High costs hurt stock lending scheme

Experts have cited high margins, taxes and poor investor awareness as reasons for tepid investor activity in SLBS.

- Ram Sahgal & Apoorva Ajith

As India's stock market regulator plans to revamp the securities lending and borrowing scheme (SLBS), experts have flagged steep margins and taxes, as well as a lack of awareness among retail investors as the main reasons for the scheme failing to gain popularity more than seventeen years after its launch.

SLBS allows an investor or a trader to short a stock, something that current regulations don't permit unless one owns the stock.

The product allows investors sitting on idle shares to lend them for a fee to those wanting to short the stock either in anticipation of a fall in its price or to meet a delivery obligation or to simply exploit a price differential in the same stock traded on different segments—cash and futures.

The minimum borrowing period is one month, while the maximum is up to a year. At the end of the tenure, the borrower returns the stock to the lender with the settlement being guaranteed by the clearing corporation of the stock exchanges—NSE Clearing Ltd (NCL) and BSE's Indian Clearing Corporation Ltd (CCL).