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Now equity investors can lend and borrow shares for 12 months

Now equity investors can lend and borrow shares for 12 months
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First Published: Wed, Jan 06 2010. 10 29 PM IST
Updated: Wed, Jan 06 2010. 10 29 PM IST
Mumbai: The Securities and Exchange Board of India, or Sebi, on Wednesday allowed equity investors to lend and borrow shares for as long 12 months compared with the current limit of one month, satisfying a long-pending demand of traders.
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 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.
Short sales means selling securities one does not own. The trade is settled in a clearing house by borrowing shares from other investors for a fee, on the condition that they will be returned to the lender on a specified date.
Under current norms, this mechanism is available only on shares traded in the derivatives segment.
This is usually done by traders who engage in arbitrage between the cash and derivatives segments. When derivatives contracts trade lower than their fair value, traders can buy these contracts and hedge their bets by selling the underlying stock for a risk-free profit. But some arbitrageurs don’t own the underlying stock and need to borrow the shares. That’s where SLB assumes significance because it allows the arbitrageur to buy back the shares at a lower price in the future.
Derivatives contracts have a fixed expiry date and are available for tenors of one-three months. The one-month restriction on borrowing stock made it hard to take advantage of arbitrage opportunities because the expiry of a contract under the SLB mechanism did not always match the expiry of a given derivative contract.
It also added to transaction costs each time a position was rolled over.
In its Wednesday notice, Sebi said that if a lender recalls the securities any time before completion of the contract, the intermediary will try to borrow the security for the balance period and pass it on to the lender. However, the intermediary will collect a fee from the lender who sought early recall.
Similarly, if a borrower wants to return shares early, and the intermediary fails to find a new borrower, the original borrower will forego the lending fee for the balance period.
Amit Garg, head of operations, BNP Paribas Securities Ltd, said: “It is a good move. But it is inefficient to the extent that if there is also cost of calling a new lender, transfer and demat charges. Also, if the lender is calling back shares with an intention to sell, then it could put further pressure on the stock, which may not be desirable. Therefore, if the lender recalls with an intention to sell, a separate window can be created between the borrower and seller to enable the transaction. This could help the transaction occur at much lesser cost.”
N. Sundaresha Subramanian contributed to this story.
anirudh.l@livemint.com
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First Published: Wed, Jan 06 2010. 10 29 PM IST