Just prior to stepping down last week after his tenure as SEBI’s whole-time member, Ananth Narayan spoke about how the market regulator was reviewing the SLB (stock borrowing and lending) mechanism. The idea was to see if any process or structural changes were needed to make SLB simpler and a more widely-used mechanism by market participants.
While SLB has been used by institutions for long, not many retail investors — barring a few savvy ones — may be fully aware of the process to lend or borrow stocks from other investors in the market.
The SLB mechanism allows investors to lend shares that are lying idle in their demat accounts to other investors and receive an interest-like payoff. Investors can also borrow shares from others for purposes such as short-selling, arbitrage, etc.
All these transactions are done via the exchanges and regulated well.
Read on for more on SLB, including how it works, the eligible amount/shares, transactional processes, settlement and also on what happens when there are corporate actions.
Lending and borrowing shares
There are shares that you as an investor may be holding for a long time and may continue to stay invested in as a part of your portfolio holdings. Such stocks, which you aren’t looking to trade for quick gains, can be lent to other investors for short periods, usually a month and rolled over subsequently one month at a time.
For lending your shares, you will be eligible for an interest for the period. What’s more, you get to fix the amount you wish to receive as payoff for the period of lending and if your requirement finds a matching borrower, the transaction is completed.
At the end of the borrowing period (one month or in multiples of one month if contract is rolled over), you get back the shares in your account and also the interest amount (payoff). You retain the ownership of the stocks even when you have lent them.
At the other end of the spectrum, there are multiple reasons why investors may want to borrow shares from others.
First, borrowers can short-sell shares they do not own (in this case they have borrowed shares) when they expect those shares to fall in price. They sell the borrowed shares at a higher price and buy the same stocks back after the fall, and pocket the difference. The shares are then returned to the lender with the interest fee.
Second, borrowers can make gains from arbitrage between the cash and futures markets. If a stock in the futures segment trades at a discount to the spot market price, selling the (borrowed) stock in the cash segment and buying the futures would help generate an arbitrage income. Later when the stock falls, it can be bought and returned to the lender at end of the contract period.
Third, investors may face settlement issues when they short-sell. What if the stock hits upper circuit and further buying becomes impossible? The settlement goes to the next trading day via auctions (discussed later). This may result in huge cost implications and losses. To avoid delivery defaulting or settlement failure on short trades, sometimes investors borrow from the SLB mechanism.
Fourth, some investors choose to remain market-neutral by buying one company’s shares they expect to go up and selling another company’s stock that they expect to fall. In such cases, the shares that they wish to sell can be borrowed from the SLB mechanism.
Eligibility, process and special situations
Although NSE is the main exchange in the SLB mechanism, the BSE, too, offers the list of stocks to borrow and lend.
Companies that are part of the futures & options segment and index ETFs that are traded on at least 80 per cent of the days over the previous six months and whose impact cost over the past six months is less than or equal to 1 per cent are eligible for the SLB mechanism.
The list of stocks, the best bids, best offers and quantity for borrowing or lending are all available in these exchanges.
Settlement happens on a T+1 basis.
Brokerages tend to have a minimum criteria of ₹1-lakh worth of stock of a company for its shares to be allowed for lending and 500 shares of a company as the minimum order quantity in the case of borrowing investors.
Once you enable the SLB mechanism in your brokerage account, depending on whether you are a borrower or a lender, you can specify the quantity, payoff you want, the cost you are willing to pay and the tenure. The exchanges have mechanisms to match orders and execute the contracts. A margin deposit would be demanded for the transaction.
The clearing houses stamp the contract to the transactions to eliminate counter-party risks.
Now there are two series available in the SLB mechanism. In series A contracts, if there are corporate actions such as stock split, bonus issues, dividends etc., or an annual general meeting or extraordinary general meeting during the tenure of the contract, the contract is foreclosed and the positions are reversed.
In series B contracts, the lenders of shares would receive the benefits of dividends, stock splits, bonus issues etc. even as the borrower holds the shares.
Though a rarity, if there is a default (not being able to return the shares borrowed) on the date of expiry of the contract, then the borrower has to buy the shares of the same quantity via an auction designed for such purposes. The share bought from the auction route must then then be returned to the lender. In case, there is no seller available in the auction route, the borrower must give the cash equivalent of the shares to the borrower along with the payoff interest amount.
Only if these transactions make significantly higher profits than the total SLB transaction fees and amount payable to the lender, must a borrower consider the option.
Fees and taxes
For a lender or borrower of shares via the SLB mechanism, since there is no delivery of shares, the securities transaction tax and SEBI turnover taxes would not apply.
However, brokerages would charge a fees ranging from 15 per cent to 20 per cent of the best bid/best offer amount, depending on the transaction and a GST (18 per cent) would be applicable on this amount as well.
Any amount earned by lending shares in the SLB mechanism is treated as income from other sources and added to your overall income and taxed at the applicable slab. For a borrower, there may be other short-term capital gains implications depending on the transactions.
Though not very risky from a lender’s perspective, the SLB mechanism is best left to relatively savvier and well-off investors.
Published on October 11, 2025
