Transparent profit and loss metrics from brokers, along with regulations to lower margin costs, are needed to ignite interest in the securities lending and borrowing (SLB) segment, according to industry experts.
They said most of the shorting happens through the stock futures route because of higher liquidity, and regulations on collateral are opaque.
A market participant said. “Vibrant stock futures market is coming in the way of SLB.” He added that regulations are not very clear on taking security on loan and holding for long term for future selling opportunities. He highlighted the need for synchronisation between clearing corporations which act as counterparties for both lenders and borrowers.
NSE data show that in the past month just 71,959 trades happened in this segment of the exchange across stocks and the traded quantity was 114.9 million.
Rajesh Palviya, head of technical and derivatives, Axis Securities, said: “Currently, very few HNIs and smart investors participate by holding large quantities of a few stocks that are most traded in this segment.” Some of these are Wipro, Ashok Leyland, Cholamandalam Finance, Rail Vikas Nigam, Nykaa, and Dr Reddy’s Labs. Palviya said retail participation is less as most brokers have not enabled it on platforms and retail investors do not have access to profit and loss metrics.
“We currently send mails to investors who hold illiquid securities and try to educate them,” he said. The framework that allows investors holding shares to lend them for a fee, enabling activities such as short selling, was introduced by Sebi in 2007. It was last updated in 2012 when lenders and borrowers were permitted to roll over their positions for up to three months. However, netting of counter positions (borrowed versus lent) was not allowed during the roll-over and its eligibility was expanded to liquid index exchange traded funds that meet specific criteria.
According to Sebi officials, some early-stage discussions regarding SLB have commenced at the regulatory level to encourage its greater use.
Kranthi Bathini, director of equity strategy at WealthMills Securities, believes that investor awareness is one of the things that can be done to boost participation, along with more simplification. “Current institutional players are not getting the kind of liquidity they want.”
Building a robust SLB ecosystem was a part of the Association of National Exchanges Members of India’s five-point reform manifesto to accelerate growth in capital markets. According to it, the market remains underdeveloped due to high margin costs and low retail awareness. It had called for rationalising margin requirements and improving retail access to SLB platforms.
“A well-functioning SLB ecosystem will empower investors to hedge or express views without relying solely on derivatives. It also helps curb excessive speculative activity and encourages a healthier market structure,” the association said.
Globally, SLB usually operates as an over-the-counter product, functioning through private agreements between parties. The participant quoted above said, “Internationally, order matching in SLB has never succeeded, it’s a phone-based reporting market and participants need full required quantity with guarantee from a single lender as far as possible.”