Mumbai: The stock market regulator Securities and Exchange Board of India, or Sebi, on Thursday allowed rollover in stock lending and borrowing (SLB) sessions for up to three months and permitted index exchange traded funds (ETFs) that are liquid to be traded in the SLB segment in an effort to add depth to a lacklustre SLB market in India.
This means borrowers or lenders of stocks who wish to carry forward an existing position that is nearing settlement can do so.
Naked short selling or selling stocks without owning them is not permitted as delivery has to be made at the end of the trading day. Under SLB, an entity or individual that is bearish on a stock that it or he does not own and wants to benefit from an expected fall in prices can borrow the same stock from a shareholder for a predetermined period and sell those stocks in the market.
Later, these stocks can be bought back from the market at a lower price and returned to the borrower. In the process, the entity or individual makes a profit.
SLB allows lenders to earn returns on idle stocks in their portfolios while short-term players can also profit from it.
“Roll-over shall be available for a period of three months— the original contract plus two rollover contracts (each lasting for a month),” Sebi said in a circular. “An index ETF shall be deemed ‘liquid’ provided the index ETF has traded on at least 80% of the days over the past six months and its impact cost over the past six months is less than or equal to 1%,” it added.
ETFs are mutual fund schemes listed and traded on the stock exchanges just like stocks.
However, the regulator said that netting of counter positions of a client will not be permitted. This means that netting between the borrowed and lent positions of a client will not be allowed.
The SLB market is currently extremely shallow. The total number of SLB trades on NSE on Thursday stood at 95 and traded volume of shares was to the tune of Rs.10.04 lakh.
“This is a good move from Sebi and may help see more volumes in the segment as there is flexibility. But the procedures for getting registered as an approved intermediary and costs involved with it have caused many brokers to stay away,” said Joby Mathew, a securities market lawyer. The system was brought in to replace badla and is a well-regulated one wherein lenders can get liquidity without losing ownership while the cost of acquisition is low for the borrower who can also benefit from a short term price movement, he added.
In 2007, Sebi allowed short selling through stock lending, but only by borrowing for seven days. It was later extended to 30 days, but that has not helped boost activity in the segment.