Market regulator, Securities and Exchange Board of India(Sebi) on Wednesday, modified the framework of Securities Lending and Borrowing (SLB) after receiving feedback from the market participants.
According to the market players, this move could improve the SLB and facilitate better price discovery, as Sebi permitted lending and borrowing of securities beyond the current 30-day limit, subject to a ceiling of 12 months securities.
“Certainly, this is a move that will kick off the SLB and would help the market. The 30 day period was definitely very less and did not spur the mechanism,” believes Dharmesh Mehta, head equities with Enam Securities. Sebi in its release said, “The tenure of contracts in SLB may be upto a maximum period of 12 months and the intermediary shall have the flexibility to decide the tenure. The lender and the borrower shall be provided with a facility for early recall/repayment of shares.”
In case the borrower fails to meet the margin obligations, the approved intermediary (AI) shall obtain securities and square off the position of such defaulting borrower, failing which there shall be a financial close-out.
And in case lender recalls the securities anytime before completion of the contract, the AI on a best effort basis shall try to borrow the security for the balance period and pass it onward to the lender. The AI will collect the lending fee from the lender who has sought early recall, added Sebi.
However, there is a section of the broking community that believes that the mechanism has the potential to trigger off short-selling in the market place. The flexibility offered by the system could be cause, they recon. “Also the fact that the institutions like insurance companies who are long-term players are not allowed to lend in the market place could be a detterrant,” adds a senior executive with a leading brokerage.