Basics on SLB (Stock Lending & Borrowing)

November 29, 2013

Note: We have disabled SLB services. All clients will be alerted, if we begin offering it again in the future

Traders,

  • Do you have stocks that has been sitting idle in your demat account, and would it interest if I told you can earn extra  just by lending those shares?
  • Do you want to take those arbitrage trading opportunities like when futures are at a discount, but you don’t hold the stock to do so?

This post should help understand SLB which is gaining popularity of late and a facility that is available to you from Zerodha, both for borrowing and lending securities. Do note that you can use this facility through us even if you don’t have a demat account at Zerodha.

SLB introduction

SLB is a legally approved medium for lending and borrowing of securities. The regulations were originally formed by SEBI in May 1997 and last modified in Nov 2012. All market participants including retail (except Qualified Foreign Investors) in the Indian securities market have been permitted to lend/borrow securities but only through an Authorized Intermediary(AI).

NSCCL (NSE clearing corporation) and BOISL ( BSE clearing corporation) are the only 2 authorized intermediaries presently, NSCCL is preferred and is getting bulk of the transactions today.

Lender

What is in it for a lender?

It provides an incremental return on an idle portfolio. So if I am holding 1000 shares of Infosys which I intend to hold it for long term, in the shorter term I could lend this whenever there is a demand and get additional return in terms of lending fees knowing that  NSCCL/BOISL are the guarantors.

Jewelry in Locker :)

Jewelry in Locker 🙂

 

Imagine if tomorrow we could lend all that gold jewelry that is sitting idle in the bank locker for a fee and there is someone like NSCCL guaranteeing the return of the jewelry.

Who are the lenders?

Insurance companies, Banks, HNI, Mutual funds and Retail

 

Borrower

What is in it for a borrower?

A borrower is probably looking at one of these opportunities, arbitrage in stock price between 2 exchanges, reverse arbitrage when futures are at a discount to stock, to cover short position: to avoid settlement failure, mis-pricing in options, and other F&O arbitrage or hedging strategies which requires you to have stocks and this could be borrowed from a lender for a fee using SLB.

A simple example would be the many reverse arbitrage opportunities Tata motors has been giving over the past. Stock price is at Rs 400 but futures price is at 394 a discount of Rs 6 when ideally it should be at premium. (lot size of Tata motors is 1000)

An arbitrageur would using SLB  borrow 1000 shares of Tata motors for a fee and sell it in the market at Rs 400. At the same time he would buy 1 lot of Tata motors futures at 394 and on the expiry day when the price of Tata motors futures and stock would be the same, he will sell the futures and buy back the stock and give it to the lender, potentially making a risk less Rs 6000 per lot (1000 x Rs 6).

Who are the borrowers?

Cash and derivatives arbitrageur, short sellers – especially the long term shorts, market makers and retail traders.

Getting Started

Zerodha has a partnership with ISSL (ILFS securities services ltd) who is the largest contributor of total volumes being generated in SLB segment.

There are 2 forms that have to be signed for both the borrower and lender, Form A and Form B respectively. Form A is an agreement between ISSL and NSCCL and Form B is an agreement between you the client and ISSL. As is the normal case, both these forms together are 90 pages long.

Once the forms are signed and relevant proofs are submitted you are good to go within 2 weeks.

The Process

  • Lender places an order with the participant (like ISSL)  mentioning the stock, quantity to lend , time period, and lending fees he is expecting. Lending fees is quoted on a per share basis, so in the Tata motors example it could be 1000 shares to lend at Rs 3/share.
  • Borrower places an order with the participant mentioning the stock, time period, quantity and the lending fees he is ready to pay.
  • Order matching on the lending fees takes place similar to trading on an exchange.
  • The lender is asked for 25% of the total amount of stock he is lending immediately to ensure that he doesn’t default after saying yes to lend. This margin is released as soon the stock moves out of his demat account to the participant. At Zerodha we ask for the security the same day from the lender and hence don’t ask for the 25% margin.
  • Borrower is asked to bring in 125% of the stock value he is borrowing as margin, and also lending fees over and above the margin. Out of the 125% asked, once he borrows he can sell the stock effectively blocking only 25%. But he would have to bring in 125% while entering the transaction.
  • Daily MTM on the margin to ensure no borrower default risk.
  • At the end of contract, lender gets back the stock and borrower margin is released.

Which stocks can be lent/borrowed and for how long?

Only the stocks which are trading on the F&O segment are allowed on SLB and the contract period for lending can vary between immediate expiry(1 month) upto 12 months. Usually the maximum liquidity for borrowing and lending will be for 1 month.

List of F&O stocks

Also an interesting  thing  is that in case the borrower wants an early repayment or lender wants an early recall there is a mechanism to do so. The borrower would place an early repay request with the fees they are willing to receive and the lender would place an early recall request with the fees they are willing to pay.

See the live market for SLBM on NSE by clicking here .

What happens in case of a corporate action like Dividend payout, stock split or others?

The borrower would pay the dividend received on the record date +1 (1 day after stock goes ex dividend) to the lender.

In case of stock split, the borrowers obligation is adjusted proportionately and lender receives the revised quantity.

What is important to note is that it would be as good as the lender holding the stock, so he will get all benefits of any corporate action even though he would not be holding stocks in his demat account

Borrower Risk?

In the example above what if  the arbitrageur borrows 1000 shares and defaults to pay back? How does the AI (authorized intermediary) ensure that the risk is covered?loancrisis

The borrower is asked to put up a margin of 125% of the value of the stock borrowed which is also marked to market daily similar to futures. So to borrow stocks worth Rs 4 lakhs ( Rs 400 x 1000), the borrower has to keep a margin of Rs 5 lakhs (125% of 4 lakhs) with the AI.  The lender knowing that 125% margin is put by the borrower also feels secure lending stocks using the SLB mechanism.

The only risk a lender has would be the close out risk (When the borrower defaults but gets the credit of shares from AI(NSCCL) using the 125% of borrower margin blocked by having an auction to purchase those shares). This close out credit of shares is deemed as a sale transaction and if the stock has made any gain from the time the lender had purchased Short term capital gain tax would apply on the gain.

Though 125% of the margin is blocked, once the borrower gets the share and sells it in the market he gets back the value of the stock on T+2 day, effectively blocking only 25% margin.

Costs

Lender

Processing fees levied by ISSL (also called as participant) + service tax, this would be a % of the lending fees

Presently there are no regulatory charges applicable, No – Stamp duty, Exchange transaction charges, SEBI fees or STT

Depository charges applicable for debiting shares from your demat

Note that lending doesn’t mean selling and hence no short term capital gain tax (STCG)  would be applicable. But as mentioned above if the transaction goes to close out mode STCG would apply.

Borrower

Processing fees levied by ISSL (also called as participant) + service tax, this would be a % of the lending fees

Presently there are no regulatory charges applicable, No – Stamp duty, Exchange transaction charges, SEBI fees or STT

Depository charges applicable for debiting shares from your demat, both when you sell the borrowed shares in the market and when you have to give it back to lender

 

Hopefully this answers any basic queries that you might have on SLB, you can also see the various reports available on the same on NSE website.

opportunityImportant  thing is that if you are sitting on decent quantity of stocks ( Rs 10lakhs + per stock – doesn’t matter in which demat account, either demat opened with us or any other that you may have), or if you are looking to borrow stocks for executing trade ideas, get registered through us for SLB and when the opportunity beckons you will be ready.

 

 

 

Happy Trading,

Nithin Kamath

CEO @ Zerodha and partnering startups through Rainmatter to help grow and improve the capital market ecosystem in India. Love playing poker, basketball, and guitar. “You don't have to be a hero to accomplish great things---to compete. You can just be an ordinary chap, sufficiently motivated to reach challenging goals.” - Edmund Hillary

83 comments

  1. Mitch says:

    Hello,

    What is the fee lender will get for lending there shares?

    Thanks

    Mitch

  2. Mitch says:

    Nithin,

    So how do i know what is offered and how to do i submit my shares for lending.

  3. HIMANSHU JAIN says:

    what intial investment required for opening slb account ???

  4. yashjhaveri1 says:

    Hi Nithin,

    I currently have a Substantial holding of RIL Equity with HDFC,
    Since they are lying idle…i am really keen on securities lending,
    Could you please help me make sense of Securities Lending for RIL Equity.

    I Tried this link – http://nseindia.com/live_market/dynaContent/live_analysis/slbs_chain/chainDataBySymbol.jsp?symbol=RELIANCE

    But Did not really understand…could you please let me know what Lending Fees would i get per share of RIL (based on current market)…for a 6 month lending agreement.

    Also, could i speak to a Zerodha Representative about it to understand the entire process in details (including the risk involved) ?

    Awaiting your reply

    Thanks,
    Yash Jhaveri

    • yashjhaveri1 says:

      *By Substantial Holding i mean forming a substantial part of my investment portfolio (which is my long term investment)….pls advice…thanks

    • Unless if there is someone bidding on the SLB watch for that stock, you cannot really lend. So unless futures trade at a discount to the spot price, the opportunity for lending is quite small. Do send an email to [email protected], with your client ID and number of stocks that you have. As and when we spot an opportunity, we will try to inform you.

  5. AK says:

    SLB- few queries

    1.In the NSE website (http://www.nseindia.com/live_market/dynaContent/live_analysis/slbs_chain/chainDataBySeries.jsp), one can see only the best bids and best offers. How are they getting executed against each other?

    Are there market orders too in existence (like in normal trading exchanges)?
    How can limit orders trade amongst themselves?

    2. In this segment,are we lending/borrowing the shares itself or their derivatives(i.e futures/options) ?

    3. What are the options that the borrower can do with the borrowed shares/derivatives?
    -is his only option is to sell?
    -if yes,is that short selling ?
    -if yes,does that selling takes place automatically and immediately (at least in the same day) after the borrower receives those shares/derivatives from the lender?

    4. Please see attachment (http://www.4shared.com/photo/kB8V2weJce/slb.html), if the entire traded/borrowed volume is ultimately shorted, can the trading/borrowed volume be considered as short selling volume?

    5. Lastly, the above mentioned screenshot attached shows data for sep-2014.This is not EOD (daily) data. Where to get EOD (daily) data?

    Thanks

    • AK says:

      I am a newbie in the SLB s , so the queries may be a bit irritating. Please bear with me

    • To participate in SLB, you need to first open an SLB account, unless you intend to borrow/lend atleast 25lks worth of stocks it is not really worthwhile to participate.

      1. Actual matching happens as explained in the post above. As long as there are limits which don’t match, there is no transaction that takes place.
      2. You are lending/borrowing the actual stock and not their derivatives.
      3. Borrowers is either looking at shorting or to get into any of the arbitrage opportunity that exists between stock and its F&O contracts.
      4. No it cannot really be considered as short selling. Borrower as I explained might be using this for arbitrage.
      5. SLB is still not very active, not many transactions that take place. What you see on NSE is the only data available.

  6. AK says:

    Thanks very much again

    Can you please provide the NSE website link where short selling EOD data is available( both for stocks and Nifty futures)

  7. abvblogger says:

    When I first read about this, I got quite excited. I thought I could lend out my whole portfolio and make a cool 5-6% more per annum!

    Sadly this is not the case. The NSE link you’ve provided shows quite clearly that this is mostly an arbitrage game. Nor is the market in a mood to short at the moment. But during bear markets this must be a real game-changer for the buy and hold investor.

  8. Sangita says:

    Hi,

    In case you have access to odd lot data/information like:

    1.Odd Lot order Book
    2.Odd Lot Short Sales data
    3.Odd Lot EOD data etc.

    from the exchanges (both BSE and NSE), can you provide the same to the customers ?

    I am ready to pay additional charges for the extra information.

    Thanks

  9. raja says:

    To nithin: With the margin amount being 125%, why would someone want to short sell when you can easily go short in future or option?

    • The guys who usually use this facility are the arbitrageurs. So assume futures are trading at a discount to spot market. So they borrow and sell it in the spot market, and buy the futures. On the expiry day, when futures and spot is trading at same price, they reverse the trade.

      Also the people who want to take a longer term short view on a stock, can use SLB as this way they don’t have to worry about the rollover costs.

  10. Surajsingh Rajput says:

    This is a very good option to earn on shares that I hold with 2-3 years window (apart from dividends). I would like to know if there is any minimum number of shares I need to have to be able to lend.
    For example, the market lot of Coal India Futures is 1000 but I own some 100 shares of Coal India, will I be able to lend those 100 shares??

  11. Harsha says:

    Hi, I wish to have it in clear terms, so can you explain clearly considering the case of following example ?

    Example: Suppose that, I’ve opened account with you, and now I observed an arbitrage opportunity as following

    Stock Godrej Industries : Spot price 379.1, Oct fut-358.45, what I’ve to do now to profit from this, how much money do I need ?

    Two more doubts:
    1. Suppose that, the spot and future prices converge before the expiry can I buy back those share, or is there any kinda locking period?
    2. Why there is no liquidity for near month, as I observed in the link you posted earlier in the comments section?

    Thanks.

    • Lot size on godrej is 1000. So for every lot you want to buy in futures, you will need around Rs 70,000 and to borrow and short 1000 shares you will need Rs 3.8lks + 20% more so totally 70k+ 4.5lks = Rs 5.2lks for every 1000 godrej.
      1. Yes you can cover. But you will not be able to give back the shares to the person from whom u have borrowed as it has fixed periods of borrowing.
      2. SLB is not really popular in India.

  12. Kamakshi says:

    I am holding 4000 Granules India, 1000 NCC, 1000 Marksans Pharma and small qty of other scrips. I want to lend these. My option is to lend it for 3 to 6 months,Will lending fee is on monthly basis or for complete period of 3mnth or 6 months for which I wish to lend. Actually I donot want to keep watch day to day Market, as my portfolio is Good return giving. Hence I wish to keep it for Long term. Mean while I need small Income.

    Please reply

  13. Kamakshi says:

    I am holding 4000 Granules India, 1000 NCC, 1000 Marksans Pharma and small qty of other scrips. I want to lend these. My option is to lend it for 3 to 6 months,Will lending fee is on monthly basis or for complete period of 3mnth or 6 months for which I wish to lend. Actually I donot want to keep watch day to day Market, as my portfolio is Good return giving. Hence I wish to keep it for Long term. Mean while I need small Income.

    Please reply
    Kamakshi

  14. PURUSHOTTAM KULKARNI says:

    The mechanism is difficult to understand. If I have a portfolio of 40 Companies trading in F & O worth 25 Lakh. Can I lend them as value wise the average holding is average Rs. 60,000. In such a case what would be a monthly yield if all of them are lent? Your own charges would slash about 12 to 18% from it. Will it be about .5% to 1% of the value?

    • You can lend only if there is a demand for the stock. Usually the demand for stock arises if the stock futures are trading at a discount to spot. In this case the arbitrageurs would want to borrow. This has still not taken off in India, check this SLB watchlist. Hardly anyone wanting to borrow. How much yield depends on what kind of opportunity the borrower has.

  15. Rajiv says:

    Nithin,
    Thanks for the article. You write:- “Though 125% of the margin is blocked, once the borrower gets the share and sells it in the market he gets back the value of the stock on T+2 day, effectively blocking only 25% margin.”

    Is there any restriction on this 100% margin that gets unblocked on T+2 after stock gets sold? Say, I borrow 100 shares of Reliance trading at 890. Current ask price on SLB is 0.5. So, it will cost me 0.5*100 = 50 Rs. Also, I need 125% margin. So, I need 125% of 89,000 = 1,11,250 Rs in my account. Immediately after borrowing on SLB, I sell 100 shares of reliance at 890. 89,000 will get unblocked on T+2, so on T+2, my account will show 100 short Reliance and 89,000 Rs cash. Is there any restriction on this 89,000 Rs cash available in my trading account?

    Specifically,
    1) Can I use this 89,000 Rs to buy 89,000 Rs worth of another company’s shares, so that I have effectively a long-short strategy in my account?
    2) Can I use this 89,000 Rs as margin to buy futures/options?
    3) Can I use this 89,000 Rs as margin to write options?

    Please also answer:
    1) Since I am using only 22,250 (=1,11,250-89,000) to control 89,000 worth of stock. Will Zerodha or ISSL charge me any interest rate on 89,000-22,250 = 66,750 Rs?
    2) What would be the processing fee levied by ISSL + service tax for this Reliance transaction? Article said – “this would be a % of the lending fees.”

    Please clarify thanks.

    • Rajiv, Yes effectively only 25% of the margin is blocked. Yes you can use the credit from the sale of shares (Rs 89,000) for any other purpose. When you are borrowing the lender charges already factor in interest rate into it (the Rs 0.5). Zerodha currently charge anything separately, but ILFS will make a portion of Rs 0.5.

  16. Vaibhav sharma says:

    I am short seller . I want to short stocks but 100 – 200 quantity can i get stocks for shorting in small quantities

    • No Vaibhav, SLB is still not a liquid market and the guys who offer look for borrowers of big quantities (atleast 10 to 20lks worth of stocks).

      • Rajiv says:

        Nithin,

        You say – “guys who offer look for borrowers of big quantities (atleast 10 to 20lks worth of stocks).”

        I understand SLB is not a negotiated market, rather an order book is displayed as here:
        http://nseindia.com/live_market/dynaContent/live_analysis/slbs_chain/chainDataBySeries.jsp

        So, if someone is offering to lend 500 stock in a particular scrip, why can’t I buy 100 stocks at ask price? Or, is it a constraint that I can borrow only in market lot size of that particular scrip? Or, the constraint is that I need to borrow all 500 stocks that a lender is lending and then only trade will go through? Kindly clarify. Thanks.

        I am wondering whether ISSL offer a screen based SLB software on which we can trade or do we have to call them?

        • ISSL doesn’t offer any screen based SLB. Also if someone is lending, he is lending the entire lot at one time. You cannot ask for a portion of what he is lending.

          • Rajiv says:

            Nithin,

            1) If ISSL does not offer screen based SLB, what does information in the link below represent? Does below is a cumulative SLB book available at NSCCL and BOISL?
            http://nseindia.com/live_market/dynaContent/live_analysis/slbs_chain/chainDataBySeries.jsp

            2) Above NSE link shows 9000 shares available for borrow for GAIL at price 1.23. Lotsize is 1000. So, Can I borrow 1000 shares, or do I have to necessarily borrow 9000 shares?
            3) Since no screen facility is available, do I have to call Zerodha/ISSL wheneven I want to know stock availability in SLB? So, Call and trade is the way to operate in SLB space?

          • vipul vora says:

            if i have 5000 stock of sun pharma ,can i land ( rent) my stock via slb platform? it is just rent my stock so there nothing risk for my stock right?and how much i received per stock if i rent this stock for 6 or 12 months? (approximate give me a price which i recived per share,per day), can u advise that can i give my valuable stock for rent, actually main thing is i am worry because of leak of knowledge about securities of my stock! kindly reply me pls,so i plan to rent my stock if there no risk . thank u sir.

  17. Sanjiv says:

    Great explanation. I have around 6 lacs of SBI shares. Can I participate as a lender?

  18. Solai Alagu says:

    I want open SLB account. What is the procedure for that.

    Kindly tell me

  19. Ajit says:

    Hi Nithin,
    Have you started offering SLB now?

  20. VINAY GHARAT says:

    Very good explanation for SLB. Understood the concept of SLB

    Thanks!.

  21. garg10may says:

    As I see on the NSE website there’s just 5-7 shares which are showing up any activity, so there’s not much in this, also volumes are low.

    I thing I didn’t get why would an arbitrageur look to borrow the stock rather than buy when the margin required is 125% which is more than the purchase price.

    • If the futures is trading at a discount to the stock, makes sense to borrow. So stock is at 102, futures is at 100. Borrow the stock and sell it int the market at 102, buy futures at 100 same time. When the spot and future price is same, do the reverse trade. Riskless 2% returns.

  22. manoj says:

    If I want to borrow any share, and want to keep them as Margin required to deal in Options, is it possible and how ?
    If the Options I am dealing are Nifty Options, where also any Shares
    are accepted as Margin Money, can I borrow these shares and use them as Margin Money for Options ?

    Pls clarify

    • Yes you can pledge shares and use margin to trade options (only shorting, not buying). Instead of borrowing, which requires you to give 125% of the value of stocks, you can just buy stocks and pledge them.

  23. Rahul Goenka says:

    SLB looks like this also fluctuates like our stock market, and the best buyer and seller enters into the deal,is this how it is?

    So does the fee will differ from the predicted fee at the start date.

  24. Rahul Goenka says:

    since the actual fee is based on marked to market stock price

  25. TCB says:

    Can I lend shares lying in my Zerodha demat account ?
    What is the procedure and charges ?
    Is there any minimum quantity of any stock which can be lent ?

  26. Hemal shah says:

    how to know the lending interest (rupees per share) of all the companies.

    I have 1800 SBIN so, what would be the return for 1 month.

    Please guide

  27. sandip says:

    Hi Nithin Kamath Sir

    How is the MWPL calculated in SLB contracts and what is the maximum percentage one can built

  28. Jinav Satra says:

    Great Article Nithin!

    I wanted to ask what would be the taxability of the proceeds of the rental income for the lender? Will such income be taxable? If yes, under which head?

  29. Sameer says:

    Suppose if I borrow 10 shares of Reliance and short sell in market at 1100 and then recover it at 1000 per share. then I will get 100 per share profit so then how much income tax I have to pay on this transaction? Do I need to pay income tax according to speculative profit or short term gain??

    Thanking you in advance.

  30. Raj says:

    How can i bid on SLB, so i can buy those shares on premium

    Also in the link “https://www.nseindia.com/live_market/dynaContent/live_analysis/slbs_chain/chainDataBySeries.jsp”, are the prices per share (or) for the lot size mentioned?

  31. Mahesh Wani says:

    I am an Individual investor.
    I am holding L&T, Reliance, R Power in Good Quantity as per F&O lot.
    Having dmat with Indiabulls.
    I wish to lend my stock.
    How to start ?
    Is there any registration procedure ?
    Where I will get form A & B ?
    Where I should submit Form A & B ?
    Please Help.

  32. Komal Anand says:

    Hi,

    Please guide whether a company being a shareholder can lent its securities under SLB Mechanism?
    And whether this act would be in compliance with the provisions of Companies Act, 2013?
    Also, suggest the specific compliance to be done by company for lending the securities?

  33. bhupesh says:

    > transaction goes to close out mode STCG would apply.

    Can some one explain it more in detail. Does STCG depends on when landed shares were bought by the lander initially? or these become two separate transactions?

  34. Dr.Jatin A Gondhiya says:

    How Can I opt for SLB on zerodha;
    kindly reactivate it on zerodha;
    we wait for SLB to be there on zerodha;

  35. Gaurav Punjabi says:

    You should re-consider this service, the activity could pick up in the near future with everyones portfolio down. Zeroadha should be at the forefront.

  36. Monica Tupper says:

    Yes please reintroduce SLB! Really waiting for it since ages! The whole of Zerodha’s client base will start using it which will surely give a huge boost to volumes. Kotak and IL&FS are offering it now so I’m guessing volumes are slowly picking up.
    Would love love love ZERODHA to restart this feature at the earliest. If possible please do update us on the status. Thanks! 🙂

  37. Pradhan Prasad says:

    Please reintroduce SLB in Zerodha !! This is a great way to hold stocks for long-time investors and would provide decent returns as well.
    Other broking houses are now making this service available again, we wish Zerodha to be there as well. Please update, thanks !

  38. Keyur says:

    Have Zerodha started SLB services again?? I.e presently do zerodha provides SLB services….

  39. Monica Tupper says:

    Has Zerodha got any plans to introduce SLB soon?

    Requesting you guys to please please start SLB for clients ASAP! We will be able to earn a good side income too.

    HDFC Securities, Kotak Securities, Reliance Smart Money, KR Chocksey have all added SLB in their latest offerings. Can’t wait for Zerodha to introduce the same. The SLB market on NSE has been getting more traction too. Nithin please do give this some thought and revert to us 🙂

    Hope you guys will reply and tell us your plan

    Thanks a lot! 🙂

    • Matti says:

      Hey Monica, SLB has been something we are looking at. However, there’s no online way to offer this right now. Trying to figure out an online solution for this to offer.

      • Monica Tupper says:

        Hey Matti!

        Thanks so much for your reply. While you guys figure an online solution out, do you think you would be able to offer it on the call and trade medium only?

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