The SLBs avenue

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of any security. The lending price on May 8, 2008 was Rs 1761.50 and 25% would be Rs 440.37. (The complete cost structure is explained in the table.)

As explained before, the lending fee is paid by the borrower. However, the borrower has to deposit an additional 100% of the lending fee other than the fee paid. The last margin is MTM, where, if the investor has taken a short position in the cash market and the price goes up (in loss), then the difference between the previous lending price and the closing security price would be taken from his account at the end of the day. If the price goes down (in profit) then no amount would be taken from the borrower. While paying the margins, the borrower also has to pay the transaction price, which is the settlement amount and includes lending price plus lending fee.

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The lending and borrowing mechanism has created option for investors to carry forward their short position for five additional days in the cash market. Now the ones who are hesitant to take exposure in futures and options due to high leveraging risk can choose SLBS to increase returns when the investor expects the market to go down.

Also, the institutional players who may not be able to take positions in the F&O market due to freeze in the market wide limit can go through SLBS and buy shares in quantity. The market-wide limit is another point worth noting. A single participant can have an open position of more than 10% of the market-wide limit or Rs 50 crore, whichever is lower in one company. The same limit is applicable for foreign institutional investors/mutual funds. On a client level the market-wide position limit is not more than 1%.

Other than short-selling, this system would bring idle securities in the cash market. This would increase the liquidity, which could result in efficient pricing. Holding long and short positions in the cash market will give a healthy balance and remove the chance of unnecessary price manipulation.

Sebi has recently approved cross margining. Cross margining is a method to mitigate the burden of margin payment on institutions. As the institutions pay margin in the derivative segment, now they don't have to pay VaR margin in the cash market.

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