Securities Lending and Borrowing on NSE: How Lenders Earn a Fee on Idle Shares

Securities lending and borrowing on NSE is one of those market plumbing features most retail investors have heard of and very few have used. The idea is simple. If you hold shares you have no plan to sell for a few months, you can lend them out for a fee and get them back on a fixed date. Someone who needs those shares, usually to stay short for longer than a day, pays you to borrow them. The exchange’s clearing corporation sits in the middle, so you are never relying on a stranger’s promise.

We’ll go through who can take part, which stocks qualify, how the money and shares move, what happens around dividends and splits, and the parts that can trip a lender up. Every rule here comes from the NSE Clearing page on the Securities Lending and Borrowing Scheme (SLBS) and SEBI’s January 2024 circular on the short selling framework. The company, prices and fees in our examples are made up so the arithmetic is easy to follow.

Why securities lending and borrowing on NSE exists at all

The scheme exists because of a rule on the other side of the market. SEBI’s framework says naked short selling is not permitted in India, and every investor has to honour the obligation to deliver shares at settlement. That’s fine for an intraday trader who sells in the morning and buys back before the close. It is a problem for anyone who wants to stay short for weeks. They need real shares to deliver.

SEBI’s answer, written into the same framework, is that a securities lending and borrowing scheme “shall be put in place to provide the necessary impetus to short sell”. The framework sits in paragraph 10 of Chapter 1 of SEBI’s Master Circular for stock exchanges and clearing corporations dated October 16, 2023, and the January 5, 2024 circular restated its short selling annexure. If you want the full picture of the shorting side, our guide to short selling in India covers it. Here we are looking at it mostly from the lender’s chair.

Who can lend, who can borrow, and what you can lend

You don’t walk up to NSE Clearing yourself. According to its SLBS page, all clearing members of NSE Clearing Limited, including banks and custodians, are eligible to participate once they register as SLBS participants and sign an agreement with the clearing corporation. These participants can lend or borrow on their own account or on behalf of clients. Before they do it for a client, they have to sign a separate agreement with that client in the format NSE Clearing specifies.

So for an individual investor, the practical route is a broker who is registered as an SLBS participant and offers the facility. Ask yours whether it does before you go looking for the option in your app.

On the stock side, NSE Clearing lists the eligible securities as stocks available for trading in the F&O segment, index-based ETFs, liquid ETFs, and securities in Group 1 that meet certain SEBI criteria. Lending and borrowing happens only in dematerialised form. The clearing corporation publishes the list of eligible securities, along with the ones eligible for early recall and repayment.

How a loan runs: series, first leg and reverse leg

An SLB trade has two legs. In the first leg, the lender’s shares move to the borrower. In the reverse leg, they come back. The tenure, per NSE Clearing, ranges from one month up to a maximum of 12 months, and each possible return date is a separate series with its own series number. When you pick a series, you’re picking the day your shares come home.

Settlement of the first leg happens on T+1, the trading day after the deal. On that day the lender has to deliver the shares by the scheduled time. The borrower, on the same T+1, pays two things in cash: the lending fee, and the lending price, which is the previous day’s closing price of the stock, as cash collateral. Obligations are worked out on a gross basis, with no netting of one transaction against another. The reverse leg settles on the date fixed by the series.

The fee itself is not set by the exchange. It’s market determined, quoted by lenders and borrowers on the order matching platform. Investopedia’s overview of securities lending, which describes how lending works globally, makes the obvious point that scarcity drives the price. The harder a security is to find for borrowing, the higher the cost. So you’d expect a stock that lots of traders want to short to fetch a better fee than one nobody wants to borrow.

Worked example: lending 2,000 shares for three months

Say you hold 2,000 shares of a hypothetical company, XYZ Ltd. You don’t plan to sell before the new year, so you offer them in a three-month series. A borrower takes them at a lending fee of Rs 3.50 per share. XYZ closed at Rs 850 the day before the trade.

That last line is a back-of-the-envelope figure, not a promise. Fees move with demand, and your broker’s charges and taxes come out of the Rs 7,000. Still, it gives a sense of scale. On a quiet stock, SLB fees are a small top-up on a long-term holding, not a second income.

Lending shares is a way to get paid for patience. The fee is rarely big, but it comes from shares that would otherwise just sit there.

What happens to dividends, splits and other corporate actions

This is where lenders need to read the fine print, because NSE Clearing treats corporate actions differently depending on the type.

• Dividend: the loan continues. NSE Clearing collects the dividend amount from the borrower and pays it to the lender.
• Stock split: the loan also continues. The borrower’s position is adjusted in proportion, and the lender receives the revised quantity on the reverse leg settlement date.
• Any other corporate action: all transactions are foreclosed on the ex-date. In the case of only an AGM or EGM, foreclosure applies depending on the series of contracts.

Foreclosure has a cost for the lender. NSE Clearing’s rule is that lenders repay a proportionate amount of the lending fee they received, collected on a pro rata basis for the balance period and passed on to the borrowers. There’s one exception. If the clearing corporation had already announced the corporate action before the transaction was executed, there is no fee adjustment, and participants are expected to quote fees for the shorter cycle.

Worked example: dividend, split and an early foreclosure

Stay with the same 2,000 XYZ shares lent at Rs 3.50 for what we’ll treat as a 90-day loan.

We’ve used days to make the pro rata split easy to see. The exact way NSE Clearing computes the balance-period fee is set out in its own procedures, so treat the third row as an illustration of the idea.

One more thing a lender gives up. Investopedia points out that holders lose voting rights on stock they have lent out. If a shareholder vote matters to you, keep those shares out of the scheme around that date. Our explainer on ex-dividend date vs record date is useful here too, since corporate action dates are what decide whether your loan runs or gets cut short.

Getting your shares back early: recall and repay

Locked in for six months and suddenly want to sell? The scheme has an exit, though it isn’t free. NSE Clearing offers an early recall facility. The lender places a RECALL order on the order matching platform for the same series, security and client. Because the lending fee for the remaining period is market determined, the lender has to quote the fee he or she is willing to forgo for that balance period. A market order is also allowed. You can only recall if you have an existing reverse leg position, and you can recall part of the quantity.

The borrower has a mirror-image facility, a REPAY order, for returning shares before the due date. The borrower first has to move the shares into the repayment account NSE Clearing prescribes, and then quotes the fee expected for the balance period. Recall and early repayment transactions settle on T+1. Early recall and repayment are only available in securities NSE Clearing has marked as eligible for it, so check that list before you assume you can get out early.

The practical takeaway: choose your series with some honesty about how long you really won’t need the shares. Recalling early can mean giving back more of the fee than you’d like if borrowing demand has risen since you lent.

What if someone doesn’t deliver?

The clearing corporation steps in on both sides, and the penalties are written to be painful.

If the borrower doesn’t return the shares on the reverse leg date, NSE Clearing conducts a buy-in auction in NSE’s capital market segment. If there is no offer in that auction, or the seller in the auction fails to deliver, the transaction is closed out at the higher of two prices: the maximum traded price in the capital market segment from the day before the reverse leg settlement date to the reverse leg settlement date, or 25% above the closing price on the reverse leg settlement date.

If the borrower runs short of funds at the start, the SLB transactions are cancelled and the shares go back to the lenders along with the lending fees.

And if it’s the lender who fails to deliver shares on T+1, the transaction is closed out at the higher of 25% of the stock’s closing price on T+1, or the maximum trade price from T to T+1 minus the T+1 closing price. NSE Clearing can also take other actions against a participant who runs short, including withdrawing access to the order matching platform or withholding pay-outs.

Worked example: both kinds of failure

Look at the first row from the lender’s point of view. The shares were worth Rs 18,00,000 at the Rs 900 close, and the close-out is valued at Rs 22,50,000. The rule is built so that failing to return borrowed shares costs the borrower far more than the shares are worth. The second row is the warning for lenders. Don’t offer shares that are pledged, about to be sold, or not actually free in your demat account. A delivery failure on your side is expensive.

The scheme protects lenders well against a borrower who vanishes. It is much less forgiving of a lender who offers shares he can’t actually deliver.

Position limits that cap how big the book can get

NSE Clearing also limits how much of any one stock can be out on loan. The market-wide position limit for SLB transactions is 10% of the company’s free-float capital, counted in number of shares. No clearing member or participant can have an open position above 10% of that market-wide limit, FIIs and mutual funds get the same limit as a participant, and a single client can’t go above 1% of the market-wide limit. These limits are worked out on the last trading day of each month and apply for the following month.

Take a hypothetical stock with 50 crore free-float shares. The market-wide SLB limit is 5 crore shares. One participant can hold up to 50 lakh shares of open positions in it, and one client up to 5 lakh shares. For most retail lenders the client cap will never bind, but it explains why borrowing large quantities of a single stock can get hard once the book fills up.

A lender’s checklist before you switch it on

• Lend only shares you are sure you won’t need before the reverse leg date of the series you pick.
• Check that the stock is on NSE Clearing’s current eligible list, and whether it’s eligible for early recall.
• Look at the corporate action calendar. A bonus, rights issue or similar event can foreclose the loan and claw back part of your fee.
• Remember you won’t be able to vote those shares while they’re lent out.
• Ask your broker what it charges per SLB trade and what it blocks or debits, and talk to your tax adviser about how the fee is treated in your return.
• Never lend shares that are pledged or already promised elsewhere. The lender’s close-out formula is steep.

Short sellers sit on the other side of every one of these loans, and when they rush to close, prices can jump. Our piece on a short covering rally explains what that looks like on the screen. For the bigger picture on keeping losses in check while you trade or lend, see our risk management in trading guide.

The short version

Securities lending and borrowing on NSE lets long-term holders earn a market-set fee on idle shares, while giving short sellers the delivery they are required to make. NSE Clearing guarantees the trade, collects the previous day’s closing price as cash collateral from the borrower, passes dividends back to the lender and adjusts splits. The catches are real: other corporate actions can cut the loan short, recalling early costs fee, you lose voting rights while the shares are out, and failing to deliver as a lender is expensive. Go in knowing your dates, and it’s a sensible, low-key extra on a portfolio you weren’t going to touch anyway.

Disclaimer: This article is for information and education only and is not investment advice or a recommendation to buy, sell, lend or borrow any security. XYZ Ltd, its prices, the lending fees, the dividend, the split and the free-float figures in the examples are hypothetical and used only to illustrate how the rules work. SLB rules, eligible securities and charges can change, so check NSE Clearing’s latest circulars and your broker’s terms before you take part. Please consult a SEBI-registered investment adviser and a tax professional before acting.