Have stocks to lend? Here’s how SLB allows you to earn more
The Hindi word badla conjures different meanings for most people. But for old-time punters, it opens up a magical world of stock market trades that existed prior to 1993. And, it also shines the spotlight on the 1992 stock market scam perpetrated by ‘Big Bull’ Harshad Mehta. Before the arrival of electronic trading at BSE, badla denoted the positions carried forward by traders at the end of the day based on borrowed money (vyaaj badla) or shares (share badla). This was the only way investors could take leveraged positions or short-sell stocks back in the day. Badla was banned in 1993.
Over time, the National Stock Exchange (NSE) and BSE launched a stock lending and borrowing (SLB) mechanism that offered similar flexibility, but with tighter rules.
SLB is not used widely these days as traders mostly rely on the equity derivative market—the futures and options (F&O) segment—for leveraged bets, bearish trades (buy put-sell call options/sell futures), as well as carry forward their positions by rolling-over of F&O contracts.
SLB still has its use cases though. Investors with long-term portfolio can gain from lending fees on their portfolio, while still being eligible for the dividend, bonus, split, rights issue, etc., that are associated with such shares. While stocks that are part of F&O segment are also part of SLB (although that number is comparatively less), certain stocks are only available to trade via SLB. And these include shares of YES Bank, Paytm, Nykaa, Zomato, Aavas Financers, Home First Finance Company, etc. Short-sellers or arbitrageurs can tap the SLB mechanism to borrow these shares for their trades.
Lending fees & break-even
Share lenders get a fee on the stock that is borrowed from them by short-sellers
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