SLBM (Stock Lending and Borrowing Mechanism) is a legally approved medium for lending and borrowing securities. It is a system in which a trader can borrow shares that they do not already own or lend the stocks they own. All market participants, including retail (except Qualified Foreign Investors) in the Indian securities market, have been permitted to lend/borrow securities but under the supervision of – NCL (NSE clearing limited) and BOISL (BSE clearing corporation). There are mainly two parties involved in SLBM transactions –
• Borrowers
• Lenders
For lenders, it provides an opportunity to earn returns on their idle portfolios if they intend to hold those stocks in their portfolios for the long term. At the same time, it allows the borrower to use this mechanism for their advantage, like - to cover short positions: to avoid settlement failure and mispricing in options.
In this SLBM process, to maintain the compliance level, both parties have to meet certain criteria like the lender depositing 25% of the shares in advance and the borrower depositing 125% of the value of stocks he wishes to borrow a margin amount for safety.
Overall, it has various advantages like –
Additional income to the lender from an idle portfolio, Less risk due to a robust compliance process by the authorities.