Are you a long-term investor? Did you know through stock lending and borrowing (SLB) scheme you could lend your shares and earn an extra income of 5 to 10% with minimal risk?
Let’s discuss how.
Estimated read time: 3 minutes and 33 seconds
Buckle up, here we go!
Let’s say you have been investing in equities for a long time. And your strategy is to buy and hold excellent companies for a long time. After buying the equity, the company’s shares stays idle in your Demat account, right?
Now, we have a mechanism called Stock Lending & Borrowing (SLB). As the name suggests, you can lend and borrow shares from other investors.
If you lend your shares, the borrower will return the shares back to you with an interest return. This interest return is not fixed and depends on the demand for that share. If the demand is high, you can earn a 10 to 20% return.
But why would someone borrow shares from you? These borrowers are mostly traders. Whenever they think they have an opportunity to earn a profit from short selling a stock or in the future & options, they try to borrow the share and, in return, are willing to pay interest for borrowing.
You would think that’s risky, right? What if this borrower loses money? How will they return your shares and pay lending fees?
You don’t have to worry about this.
Because securities lending and borrowing have no counterparty risk. National Securities Clearing Corporation Limited (NSCCL) act as a financial guarantor for SLB product.
Also, the borrower is asked to bring in 125% of the stock value as margin and lending fees over and above the margin. These two things reduce your risk as a lender.
And what if the company announces dividends or split while you lend the share?
You will receive all the dividends in your account as you own the shares. You just lent it, didn’t sell it. The same goes for the stock split and other benefits.
Does all this sound exciting?
Now comes the rules.
Rules on SLB
You can only lend the shares if you own a minimum of ₹1 lakh worth of shares of that company.
Also, you can’t lend any share you want. National Stock Exchange (NSE) announces a list of approved shares that can be lent and borrowed. You can check that list here.
If the share you own is on the list, only then you can lend your shares.
Also, as a borrower, you need to borrow a minimum of 500 shares per order.
How long can you lend the shares for?
Most lending and borrowing contracts are held for one month, and the contract expires automatically on 1st Thursday of the next month.
If you want to extend, you can lend your shares for a maximum of 12 months, but the borrower has to agree to it. Or else you have to keep creating new contracts every month.
How can you lend your shares?
Most brokerages in India are providing the SLB mechanism now. But usually, these features can’t be activated online.
Reach out to them directly (offline) and activate this feature. Also, even to lend your shares, most brokerages accept trade orders offline only.
For example, you might need to send a mail to your broker to place an order mentioning the stock, quantity to lend, time period, and lending fees you are expecting.
We quote lending fees on a per-share basis. So, if you want to lend shares of Reliance, it could be 50 shares to lend at ₹100/share.
And if any borrower matches and agrees to the lending fees, your trade gets executed.
What are the charges on SLB?
Most brokers charge 15 to 20% as processing fees on the lender fees and 18% GST on the processing fee.
Let’s say you lend 50 shares at ₹100/share.
20% of ₹5,000 (50*100) = ₹1,000.
Plus, 18% GST makes it a total fee of ₹1,180.
Also, Depository Participant (DP) charges are charged by the Depository (CDSL) and the Depository Participant at ₹13.5 (+18% GST) per day per scrip (stock).
Should you lend your shares using SLB?
In theory, the stock lending and borrowing mechanism seems very interesting.
But as you check the practicality, most of you will lose interest in lending your shares. Why?
The trade volume is very low. No online quick trading system as we have for regular trades. There is too much friction in the mechanism. Lending your share is not as simple as it seems.
Most long-term investors know little about the contracts of future & options. And just seeing the NSE SLB trade site will be overwhelming for them.
But if you are not one of them. If you are ready to spend time understanding the how of lending (practically) and execute it now and then. Then, this is really good for you. You can earn extra income on the shares lying idle in your Demat account.
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