A working group constituted by the Indian market regulator is discussing measures to improve the country's stock lending and borrowing framework through greater custodian participation and digitization of the Securities Lending and Borrowing Scheme (SLBS) processes. According to reports from Mint, the move is part of a push by chairman Tuhin Kanta Pandey to deepen cash markets and offer investors alternatives to the risky derivatives segment. The working group members have individually sent their preliminary suggestions on strengthening the SLBS framework to the regulator, with the group scheduled to meet again to discuss these suggestions exhaustively.
The key challenges identified include prohibitive 125% margin requirements and a manual trading system that relies on phone calls rather than digital screens. As reported by Mint, custodians are currently hampered by the need to physically call around half a dozen brokers to apprise them of their clients' willingness to lend shares. The regulator aims to link cash and derivatives markets better to improve price discovery systems, with the reforms potentially unlocking billions in idle shares held by institutional players. The current SLBS segment has been open to all categories of investors since its launch in April 2008, with around 213 stocks eligible for derivatives and others stipulated by the exchange.
The Securities Lending and Borrowing Scheme allows investors to lend idle stock in return for a fee, with the minimum lending tenure of one month and maximum of 12 months. According to Mint, the lending fee can range from an annualized 0.5-10% based on market conditions. The borrower is typically an investor who wishes to short-sell a stock or exploit mispricing between cash and futures markets. Since the entire mechanism is exchange-traded, unlike over-the-counter systems in other countries, trades are guaranteed by clearing corporations of the exchanges.
The reform initiative comes amid concerns over sustained losses in derivatives trading, with a Sebi study finding that net losses of individual traders widened by 41% to ₹1.06 trillion in FY25 from ₹748 billion in the preceding fiscal. As reported by Mint, currently most investors prefer to sell futures or options rather than use SLBS for bearish bets. The regulator seeks to reduce retail reliance on risky derivatives via cash markets, with the successful implementation potentially providing the liquidity necessary for a more robust short-selling ecosystem in India.
