SLB mechanism, changed, lending tenure extended

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Mumbai, Nov 1: Stock market regulator Securities & Exchange Board of India (Sebi), as promised earlier, has reviewed the Securities Lending and Borrowing (SLB) framework and instructed the exchanges and depositories to extend the tenure from present seven days to 30 days.

In a circular in October, Sebi had mentioned its disapproval to the foreign institutional investors (FIIs) lending shares for short sales purpose in the overseas markets. The regulator had also mentioned that they would be working on strengthening the domestic SLB scenario. It was in April that new SLB framework became operational, but there were few takers for this. This, was also one of the reasons why overseas investors preferred to have short sales transactions in the over the counter (OTC) market overseas.

The lack of popularity to the SLB was due to various reasons. Prime amongst them was that the lending mechanism was only for seven days, hence somebody who wanted to go short on particular scrip, had to return the borrowed shares in seven days. Regulations do not allow for ‘naked short sales’ wherein speculators can sell shares that they don’t own. In naked short selling, they could take a short position in the market and on the day of the delivery pay the difference to settle the trade of carry the position forward, as was in the earlier badla days.

The seven days period hence was seen as being cost ineffective and various institutions had made recommendations for extending the period for three to four months. “This would make the SLB mechanism more attractive to us,” says a senior executive with an FII. The extension of the period is a welcome move, though we wanted a longer period, but we will evaluate it come out with strategies, he added.

Another grievance of the trading community was the trading window where SLB activity was to happen from 10 am to 11 am. This has now being changed to 9:55 am to 3:30 pm.

The regulator has also mentioned norms on the corporate action, like dividend declaration, bonus issues and stock splits, which could take place when the stock is lent out. In case of a dividend declaration, Sebi says, “The dividend amount would be worked out and recovered form the borrower at the time of reverse leg and passed on to the lender.”