What is Securities Lending and Borrowing Mechanism (SLB)?

A Brief Background of SLB

SLB has been governed by SEBI through its rules and regulation since May 1997. Since then, several modifications have taken place. Transactions happen with the help of operations at the National Stock Exchange where agreements between the two parties are made in order to ensure the security of lenders. Lending and borrowing are allowed only in dematerialized form; physical stock cannot be lent or borrowed in such a case.

How Does SLB Work?

The process is fairly straightforward. The lender, usually a long-term shareholder whose stocks are not currently under active trading, will post a lending order on the stock exchange, stating the fee he expects to receive and the number of shares that he wishes to lend out. On the other end, the borrower will make a borrowing order, stating what shares are required, how long for, and at what rate he would like to borrow the shares at.

Like futures and options contracts, SLB contracts expire on the first Tuesday of every month for whichever series they are traded in. In case of exchange holidays, the expiry falls on the next working day.

Contracts are available for tenures ranging from one month to twelve months, giving both parties some flexibility. Each stock in the SLB segment has a predefined lot size, typically 500 or 1,000 shares and orders must meet or exceed this minimum.

The interest or lending fee in SLB is not fixed; it changes based on market conditions, demand for that stock, and the agreement between the lender and the borrower. You can check the latest rates on the NSE's website, where the list of approved securities is also updated regularly.

Who Can Participate?

Investors from all segments can invest under the SLB framework, both retail and institutional investors alike. An investor should have an active demat account. Registration has to be made through a broker or depository participant who is a clearing member of NCL/ICCL. The institutions which play a significant role as the lenders in this market include mutual funds, insurance firms, and family offices because of their large cash reserves.

What Happens to Corporate Benefits in SLB?

This is one of the more reassuring aspects of SLB for lenders. Corporate actions such as dividends, splits and bonuses, are credited to the lender, not the borrower. The clearing corporation ensures these benefits are passed on to the original owner even during the lending period. However, for corporate actions other than dividends and stock splits, such as mergers or rights issues, the contract may be foreclosed two days prior to the ex-date.

Charges Involved in SLB

DP charges of ₹13 + 18% GST are applicable when shares are moved from the demat account for settlement. If the primary (first) holder of the account is a woman, the DP charges are reduced to ₹12.75 + 18% GST. Beyond this, clearing corporations levy small transaction and settlement fees. Brokers may charge either a flat fee or a percentage of the lending income, some platforms charge up to 20% of the fee earned. It is worth checking these charges with your broker before you participate, since they can eat into the income you earn as a lender.

Neither the Securities Transaction Tax (STT) nor SEBI's turnover fees are applicable on SLB transactions.

Tax Treatment for SLB

Normal SLB does not trigger capital gains tax because shares are not sold. But your earnings from the lending fee are taxable and the tax depends on your income slab. The situation becomes more complicated if the borrower defaults, in that case, shares are auctioned by the clearing corporation, and this can be treated as a sale, potentially attracting capital gains tax.

Risks to Keep in Mind

SLB is backed by clearing corporations, but that does not make it entirely without risk.

The first is a lock-in. Once you lend your shares, you cannot sell them during the lending tenure. If the market moves against you during that period, you are stuck. The second is the possibility of early foreclosure due to corporate actions, in which case the contract ends ahead of schedule and you may have to return a portion of the fee received. The third is demand risk; you earn only if someone borrows your shares. If there is no demand, you earn nothing. And while some stocks do see healthy demand, many do not.

SLB tends to work better for shares that short sellers are actively interested in.

Why Does SLB Matters For The Market?

Beyond the income angle, SLB serves a broader purpose. It supports short selling in the cash segment, which is important for price discovery. When traders can borrow shares legitimately to take short positions, the market tends to be more efficient at correcting overpriced stocks. By enabling investors to earn additional income on otherwise idle shares, the SLB framework not only benefits lenders but also improves liquidity and overall market efficiency.

SEBI has recently acknowledged that the framework needs a refresh. Simplifying SLB could make it a more practical alternative in the cash market. For a long-term investor with a meaningful demat portfolio, SLB is worth understanding; not as a primary strategy, but as a way to make idle holdings work a little harder.