SEBI to Review Short Selling and Securities Lending Frameworks

Context:

Markets regulator SEBI will set up a working group to conduct a comprehensive review of short selling and Securities Lending and Borrowing (SLB) frameworks. The move is aimed at improving transparency, efficiency, and market depth in India’s capital markets.

Background

• The short selling framework, introduced in 2007, and the SLB mechanism, launched in 2008, have remained largely unchanged since inception.
• Despite multiple tweaks, India’s SLB market remains underdeveloped compared to global peers, necessitating a structural review.

Key Details

Formation of Working Group

• SEBI Chairman Tuhin Kanta Pandey announced the plan during the CNBC-TV18 Global Leadership Summit.
• The group will undertake a holistic assessment of both frameworks to identify regulatory gaps and global best practices.

Securities Lending and Borrowing (SLB)

The Securities Lending and Borrowing (SLB) mechanism is a regulated framework that allows investors to lend or borrow shares (securities) for a specified period, usually to facilitate short selling, arbitrage, or to prevent settlement failures.

It was introduced in India in 2008 by SEBI through stock exchange platforms and is managed by clearing corporations to ensure safety, transparency, and guaranteed settlement.

How It Works

• Lender (Investor/Institution):
  • An investor who holds shares in their demat account can lend them through the exchange platform.
  • The lender earns a fee or interest (lending fee) for the period the shares are lent.
  • After the borrowing period ends, the same quantity of shares is returned to the lender.
• Borrower (Trader/Participant):
  • A market participant can borrow shares for purposes like short selling, hedging, or to avoid delivery failure in case of short positions.
  • The borrower must return the shares after the lending period expires.
• Exchange and Clearing Corporation:
  • The stock exchange acts as a platform for lending and borrowing transactions.
  • The clearing corporation acts as a guarantor, ensuring that both parties meet their obligations and the settlement happens smoothly.

About the SLB Mechanism

• Under SLB, investors or institutions can lend shares held in demat accounts to other market participants for a fee.
• These transactions are executed through stock exchanges, with the clearing corporation acting as a counter-guarantor.
• Borrowers use such securities mainly for short-selling or avoiding settlement failures.
• The system allows investors to earn passive income on idle shares, improving market liquidity and efficiency.