Securities Lending and Borrowing is a mechanism through which investors can borrow or lend shares to other market participants. The platform provides a viable alternative to derivatives market for purposes of hedging. Borrowers in SLB are usually short-sellers i.e. traders who want to sell shares that they don’t own. Lenders on the other hand are those investors who have bought shares for long-term purposes and such shares are lying idle in their Demat account.
Benefits for Participant
SLB has benefits for both the parties Lender – Borrower.
For Lender
SLB provides an incremental return on an idle portfolio. So, if one is holding 1000 shares of xyz, which is to be held for long term; they could be lent whenever there is a demand. The lender gets lending fees, where in NSCCL is the guarantor.
For 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 for avoiding settlement failure, mispricing in options, and other F&O arbitrage or hedging strategies which requires you to have stocks. Here, stocks could be borrowed from a lender for a fee using SLB.
Why SLB?
Increased Profit & Bonus to Lender
You can earn lending fee on your existing holdings. Also, Dividends/Bonus are transferred to Lender.
Increased Liquidity for Trader
If you’re borrowing securities, you’ll have increased liquidity, and can protect other investments and portfolio, esp. during a downturn.
Reduced Tax Liability
Lending does not incur short term capital gain tax.