowed position.

The Video below puts stock lending in perfect perspective

FAQs for Securities lending and borrowing (SLB) scheme

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About the Author

Gautam Sahijwala