Securities Lending and Borrowing (SLB) in Demat Accounts: Benefits and Risks
Think of the advantages that you would get with the option to lend and borrow everyday items to meet your requirements. This is exactly what securities lending and borrowing are in the stock market. You are allowed to lend your securities to earn profit and even borrow to meet your needs.
Read on as we discuss SLB through Demat Account while evaluating the benefits and risks attached.
Understanding Securities Lending and Borrowing
Before we move ahead with the pros and cons, let’s first understand SLB in detail. SLB, Securities Lending and Borrowing allows a trader to lend shares to a borrower or borrow shares that they don’t own from a lender.
This is a vital method used in the stock market to hedge profits. Additionally, securities lending and borrowing has been a legally approved method since 1997 and regulated by the Securities and Exchange Board of India.
At present, only NSE, National Stock Exchange and BOISL, Bank of India Shareholding Ltd, are the authorised intermediaries to facilitate SLB.
Examples of Securities Lending and Borrowing
Let’s take an example to understand how securities lending and borrowing works- Say an investor holds 100 shares of a stock. Another investor is willing to borrow the stock for a rent of ₹2 per month. This would help the actual owner of the stock earn ₹24 each year without having to deal with the risks associated with the stock.
SLB in Demat Accounts: Evaluating the Benefits and Risks
An investor has the opportunity to leverage securities in their Open Demat Account to facilitate SLB seamlessly. Even in the case of borrowings, an investor’s investment portfolio reflected through their Demat Account adds to their credibility to return.
Now that you know how SLB works, let’s evaluate the benefits and risks associated with the same.
For Lenders
Benefits:
- Lenders can gain additional income without undergoing the risks attached.
- Lenders are entitled to additional benefits of the stocks lent like dividends and bonuses.
- Investors with lower risk appetite gain additional income by lending stocks.
- As per Income Tax’s circular no. 2/2008, dated 22 Feb 2008 and Section 47(xv) of the Act, lending is not equivalent to transfer thus allowing lenders to stay clear of capital gain taxes.
Risks:
- Lenders can face a loss from the declining value of collateral received from the borrower.
- Lenders often provide unsecured lending based on fiduciary relations that can work against them.
- Borrowers turning them in as insolvent/bankrupt.
For Borrowers
Benefits:
- Earn profit from short-term selling of securities.
- Allows an easy settlement of obligations arising under the derivatives segment.
- Provides an opportunity to earn profit through securities without investing the whole amount.
Risks:
- Deal with market fluctuations that change the value of securities borrowed.
- Constantly gauge the market
- Borrowing prices can be unreasonable
Summing Up
Securities lending and borrowing play a vital role for investors and are an additional source of making a profit without entering the market with a huge sum. While both lender and borrower can navigate their ways to make profits, the risk of borrowers becoming insolvent or lenders charging huge lending costs is often associated with SLB.
To facilitate SLB, you should also have a clear understanding of what is demat account. The process then begins with choosing a reliable platform like Bajaj Broking to open Demat Account and experience seamless trading on the stock market.
