Securities lending and borrowing (SLB): meaning and how it works in India

If you hold shares for the long term, they usually just sit in your demat account. Under the securities lending and borrowing scheme, or SLB, you can lend them to others for a fee. This page explains how SLB works in India, who uses it and the risks involved.

Quick answer

Securities lending and borrowing (SLB) is an exchange-based scheme where investors who own shares can lend them to others for an agreed period in return for a fee. Borrowers use these shares mainly for short selling or to meet delivery needs. In India, the clearing corporation acts as the central counterparty and guarantees the return of shares. Contracts can run for up to 12 months.

Key takeaways

• SLB lets you lend shares you own and earn a lending fee.
• Borrowers use the shares for short selling or delivery needs.
• The clearing corporation guarantees the deal in India.
• SLB began in India in April 2008 and allows terms up to 12 months.
• Lenders still get benefits like dividends through adjustments.

What is securities lending and borrowing?

In this scheme, one investor lends shares to another for a fixed time. The borrower pays a fee and returns the same number of shares at the end. The lender keeps economic ownership but gives up the shares for the period.

SEBI set up the framework in December 2007, and trading started on 21 April 2008. In January 2010, the maximum tenure was extended to 12 months. Transactions take place on the SLB segment of exchanges through brokers registered as SLB participants.

How does the SLB scheme work?

A lender places an order to lend a certain number of shares for a chosen period. A borrower places an order to borrow. The lending fee is decided by bids and offers, much like a share price is set in the normal market.

Once matched, the lender's shares move to the borrower through the clearing corporation. The borrower must pay margins. At the end of the period, the borrower returns the shares, and the lender gets them back in their demat account.

Why do people borrow shares?

The main reason is short selling, where a trader sells borrowed shares expecting the price to fall, then buys them back later. Others borrow to avoid delivery failure or for arbitrage between markets.

Since the clearing corporation stands in the middle, the lender does not need to know or trust the borrower. This reduces counterparty risk for both sides.

What happens to dividends and corporate actions?

If a dividend or other corporate action happens during the lending period, the system makes adjustments so the lender's economic benefit is protected. Some contracts may be closed early around certain corporate actions, as per exchange rules.

Voting rights stay with whoever holds the shares on the record date, so a lender who wants to vote may need to recall the shares early. Exchanges provide a facility for early recall and early repayment.

Risks and points to check

For lenders, the main points are the fee level, liquidity of the SLB market for that share and tax treatment of lending fees. Tax rules can change, so please check the current position before you invest.

For borrowers, short selling carries the risk of unlimited loss if the price rises. In short, securities lending can put idle shares to work, but both sides should understand the rules first.

Frequently Asked Questions