Sebi plans to simplify securities lending

MUMBAI: The markets regulator is plans to simplify the Securities Lending and Borrowing (SLB) framework for participants, said Ananth Narayan, whole-time member of the Securities and Exchange Board of India (Sebi).

“The discussions around SLB are still in the early stages…but we need to explore what can be done to encourage greater use of SLB in the markets,” Narayan said on the sidelines of the Global Fintech Fest 2025.

Currently, market participants tend to use the futures segment for shorting. “We are trying to see if we can make SLB transactions easier from a process and design perspective for participants,” he said.

SLB allows investors to lend or borrow shares for a specified period. Borrowers typically use it to meet short-term needs such as avoiding settlement failures or executing short sales, while long-term shareholders can rent out their holdings temporarily to earn additional income.

Eligible securities for SLB include dematerialized shares traded in the F&O segments of the National Stock Exchange (NSE) and the BSE. Sebi has previously attempted to expand the list of stocks eligible for SLB, but no significant changes were implemented.

Globally, SLB usually operates as an over-the-counter product, functioning through private agreements between parties. This allows for greater customization and flexibility, though transactions remain subject to regulatory norms.

India’s SLB framework, in contrast, is overseen by stock exchanges, which regulate and monitor all trades. The exchange’s clearing corporation acts as a counterparty guarantor, ensuring the safety and settlement of every SLB transaction.

Saurabh Jain, head of fundamental research at SMC Global Securities, said Sebi is considering reforms to make the SLB scheme more accessible, aiming to boost market liquidity and broaden investor participation.

Currently, the scheme faces several challenges, including limited participation, operational constraints, a lack of transparency due to over-the-counter transactions, and underutilization of idle securities. Reforming the SLB framework could address these issues by increasing liquidity, improving price discovery, and allowing investors to earn additional income by lending dormant securities.

Enhanced SLB operations would also support short-selling and hedging strategies, while aligning India’s framework with global best practices—potentially strengthening the credibility and attractiveness of the Indian securities market. Jain emphasized that Sebi should implement these reforms cautiously, balancing innovation with effective risk management.

One challenge for borrowers is the additional GST levied when borrowing shares through SLB, experts say.

Chirag M Shah, senior securities lawyer, said, “For the lender, there’s no issue — they simply earn a lending fee per share for a specified duration, and the money is received directly, net of brokerage charges.”

However, the problem arises for the borrower, who must pay GST on the lending fee since stock borrowing is treated as a service, Shah added. Many market participants, particularly proprietary traders, cannot claim input credit on this GST because they are not providing any onward service, he added.

Further, there is no reason for this segment to be kept under the T2T mechanism, intra-day square up should be allowed and this segment should also be made interoperable across exchanges like cash and F&O segment for margin optimization.