What Is Securities Lending And Borrowing In NSE And BSE?
Do you know that you can earn good returns from the stock market by lending your shares to the traders? Yes, you heard it right. Not many investors, especially the beginners are aware of this facility, which is offered by the stock exchange. This is certainly a surprise for most of the market players. So, without wasting any further time, let us discuss about securities lending and borrowing in detail.
What is Securities Lending and Borrowing?
Securities lending and borrowing is basically a scheme that involves the act of lending and borrowing shares. It is legally approved by Securities and Exchange Board of India (SEBI). This particular mechanism is extremely beneficial for those investors who have idle shares or are not trading in the stock market on the regular basis. Here the stocks are provided to the traders who engage in the activity of reverse arbitrage, hedging or short selling. Two parties are involved in the process of securities lending and borrowing, which are ‘Lender’ and ‘Borrower’.
Lender: These are essentially those individuals who have purchased the shares for the long-term purpose and lying idle in their demat accounts.
Borrower: These are those individuals who are basically short sellers and engage in the trading activity of those shares, which are not their own.
The main purpose of launching the securities lending and borrowing scheme by SEBI is to help in the settlement of those shares that has been sold short. The lending of the idle shares in the demat account is carried out through the clearing corporations or intermediaries to earn better returns. NSCCL (NSE clearing corporation) and BOISL (BSE clearing corporation) are the two intermediaries that has been authorized by SEBI for carrying out the securities lending and borrowing activity. Furthermore, there are some important points to remember while engaging in the securities lending and borrowing activity:
All the market participants except the qualified foreign investors have been permitted by the SEBI to lend and borrow the shares.
The lending borrowing of the shares must be done through an authorized intermediary.
Shares in the Futures and Options (F&O) segment are eligible for the purpose of short selling.
Securities Transaction Tax (STT) and SEBI turnover fees are not levied in this kind of scheme.
The securities are made available for the duration of 1 month to 12 months.
Advantages of Securities Lending and Borrowing for the Lenders
The lenders are liable to get an incremental return if they lend their idle shares to the traders. For example, if you are holding 100 shares of the Company ABC for the long-term basis, then you have the option to lend them if there is a demand for the securities. You will get the lending fees and the best part is that there is no fear of any risk or loss because NSCCL is the guarantor.
The lenders are entitled to receive the bonus or dividend during the period for which the shares have been lent to the borrowers.
There is no risk of the loss as the transactions are guaranteed by the authorized intermediaries.
Capital gain tax is not levied on the shares that have been lent to the borrowers.
Advantages of Securities Lending and Borrowing for the Borrowers
The borrowers have to pay a certain fee to the lender and they can use the shares for the purpose of arbitrage, short selling and make short-term profits.
Those borrowed shares can also be short sell if they are not available in the derivative segment.
If there is any kind of the difference in the cash and derivatives segment, then you can also indulge in the arbitrage of the shares under the securities lending and borrowing mechanism.
Hence, it is crystal-clear that securities lending and borrowing is one of the best ways to earn an additional income if you are inactive or not trading in the stock market for some period of time. It is also a golden opportunity for the traders to borrow the shares they do not own and benefit from the short selling or arbitrage.