Earn Extra Income with Stock Lending and Borrowing (SLB)

If you’re a long-term investor in India who holds stocks for a long tenure, there’s a way to generate additional income without changing your core strategy. It’s called Stock Lending and Borrowing (SLB). This guide explains how SLB works in the Indian market and how you can use it to earn extra money on the stocks you plan to keep for the long term.

What is SLB?

Stock Lending and Borrowing (SLB) is a process where investors lend shares to borrowers in exchange for a fee. The system is regulated by the Securities and Exchange Board of India (SEBI) and facilitated by major exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). SLB enables lenders to earn additional income while borrowers can short-sell stocks or hedge their positions. The borrower provides collateral to ensure the stock is returned after the agreed-upon lending period.

Getting Started with SLB

To participate in SLB, you need to prepare your portfolio and understand how the system works.

Preparing Your Portfolio

• Stock Selection: Choose stocks in your portfolio that are in high demand for short-selling or hedging. These are typically shares with high volatility or those expecting corporate actions.
• Risk Assessment: Understand that lending shares may affect your voting rights and that you cannot sell these shares during the loan period without recalling them.

Engaging in SLB

Here’s a step-by-step guide to lending your shares through SLB:

1. Register with Your Broker: Speak with your broker to ensure they offer SLB services and understand the fees involved.
2. Set Loan Terms: Decide on the loan duration. SLB contracts often have a minimum of one month.
3. Set the Lending Fee: The fee depends on market demand. Check the rates for similar transactions to ensure your fee is competitive and profitable.
4. Collateral Management: Borrowers post collateral, managed by the exchange’s clearing corporation. Familiarize yourself with the collateral process and its risks.

Maximizing Returns with SLB

To make the most of SLB, consider these strategies:

• Active Portfolio Management: Regularly review your portfolio to identify lending opportunities. Stock demand fluctuates with market trends and events like earnings announcements.
• Monitor Market Trends: Pay attention to market events and news that could increase demand for certain stocks, thereby raising the fees you can charge.

Managing Risks

While SLB offers additional income, it’s essential to be aware of potential risks:

• Counterparty Risk: Although the exchange’s clearing corporation manages collateral, ensure you know your rights in case of default.
• Market Risk: Remember that you can’t sell your shares during the loan period without recalling them, limiting your ability to react to sudden market changes.

Not every stock is eligible for trading on the Stock Lending and Borrowing (SLB) platform. In India, the availability of stocks for SLB transactions is determined by the Securities and Exchange Board of India (SEBI) and the respective stock exchanges like the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Several key factors determine the criteria and process for selecting stocks to include in the SLB segment.

Know: Art of Loan Negotiation

Factors Determining SLB Eligibility

• Liquidity Criteria

SEBI and the exchanges select stocks based on their liquidity. They may set specific thresholds for average daily trading volume and market capitalization to ensure that only liquid stocks are eligible for SLB. This criterion ensures smooth transactions and a sufficient supply of securities for borrowing and lending.

• Market Capitalization

Stocks with a higher market capitalization are more likely to be included in the SLB scheme. These stocks tend to be more stable and widely held, making them more suitable for lending and borrowing purposes.

• Regulatory Compliance

Stocks that consistently meet SEBI’s regulatory requirements are preferred for the SLB segment. Compliance with financial reporting, corporate governance standards, and other regulations plays a critical role in determining eligibility.

• Demand and Supply

SEBI and the exchanges also consider the demand for stocks from market participants. If there’s significant interest in short-selling or if investors want to lend certain stocks, those stocks might be added to the SLB list.

• Review and Revision

The list of stocks eligible for SLB transactions is routinely reviewed and updated to reflect market trends and stock performance. This ensures the SLB segment stays dynamic and relevant to current market conditions.

How to Find SLB-Eligible Stocks

To find out if your stocks are eligible for SLB transactions, follow these steps:

Step 1: Check the Exchange Websites

• Visit the NSE or BSE Website: Go to the official website of the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE), depending on where your stocks are listed.
• Look for the SLB Section: Both exchanges have a section that provides a list of SLB-eligible stocks. This list is updated regularly.
• Search for Your Stock: Find the downloadable or viewable list and check if your stocks are listed for SLB.

Step 2: Sign up for SLB through Your Broker

• Contact Your Broker: Reach out to your broker or trading platform provider to express interest in participating in the SLB market.
• Complete Registration: Your broker will guide you through the registration process, which might involve additional agreements or specific requirements to enable SLB in your account.

Step 3: Lend Your Shares

• Notify Your Broker: Inform your broker about your intention to lend shares and specify the quantity.
• Set Loan Terms: Discuss with your broker the lending fee and the tenure for lending. Your broker can guide you based on current market rates.
• Agreement and Collateral: Once terms are agreed upon, your broker finds a borrower. The borrower provides collateral, managed by the clearing corporation of the exchange.

Step 4: Collect Your Lending Fee and Collateral.

• Fee Payment: The lending fee is typically an annualized percentage of the lent securities’ value. You might receive the fee upfront or periodically, depending on the agreement.
• Collateral Management: The collateral, held by the exchange’s clearing corporation, exceeds the value of the lent securities to mitigate the risk of default.

Step 5: Completion of SLB Transaction

• Return of Shares: At the end of the loan tenure, the borrower must return the shares to you, facilitated by the clearing corporation.
• Receiving Your Shares Back: Once the shares are returned, they’re credited back to your demat account.
• Release of Collateral: After successful return of the shares, the collateral is released back to the borrower.

Important Considerations

Market Conditions: Demand for borrowing shares can change with market conditions, affecting the lending fee.

Broker’s Role: Your broker plays a crucial role in SLB transactions, including finding a borrower, negotiating terms, and handling share and collateral transfers.

Regulatory Framework: Make sure to understand SEBI’s regulatory framework to know your rights and obligations in SLB.

By following these steps, you can lend out shares in India through the SLB mechanism, earning additional returns while retaining ownership of your investments in the long term. It’s an effective way to generate extra income and optimize your investment strategy.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.