Securities Lending
Securities lending is the temporary transfer of securities from a lender (typically an institutional investor with long-term holdings) to a borrower (typically a short seller or arbitrageur) against collateral, with an obligation to return equivalent securities at a future date, facilitated in India through the Securities Lending and Borrowing (SLB) mechanism.
Securities lending serves a critical function in capital markets: it allows investors who need to borrow shares—to cover short positions, to settle delivery obligations, or to execute arbitrage strategies—to source those shares from long-term holders who are willing to temporarily part with them in exchange for a lending fee. The lender retains the economic benefits of the position (through the fee) without selling the shares, while the borrower obtains the shares needed for their strategy.
In India, formal securities lending operates through the Securities Lending and Borrowing (SLB) mechanism maintained by NSE and BSE under SEBI's framework. The SLB platform is an exchange-operated, anonymous marketplace where lenders and borrowers are matched. The clearing corporation acts as the central counterparty, eliminating bilateral default risk. Collateral (cash or approved securities) is deposited by the borrower with the clearing corporation.
The SLB mechanism in India has had a chequered history. Introduced in 2008, it attracted limited participation for many years because the primary user of borrowed shares—the short seller—had limited incentive structures in a market where intraday short selling could be done without borrowing. The mechanism gained relevance particularly for institutional arbitrageurs, index arbitrage strategies, and for covering accidental short deliveries.
A key distinction in India is between the formal exchange-operated SLB and informal or bilateral securities lending arrangements. SEBI does not permit bilateral OTC (over-the-counter) securities lending outside the exchange platform, unlike some global markets where institutional prime brokers operate their own securities lending desks. All securities lending in equity shares must go through the NSE or BSE SLB platform.
Lenders in the SLB mechanism—typically mutual funds, insurance companies, and FPIs with large long-term equity portfolios—can earn an incremental fee income by lending shares they intend to hold for the long term. This fee is treated as business income for tax purposes in India. Corporate actions (dividends, bonuses) during the lending period are typically handled through manufactured dividends—the borrower compensates the lender for any distributions received on the borrowed shares.