The stock market witnessed a bloodbath on Monday after the decadal high US inflation data reached the market. The market opened at lower levels and remained under pressure all day long. The NSE Nifty 50 opened at 15,877 points from the previous close of 16201.8 points. The Nifty 50 closed at 15,774.4 points, losing 427.4 points or 2.64 per cent during the day.
If you are a trader or investor, the stock market crash must be worrying you, and you may be looking for new avenues to make profit. The Securities Lending And Borrowing (SLB) scheme, through which investors can lend and borrow, can benefit you even if the returns on your stocks are in the negative territory. Read more about what is SLB and how it works here.
Here’s how this scheme can help you earn some income off your stocks, even if the market is down.
How Lenders Can Benefit Through SLB
If you sold stocks in your demat account, you can be a potential lender under the SLB scheme and earn an income. Here’s how you can benefit from it:
Get risk-free income: The only two authorised intermediaries for SLB are NSE Clearing Limited (NCL) and BSE Clearing Corporation (BOISL). Bharat Shah, head institutional business, Ventura Securities, says that if retail investors hold shares as a passive investment and do not want to sell them in the near future, they can use the SLB platform to earn some additional income.
“A great feature of these transactions (SLB trades) is that they are risk-free, since settlement is guaranteed by the clearing agencies of the respective stock exchanges,” adds Shah.
Maintain portfolio performance: Even if the stock market is down for some reason and the stocks you purchased are not giving any significant return, SLB can help to a certain extent. Shah says that while availing of the SLB scheme, investors do not lose any rights related to dividends, bonus shares, stock splits or others. That along with the income from lending can shield the portfolio performance to some extent.
Balance initial cost: When lenders place an order with the participant, they need to mention the name of the stock, the quantity they want to lend, the period of lending and the expected lending fees. The lending fees is quoted on a per share basis such as Rs 3 per 1,000 shares. Hence investors can use this money to lower their initial cost (brokerage, others) incurred at the time of buying the stocks.
Lenders can revoke the SLB arrangement before the lending period end but will have to bear some charges for the contract ending prematurely.
How Borrowers Can Benefit Through SLB
Among borrowers, this platform can benefit short-sellers. “The SLB platform provides a viable alternative to the derivatives market traders for purposes of hedging. Borrowers in SLB are usually short-sellers i.e. traders who want to sell shares that they don’t own,” says Vijay Lathwal, head of finance, Payme India.
Under short-selling, traders sell a stock without actually owning it. They do this to benefit from the fall in the price of the stock. For example, if a trader sells a stock short at Rs 210, and when the stock price falls to Rs 190, the trader will buy the stock from the market and fulfil his obligation.
Here is how short-sellers can benefit from SLB:
In futures market trading: Shah says that borrowers can benefit from the reverse cash future arbitrage trade opportunities. “Usually, there is a difference in the price of a stock in the cash market and futures market due to various factors like time value of money, interest rate and others. Hence, traders can sell short securities short (by borrowing under SLB) against an offsetting derivatives position to take advantage of a difference in price.
During future and options (F&O) market trade ban: Sometimes due to increased market-wide positional limit or other factors, stocks are banned in the F&O segment. For example, Delta Corp F&O was banned on June 13, 2022, in the NSE F&O segment as it crossed the 95 per cent of the market-wide position limit.
“Normally, traders cannot hedge during the F&O ban period. However, they can borrow the scrip (via SLB) and sell it in the cash market to benefit from the fall in the price of the stock,” says Shah.
Get additional funding: The interest rate changes every second on the SLB platform. Hence, traders on the lookout for a trade opportunity can buy the SLB stock at a low interest rate and then sell that in the market and use the proceeds of the sale to trade in other stocks.
“A borrower can also use this as a funding product. By selling shares in the cash market, the amount received can be invested in more profitable propositions (the assumption is that the margin is given through a bank guarantee, fixed deposit or securities),” says Shah.
