In other words, to borrow stocks worth Rs 100 the borrower would have to furnish a collateral of Rs 120 with the intermediary. The collateral will not include physical shares and will be marked to market. However, 50 per cent of the collateral can be in the form of dematerialised shares. The cash component of the collateral will be a minimum of 25 per cent.

The exchange is getting into the stock lending business through its wholly owned subsidiary, the National Securities Clearing Corporation Ltd (NSCCL), and plans to kick-off operations by end-October. The detailed business plan for stock lending has been cleared by the NSCCL board last week and will be submitted shortly to the Securities and Exchange Board of India (Sebi) for its approval. Sebi has already awarded an in-principle approval to the clearingcorporation for being an approved intermediary for stock lending.According to sources, NSE will guarantee stock lending with respect to dematerialised shares although it will allow a borrower to return the shares in paper form as well.

NSCCL will target its operations through the depository participants with the National Securities Depository Ltd (NSDL) as typically lenders would be clients of depository participants who would be holding a large pool of securities and would be willing to lend the same.

The credit risk will be borne by the intermediary ie the clearing corporation. NSE will be in direct competition with the Stock Holding Corporation of India Ltd (SHCIL) and will try to attract UTI to lend through the clearing corporation. SHCIL is UTI's custodian and the two had earlier planned to commence the lending activity. This plan has, however, failed to take-off despite several claims to this effect.

Sources said that the collateral could include government securities and bonds apart from cash,debentures and other debt and equity instruments, the last one only in the demat form.

The collateral value will include a margin component. In case the value of the collateral falls below the prescribed minimum, the intermediary will make an additional collateral call on the borrower and this additional collateral would need to be deposited within the time frame prescribed.The business plan has also outlined the other crucial aspect ie the distribution of the corporate benefits. The lender loses the title of the securities lent but continues to retain the right to receive equivalent securities and all benefits except voting rights. The borrower will be required to pay the monetary benefits accrued in respect of the securities borrowed, to the lender.

These benefits will be recovered from the borrower when the loan is repaid. The same procedure will be followed for bonus shares.