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Thursday, January 07, 2010

Sebi modifies rules on stock lending and borrowing

Increases stock lending and borrowing tenure to 12 months 


Securities and Exchange Board of India (SEBI) has extended the tenure of contracts for stock lending and borrowing (SLB) up to a maximum period of 12 months compared with the current limit of one month.

Securities lending is primarily used by short-sellers who borrow stocks from other investors to meet their obligations to the clearing house. Large institutional investors such as foreign institutional investors and mutual funds who hold shares for the long term have traditionally been lenders in the market.

The decision is pursuant to feedback received from market participants and proposals for revision of SLB received from the National Stock Exchange and the Bombay Stock Exchange.

Through the SLB mechanism, participants can borrow the stocks via an approved intermediary, primarily to short sell the stocks. Short sales means selling securities one does not own.

The new norms will also allow a lender or a borrower to close his position before the agreed-upon expiry date. The absence of such flexibility has been an obstacle to the wider use of securities lending and borrowing, or SLB.

Sebi introduced the SLB platform in April 2008 to enhance liquidity in the derivatives market, and help better price discovery in underlying shares.

The SLB mechanism is, however, used only for stocks in the futures & options (F&O) segment. The lender and borrower would be free to recall or repay the shares earlier than the defined timeframe. 

Under the existing SLB scheme, a person who owns shares can lend them through Sebi-approved intermediaries, which also act as the central counter-party.

The Sebi circular stated that in case the borrower fails to meet the margin obligations, the approved intermediary will obtain securities and square off the position of such defaulting borrower.

In case of early repayment of securities by the borrower, the margins related to the same would be released immediately to the approved intermediary.
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