What is the Stock Lending and Borrowing Mechanism (SLBM)? 

Why Borrow & Lend Securities?

Reasons to Borrow Stocks:

1. Short Selling – Investors expecting a stock price drop can borrow and sell it, repurchasing at a lower price to earn a profit.
2. Arbitrage Opportunities – Mispricing in options or futures allows investors to borrow stocks, sell them, and repurchase at a corrected price.
3. Physical Delivery in F&O Trades – SLBM enables investors to meet physical delivery requirements in derivatives trading without affecting their long-term holdings.

Reasons to Lend Securities:

How Does SLBM Work?

• Both lenders and borrowers submit orders specifying the quantity, loan duration, and anticipated costs.
• Borrowers must provide 125% margin of the stock value and pay the lending fee.
• Lenders are required to maintain a 25% margin to ensure transaction security (T+1 cash market closing price) and Mark to market (MTM) at end of day are charged to the lender. (These margins are not applicable to lender in case if lender does Early Pay-in of securities).
• When the stock leaves the lender’s Demat Account, the margin is released.
• Margins are adjusted daily to prevent borrower defaults.
• At contract completion, the lender receives their stocks back, and the borrower's margin is refunded.

Which Stocks Can Be Lent or Borrowed and For How Long?

• The tenure for SLBM contracts can range from 1 month to 12 months.
• Liquidity constraints may limit contracts beyond one month.
• Immediate repayment or recall of stocks is possible through a designated system.

How to Lend Stocks?

• Orders must specify stock details, quantity, price limits, and expected lending fee.
• The lending fee varies based on stock demand and market conditions.

How to Borrow Stocks?

• Stock quantity, loan duration, and lending fees.
• Upon order match, borrowers deposit 125% margin.
• They can then sell the borrowed stock while retaining 25% of the margin.
• Daily mark-to-market (MTM) margin adjustments prevent defaults.

Benefits to Lenders and Borrowers

For Lenders:

1. Additional Income – Lenders earn fees by lending their idle stocks.
2. Higher Returns on Portfolio – Passive income is generated without selling shares.
3. Risk Mitigation – Lenders retain ownership rights and continue receiving dividends, interest, and capital gains.
4. Diverse Income Sources – SLBM provides an alternative revenue stream, reducing dependency on stock appreciation alone.
5. Liquidity Management – Lenders can recall securities as per agreement terms, optimizing liquidity.

For Borrowers:

1. Short Selling – Helps traders benefit from declining stock prices.
2. Market Efficiency – Reduces bid-ask spreads, enhancing market liquidity.
3. Flexible Trading – Allows traders to engage in arbitrage and meet F&O settlement requirements.

What Happens in Case of Corporate Actions?

• Borrowers must pay dividends in case of ex- dividend to the stock exchange on the record day+1, which then credits it to the lender.
• In case of a stock split, the borrower's obligation is adjusted, ensuring the lender receives the updated stock quantity.
• Despite lending stocks, lenders continue to benefit from corporate actions as though they still hold the shares.
• SLBM transactions remain anonymous, meaning neither lenders nor borrowers know each other’s identities.

Conclusion