- Wealth PMS
A little known fact in India is that stocks can be borrowed for shorting. The Stock Lending and Borrowing Scheme (SLBS) was started in April, 2008 on the NSE, but has met with near-zero response. In the 20 months since the launch, only 5.67 lakhs worth of shares have been borrowed. (Source: NSE site)
This comes as no surprise to most market players. First, SLBS is limited to F&O stocks only, which means there is an alternate way to short the stock (by selling futures).
Second, the regulations are impractical. Initially, The tenure suggested was too short (7 days), and you could borrow only between 10AM and 11AM. SEBI later changed the term, in October 2008, to 30 days to match the F&O cycle and extended SLBS to normal trading hours (currently 9 AM to 3:30 pm). A circular on 6th Jan 2010 extends the borrowing term to 12 months.
Third: The costs are too high. A borrower needs to pay the full amount upfront, plus additional margins. So borrowing 200 shares of Infosys at 1600 means a payment of Rs. 3.2 lakhs plus the cost of the borrowing itself – say Rs. 10 per share for 30 days, or Rs. 2,000. Add to that a daily mark-to-market margin (making good any gains in the stock on a daily basis), a Value-At-Risk margin (based on stock volatility) and an Extreme Loss Margin.
[Technical Note for the curious: You can find out what these margins are, per stock, on the NSE Web Site. Here’s a screen grab off HEROHONDA today. Figures are in percentages.]
SEBI also demands a cash margin of 25% of lending price from the lender – which is very strange, because a stock owner now has to pay money and lend his shares to get some interest. And then there’s the daily Mark-To-Market that borrowers have to pay.
What this means is that if an investor has paid Rs. 3.2 lakhs for Infosys shares and wants to lend them out, he has to shell out an additional Rs. 80,000 as margin. That’s Rs. 4 lakhs to get to the starting line. If Infosys drops to Rs. 1400, the investor needs to pay another Rs. 40,000 as mark-to-market losses. All he sees in return is the promise of Rs. 2,000 in interest, after 30 days for his trouble.
Compare that with the costs of shorting in F&O. An investor will pay about 40% margins (all inclusive) and the position is marked-to-market daily. So the same 200 Infosys shares at Rs. 1,600 can be shorted with Rs. 1.28 lakhs as margin. For a buyer of the future, the cost is the same – margins being equal on both sides – and therefore, substantially cheaper. Of course, the margin amounts to granted leverage but even if one considers someone keeping aside Rs. 3.2 lakhs to buy the future, that’s the maximum amount ever required, even if the stock goes to zero. On SLBS, the investor needs Rs. 4 lakhs to begin with, and then the spectre of mark-to-market looms above his head.
One might have justified higher costs for stocks that aren’t in the F&O segment, but SLBS is limited to F&O stocks only.
The last issue was that retailers couldn’t participate. While not specifically restricted by SEBI or the NSE, brokers simply did not integrate SLBS in their online offerings, trading terminals or indeed in any documentation they offered retail investors. [That applies, unfortunately, to currency futures and interest rate futures too, a lament worth of another post] The only way was to call a broker who had a NEAT Terminal (NEAT is only allowed at broker offices) to place an order – that is so 1995.
Read Devangshu Datta’s excellent article in 2008, on why SLBS was not likely to fly. And it didn’t.
In the latest circular, SEBI seems to be trying to regain interest. They are:
But the other limitations remain the same: Costs are high and only F&O stocks are allowed. Unless that is solved, tinkering with other regulations is unlikely to enthuse participants.
(Note: I am trying a new format – writing in the third person – so I refrain from using “I” or “You” in the post. It’s incredibly difficult! Feedback is deeply appreciated. )