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

Post Date : February 26, 2025

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

Disclaimer: Investments in the securities market are subject to market risks. This content is for educational purposes only and does not constitute financial advice

SLBM provides flexibility to investors by allowing them to lend or borrow equities for a specified period under a pre-determined price & agreement. The primary goal of this mechanism is to enhance market liquidity and improve trading efficiency. It is particularly useful for short-term trading opportunities, especially when the availability of a particular stock is limited.

Investors can lend their securities to generate some additional return over and above their investment.

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:

The main advantage for lenders is earning additional returns on their investments without taking extra risks. By lending idle stocks, investors can generate passive income while still owning the asset.

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?

Stocks available in the F&O segment are typically eligible for lending and borrowing under SLBM. . You can click here to check the list of eligible stocks.

• 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?

Investors can request their stockbroker (RMoney) to enter lending orders on their behalf.

• 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?

SLBM provides an opportunity to borrow stocks for arbitrage or short selling. Investors placing borrowing orders through RMoney must specify:

• 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?

Corporate actions like dividends, stock splits, and bonuses impact SLBM transactions.

• 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.

You could also check – Frequently Asked Questions (FAQ) on Securities Lending & Borrowing Mechanism (SLBM) –SLBM FAQs 

Conclusion

SLBM is an effective mechanism for investors looking to maximize returns on idle stocks while maintaining ownership. Lenders benefit from passive income, while borrowers can capitalize on trading opportunities. With its ability to enhance liquidity and market efficiency, SLBM is a smart choice for both traders and long-term investors.

Need Help?

Contact RMoney at 0562-4266600 / 0562-7188900 or email us at askus@rmoneyindia.com 

Kickstart your investment journey seamlessly with RMoney. Open your Demat Account to invest today!