Investing in stocks traditionally revolves around dividends and capital gains. But what if there’s a third way to earn from your stocks? Enter SLBM, the Stock Lending and Borrowing Mechanism. Imagine renting out your stocks to others and earning from it. Intrigued? Let’s delve into the world of SLBM.
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Stock Lending and Borrowing Mechanism
SLBM (Stock Lending and Borrowing Mechanism) is akin to renting out your stocks for a stipulated duration to someone who needs them temporarily. This allows the lender to earn a fee while the borrower utilizes the stocks. The process involves three main parties: the lender (stock owner), borrower (temporary user), and the exchange (ensuring proper transaction).
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How Does SLBM Work?
- Registration: Lender and borrower register through stockbrokers.
- Loan Terms: Both parties agree on terms like tenure, interest rates, etc.
- Collateral Placement: Borrower puts up collateral for the borrowed stocks.
- Stock Transfer: Agreed shares move from the lender’s to the borrower’s demat account.
- Return and Fee Payment: Borrower returns the stocks and pays a fee, shared among intermediaries.
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Example of SLBM
- Lender: Person A owns 1,000 shares of Reliance Industries
- Borrower: Mr. B, a trader, seeks to borrow these shares for a short-term strategy.
- Agreement: Person A agrees to lend 1,000 Reliance shares to Mr. B for a 1-month period.
- Lending Fee Agreement: Mr. B agrees to pay a lending fee of Rs. 10 per share.
- Current Market Price: Reliance’s share price is say Rs. 2,000 per share.
How Borrower gains in SLBM
Person A and Mr. B agree on the loan terms. 1,000 shares move from A’s demat account to B’s. Mr. B sells these 1,000 borrowed shares in the market at Rs. 2,000 per share, expecting the price to drop. Due to market conditions, the share price falls to Rs. 1,800 per share over the month. Mr. B decides to buy back 1,000 shares at the reduced price of Rs. 1,800 per share, spending Rs. 18,00,000 in total.
- Selling Price: 1,000 shares * Rs. 2,000 = Rs. 20,00,000
- Buy-Back Price: 1,000 shares * Rs. 1,800 = Rs. 18,00,000
- Net Profit: Rs. 20,00,000 – Rs. 18,00,000 = Rs. 2,00,000
- Mr. B pays the lending fee to Person A @ 1,000 shares * Rs. 10 = Rs. 10,000
- Mr. B’s net profit from this SLBM transaction is Rs. 1,90,000 (Rs. 2,00,000 – Rs. 10,000).
The lender (Person A) earns a lending fee while the borrower (Mr. B) executes a successful short-selling strategy, capitalizing on the temporary ownership of borrowed shares, resulting in profit. SLBM offers an additional avenue to earn from stocks for the lender / owner of the stock.
Why SLBM?
SLBM enhances market liquidity, aids short selling for price discovery, manages risk for traders, and offers investors a way to earn risk-free returns on idle stock assets.
Features and benefits of SLBM
Features and Considerations
- Tenure: Contracts range from 1 to 12 months.
- Eligible Stocks: Over 600 stocks qualify under SLBM, subject to changes.
- Expiry: Contracts end on the 1st Thursday of each month.
- Minimum Order Value: Varies among brokerages.
Safety Measures and Benefits
- Clearing corporations guarantee transactions.
- Lenders receive income, retain corporate actions, and benefit from favorable taxation.
- Borrowers leverage SLBM for various strategies, including short-selling and arbitrage.
Corporate Actions and Charges
- Corporate actions like dividends, bonus issues, etc., affect open SLB positions.
- No STT charges, SEBI turnover charges, or stamp duty for SLB trades.
- Taxation involves the lending fee as “income from other sources” and taxed as per income slab.
- Commission structure varies among brokerages.
Disclaimer:
The above content provided regarding Stock Lending and Borrowing Mechanism in this web post is for informational purposes only and should not be construed as financial advice. Readers are encouraged to consult with financial professionals before making any significant financial decisions.
