Introduction to Securities Lending and Borrowing Mechanism or SLBM in the Stock Market
When you’re just beginning your journey in the Indian stock market, you’re probably aware of the traditional avenues of earning returns—either through dividends or by capitalizing on the increase in the stock’s price. However, have you ever heard about a third, less talked-about method that’s akin to renting your stocks? It’s called the Securities Lending and Borrowing Mechanism (SLBM), and it’s about time we demystify this concept for enthusiastic stock market investors like you.
What Is the Securities Lending and Borrowing Mechanism (SLBM) in the Stock Market?
A New Way to Earn From Your Investments
SLBM is a system that allows you to lend out your securities to borrowers for a specified period in exchange for a lending fee. Think of it as putting your idle assets to work, allowing them to generate additional income without you having to sell them.
How Does SLBM Work in the Stock Market?
The Lender’s Perspective
As a securities owner, you lend your stocks to a borrower who needs them, often for purposes such as hedging or arbitrage. In return, you receive collateral and a lending fee. Once the borrowing period ends, the securities are returned to you.
The Borrower’s Angle
Borrowers often short-sell stocks when they foresee a decline in price. By borrowing the security and selling it in the market, they aim to repurchase it at a lower price, return the borrowed stock, and pocket the difference as profit.
Benefits of SLBM for Lenders
Earn Passive Income from Your Portfolio
With SLBM, your portfolio doesn’t just sit idly. By lending your securities, you essentially rent them out for a fee, adding a new income stream.
Diversify Your Income Sources
While waiting for long-term gains, the lending fees from SLBM contribute to your income diversification strategy, mitigating risks associated with equity investments.
Retain Ownership and Economic Benefits
Despite lending out your securities, you maintain ownership and continue to reap benefits such as dividends, unless otherwise stated in the SLBM agreement.
Securities Lending and Borrowing Mechanism / SLBM in the Indian Stock Market Context
In India, the SLBM market is regulated by SEBI (Securities and Exchange Board of India) to ensure transparency, and efficiency, and to protect the interests of participants.
Role of Clearing Corporations of the Stock Market in SLBM
Clearing Corporations such as the National Securities Clearing Corporation Ltd. (NSCCL) facilitate the smooth functioning of SLBM transactions, managing the clearing and settlement processes.
How to Participate in SLBM or Securities Lending and Borrowing Mechanism?
Eligibility and Opening an Account
To engage in SLBM, you need a demat account, and a trading account, and have to adhere to the guidelines set out by your stockbroker or the clearing corporation.
Selecting Securities for Securities Lending and Borrowing Mechanism and Lending Them Out
Identify which of your stocks qualify for SLBM, agree on the lending fee, and lend them through the proper channels. Your broker or an SLBM portal can assist with this.
How to Activate SLBM in Zerodha
If you’re a Zerodha client and keen on tapping into the additional income stream that securities lending can provide, activating the Securities Lending and Borrowing Mechanism (SLBM) is straightforward. Here’s a step-by-step guide on how to start with SLBM in your Zerodha account.
Search for SLBM
Begin by running a simple search for “SLB in Zerodha” on Google. This preliminary search should direct you to the relevant Zerodha customer support link, typically featured at the top of the search results.
Access Zerodha’s Customer Support
Once you’ve located the link, click through to Zerodha’s customer support page. Make sure it’s the official Zerodha page to proceed safely. Here, Zerodha will provide you with comprehensive instructions on SLBM in the stock market. If curious or if it’s your first time delving into securities lending, take a moment to read through the provided information to understand the mechanism better.
Steps to Enable SLB with Zerodha
Activating the Securities Lending and Borrowing (SLB) facility in your Zerodha account involves a few key steps. Here’s what you should do:
Step 1: Dispatch Your DDPI to Zerodha
The initiation process requires you to send a hard copy of the Demat Debit and Pledge Instruction (DDPI) form. This document authorizes the movement of shares from your account for SLB purposes. You’ll need to mail this to Zerodha’s head office at the following address:
Zerodha H.O 153/154 4th Cross, Dollars Colony, Opposite Clarence Public School, J.P Nagar 4th Phase, Bangalore – 560078
Step 2: DDPI Processing and Confirmation
Upon receipt of your DDPI, Zerodha will start the activation process, which is typically completed within 72 hours. Therefore, keep an eye out for a confirmation email from Zerodha, which signals that your DDPI is now active. For further clarity on this process, you can refer to the guide on “How to activate the DDPI for your account.”
Step 3: Activate the SLB Segment Online
Following the activation of your DDPI, the next step is to enable the SLB segment on your Zerodha profile. You can do this by visiting the designated section on the Zerodha console: console.zerodha.com/profile/slb. The process for activation is simple and generally takes 48 working hours.
By following these steps, you’ll be ready to participate in the SLB segment and start leveraging your securities for lending. Remember, patience is key as each step requires some processing time. Once everything is set, you’re all set to explore a new revenue stream with your investments through SLB.
The Advantage of Securities Lending and Borrowing Mechanism (SLBM) Activation
Especially in times when the stock market isn’t particularly rewarding, like in the observed stagnant periods over the past year and a half, SLBM activation can become a lucrative way to earn a return on your investments. By leveraging idle assets in your portfolio through securities lending, you’re opening a door to potential earnings that don’t rely on the stock market’s highs and lows.
Zerodha has streamlined the process to activate SLBM for its clients, ensuring that you can start quickly and hassle-free. So why wait when your dormant stocks could be earning you more? Activate SLBM today and put your investments to work in a new, smart way.
Risks and Considerations of SLBM in the Stock Market
Market Risk and Collateral
It’s essential to consider market risks and the quality of collateral received. This is where you ensure you’re adequately indemnified in case of any adverse market movements.
There is a minimal risk of default, mitigated by the regulatory framework and the role of clearing corporations, but it remains essential to be aware of it.
FAQs about Securities Lending and Borrowing Mechanism (SLBM)
The minimum number of shares required for SLBM transactions in the stock market can vary based on the specific stock and the guidelines set by the stock exchange. As a general rule, however, lending and borrowing typically start with at least one market lot of shares. However, it’s always best to check with the particular stock exchange or your stockbroker for the exact criteria.
To use SLBM, you must first have a demat and trading account. Once you’ve decided to lend your securities, you can approach your stockbroker or use a trading platform that supports SLBM. After you enlist your securities for lending, they become available to potential borrowers who provide collateral. When a match is made, the transaction is executed and governed by the terms agreed upon.
The amount you can earn from SLB depends on the demand for the securities you are lending and the lending rate you negotiate. Moreover, this rate typically fluctuates based on market conditions. Lenders can earn a lending fee, which is credited to their accounts at the conclusion of the borrowing period. However, the earnings potential is variable and can increase with the number of securities lent and the duration of the loan.
Income from SLBM is not fixed; it’s based on the lending fee rate agreed upon between the lender and the borrower. These rates can vary from one transaction to another and will vary as per factors such as market demand, the intrinsic value of the security, and prevailing interest rates. While SLBM can provide a steady stream of passive income, no one can guarantee the amount and the return can change over time.
Conclusion: Is SLBM for You in Today’s Stock Market?
For stock market beginners in India, SLBM might sound complex, but it can be a worthwhile mechanism if you’re looking to optimize returns from your idle portfolio. It’s also a path that leverages your current holdings to an additional income stream with minimal risk.
However, like all financial decisions, we should enter the SLBM market with due diligence, an understanding of the process, and a clear strategy in mind. You can watch the following video that I found useful on this topic.
Finally, are you ready to explore this third way of making money with your stocks? With SLBM, let your investments work smarter, not harder.