Securities Lending and Borrowing (SLB): A smarter way to earn from your shares

Did you know that the shares sitting idle in your demat account could actually earn you extra income? Or that you can sell shares without actually owning them to make the most from short-term trading opportunities?

That’s exactly what the Securities Lending and Borrowing (SLB) mechanism helps you do —  a win-win system where investors can lend or borrow securities for a fixed period and earn or pay a small fee. Through the securities lending and borrowing system, you can temporarily lend your stocks to another investor, against a fee, for short selling, hedging or to meet delivery obligations. As a lender, this provides you with an additional income and contributes to market liquidity.  

Let’s understand how it works and why it deserves your attention. 

Securities Lending and Borrowing (SLB) allows investors and traders to lend or borrow shares through the stock exchange for a specific period and at a mutually agreed fee. This entire framework is regulated by the Securities and Exchange Board of India (SEBI), ensuring your shares are safe.

Think of it like renting out your shares: 

• If you’re a lender, you can earn passive income by lending your shares to other market participants against a lending fee.
• If you’re a borrower, you borrow shares temporarily for trading strategies such as short selling or arbitrage. 

All SLB trades are executed on recognized exchanges such as NSE and BSE and are cleared and settled by Indian Clearing Corporation Limited (ICCL), ensuring the process is transparent, regulated, and secure.

Let’s say you own 2,500 shares of Company XYZ that you plan to hold for the long term. Instead of letting them sit idle, you can earn passive income from your holding by lending them through SLB. Assuming the lending fee on those shares is ₹1 per share per month, then you can earn an extra ₹2,500 per month — without the need to sell your shares.

And if you are a trader, and you expect Company ABC’s stock to fall, you can borrow them through SLB and sell them now. When the stock price falls, you can buy them back later at a lower price, locking in profits after paying the lending fee.

Borrowing shares through SLB offers traders and institutions a wide range of strategic opportunities: 

• Short Selling: Expecting a stock price to fall? Borrow it, sell now, and buy it back later at a lower price to profit.
• Arbitrage: Capture short-term price differences between the cash and futures markets.
• F&O Physical Delivery / Short Delivery: If a futures or options contract moves into physical settlement, or you face short delivery (failure to deliver shares on time), borrowing shares ensures smooth settlement and avoids penalties. 

While SLB is most commonly used by traders to short sell, you can also borrow shares to benefit from arbitrage opportunities in the market and exploit price discrepancies between the spot and futures markets.

For example, when a futures contract trades at a discount to the underlying stock spot price, you can buy the futures contract of that company and sell it in the cash market. This is also called “reverse arbitrage”. Here’s how it works: 

• Borrow shares via SLB.
• Sell them in the spot market.
• Buy the futures contract simultaneously. 

When the contract expires and both prices converge, you buy back the shares at the lower price and return them to the lender — pocketing the difference after accounting for the lending fee and transaction costs. 

In the SLB mechanism, borrowers are required to maintain a margin of 125% of the value of the borrowed securities. This margin ensures that the system remains safe and covers any price risk during the borrowing period. 

How it works 

• Initial Margin: 125% of the stock value must be deposited upfront. 
  Example: If you borrow shares worth ₹4 lakhs, you must provide ₹5 lakhs (125% of ₹4 lakhs).
• Daily Mark-to-Market (MTM): Margins are adjusted daily based on stock price movements. If the stock price rises, more margins may be required; if it falls, some may be released.
• Effective Margin Post-Sale: After the borrower sells the borrowed shares, they receive the 100% value of the stock (e.g., ₹4 lakhs in the example). The remaining 25% stays blocked to cover potential losses, leaving the borrower effectively trading with 25% of the initial margin.
• Purpose: This structure protects the lender from the risk of default or adverse price movement, with margins held and monitored daily by the clearing corporation. 

Key considerations for borrowers 

• Interest & Fees: Borrowers must pay the agreed lending fee to the lender.
• Risk of Loss: If the stock price rises instead of falling, the borrower incurs a loss in addition to paying the lending fee and margin of interest.
• Daily MTM Requirements: Failure to meet daily margin calls may lead to foreclosure of the contract. 

In summary, while SLB provides flexibility and strategic advantages, risk management is critical for borrowers.

For long-term investors, SLB offers a unique way to earn passive income on holdings that would otherwise sit idle. You can lend your shares for a short duration, earn a fee, and still remain the beneficial owner. 

Key benefits for lenders 

• Earn passive income from your stock holdings: You can create an extra revenue stream by lending your shares lying idle in your demat account without liquidating core holdings. The borrower will pay you a lending fee for the duration of use.
• You retain ownership benefits: Even when your shares are lent to a borrower, you retain their full ownership and continue to benefit from all corporate actions on the stock including dividend, bonus, merger, and stock splits during the lending period.
• Its secured: SLB transactions are executed on regulated exchanges and guaranteed by clearing corporations like ICCL or NSCCL, which act as central counterparties — eliminating default risk.
• Enhanced market liquidity: Lending shares increase overall market liquidity, benefiting all market participants.
• Favorable tax treatment: The lending fee is generally classified as business income or income from other sources — not capital gains, which can offer tax advantages depending on your individual tax profile.
• Flexibility: You can lend shares for tenures ranging from 1 to 12 months and may even recall shares early (depending on market availability and your contract terms). 
   

At ArihantPlus, both lenders and borrowers can easily participate in the SLB segment. It is open for both retail and institutional clients.

• For lenders: Minimum order value per security — ₹1 lakh.
• For borrowers: Minimum order — 500 shares per security.

All transactions are settled through ICCL, ensuring safety and reliability. 

When you participate in the securities borrowing and lending system, you will have to pay the following charges: 

• Lending fee: If you are borrowing the shares through SLB, you will have to pay a lending fee to the lender.
• Transaction fee and clearing charges: Both lender and borrower will have to pay the clearing corporation a small fee every time they lend or borrow shares. These charges cover the cost of settlement, risk management, and the systems that make SLB possible.
• Brokerage and service fee by your broker: Since your broker is offering you the SLB service, they charge a fee to facilitate the order. It can be a flat fixed fee or can be a percentage of the transaction value, depending on your broker.
• Demat charges: Since the shares will move from the lender’s to the borrower’s demat account and back, you will also be paying a one-time demat fee whenever you initiate the transfer. 

The Securities Lending and Borrowing (SLB) mechanism is one of the most underutilized yet powerful tools in the Indian stock market. It provides traders to profit from new strategies like short-selling and arbitrage and long-term investors with an additional source of income, all within a secure, transparent, and SEBI-regulated framework. So, the next time you see shares idling in your demat account — remember, they could be earning for you instead of sleeping!

Who can participate in the SLB scheme?

All categories of investors are eligible to participate in SLB scheme including retail investors and institutional investors. You should have a valid and active demat. 

What is the interest rate I can earn from SLB mechanism (SLBM)?

The interest or lending fee in SLBM is not fixed, it changes based on market conditions, demand for that stock, and the agreement between the lender and the borrower. SLB rates move with the market. You can check the latest SLB price on NSE’s website.

What happens to my shares when the price of short seller’s stock rises?

When you have lent stock to a short seller, even if the price of the stock that the short seller sold rises and he makes a loss, your shares remain safe. This is because every SLB transaction is secured by collateral. The borrower is required to deposit 125% margin when they borrow the shares as collateral giving you enough cushion during market volatility. 

Which stocks and securities are eligible for SLBM?

The list of securities eligible for SLBM is decided by the NSE Clearing Limited (NCL) every month and updated on the 20th of every month. According to NCL’s website, these securities are selected based on the following criteria: 

• Securities available for trading in F&O segment of NSE  
• Index based ETF that has traded on at least 80% of the days over the past 6 months and its impact cost over the past 6 months is less than or equal to 1%.  

Scrips that fulfill the following criteria:  

• Scrip classified as 'Group I security'  
• Market Wide Position Limit (MWPL) of the scrip shall not be less than ₹100 crores.  
• Average monthly trading turnover in the scrip in the Cash Market shall not be less than ₹100 crores in the previous six months.  

Can I extend the tenure of lending or borrowing by more than 1 year and what is criteria for same?  

You cannot extend the borrowing/lending period to over 12 months, according to the exchange rules. You must close the contract on expiry and start a new one if you wish to borrow again.

Will I get dividend and bonus on shares I have lent through SLB?

You maintain full ownserhip rights to the shares you have lent through SLB, and will get benefits from all corporate actions including dividend and bonus.