Mumbai: Savvy proprietary traders are using the National Stock Exchange’s (NSE) stock lending and borrowing mechanism (SLBM) to profit from a pricing anomaly in India’s information technology (IT) heavyweights such as Wipro, HCL Technologies (HCLTech), Infosys and Tata Consultancy Services (TCS), whose underlying shares are trading above their futures contracts.
Known as reverse arbitrage, the strategy allows traders to lock in high single- to double-digit annualized gross returns with literally zero market risk, according to market experts.
NSE’s SLBM allows investors to lend shares lying idle in their demat accounts to borrowers for a fee of 3-5% of the share value for periods ranging from one or two months or more. It also allows traders to legitimately short stocks by borrowing them first—the Securities and Exchange Board of India (Sebi) does not otherwise permit naked short-selling.
The opportunity has emerged because futures contracts on these IT stocks have slipped to discounts to their underlying shares after the sector significantly underperformed the benchmark Nifty over the past 15 months through June.
This was largely due to money moving out of domestic IT companies into overseas firms such as Samsung, Nvidia, TSMC and Microsoft, connected with the AI trade. Normally, futures trade at a premium because of the cost of carry—the financing cost of holding a position until expiry. However, due to extreme bearish sentiment or corporate action such as dividend payouts, futures slip into a discount to spot or underlying shares.
To profit from this pricing gap, proprietary traders have been actively borrowing IT stocks through the SLBM from retail high-net-worth investors (HNIs) and foreign portfolio investors (FPIs) for the past three to four months.
The proprietary traders then sell the borrowed shares in the cash market and simultaneously buy the corresponding futures contracts at a discount, thus locking in the spread through the reverse arbitrage trade. As spot and futures prices converge at expiry, they take delivery through the futures position, return the borrowed shares to the lender, and pocket the gain from the vanishing spread after meeting costs like transaction tax, lending fees, etc.
In June, Wipro was the most borrowed stock among 396 securities in the SLBM, with 122.43 million shares outstanding, according to NSE data. Infosys followed with 29.15 million shares, HCLTech ranked eighth with 15.06 million, and TCS was 11th with 5.34 million. Together, the four IT stocks accounted for more than half the 329.97 million shares borrowed that month.
“Arbitrageurs have been making use of the bearish market sentiment in heavyweight IT counters by selling the underlying stocks borrowed from the SLBM segment and simultaneously buying the futures of such stocks, which are trading at a discount to the underlier,” confirmed Ashish Nanda, chief business digital officer at Kotak Securities.
Returns for such reverse arbitrage trades should be around 8-10% annualized to account for the various costs like lending fee, exchange charges, securities transaction tax and cost of capital, explained Nanda, adding that after accounting for costs, net returns could be mid-single digits or higher.
Asked if the reverse arbitrage trend could continue, V.K. Vijayakumar, chief investment strategist at Geojit Financial Services, said he expected it to persist in most of the big IT counters due to the global AI trade over the next few quarters.
How the arbitrage works
Let us illustrate the mechanism through an example. For instance, Wipro’s underlying shares traded at ₹174.24 apiece on Thursday against ₹169.83 for the August futures contract, implying a spread of 2.5% for a month and a half, or 20% annualised returns.
Similarly, HCLTech’s shares traded at ₹1,175.4 against their August futures’ contract price of ₹1,161.9, implying a spread of 1.14% by the end of August or an annualised 9.12%. TCS and Infy futures too traded at a discount to their spot rates.
So, if Wipro settles at ₹190 by 25 August, the loss to the trader for selling the cash share is ₹15.76. But because the trader had purchased the futures at ₹169.83, he makes a profit of ₹20.17 per share. The total profit is ₹4.41 (20.17-15.76).
Crucially, the ₹4.41-per-share spread is locked in irrespective of the rate at which Wipro settles by August expiry on the 25th of that month.
To be sure, the returns generated by both HCL and Wipro exceed the Nifty’s negative 5% return in FY26 or 6.9% generated so far this fiscal through June.