SLB on Zerodha

Securities Lending and Borrowing (SLB) is a mechanism whereby the holder of securities (lender) temporarily transfers them to a borrower for a fee, with the borrower obligated to return equivalent securities by a stipulated date. In India, the SLB platform is operated by NSE Clearing Limited (NSCCL) and BSE’s clearing corporation under SEBI’s framework. Zerodha offers SLB to eligible clients, allowing long-term equity investors to earn lending income by putting their idle demat account holdings to work.

Regulatory framework

SEBI introduced the Securities Lending and Borrowing framework in 1997 and revised it substantially through Circular SEBI/MRD/SE/Cir-27/2007. The SLBS (Securities Lending and Borrowing Scheme) operated by NSCCL went live in 2008. Key features of the SEBI framework:

• Only SEBI-registered Approved Intermediaries (AIs) can participate as principals in SLB transactions.
• Lenders and borrowers participate through AIs.
• All SLB transactions are settled by NSCCL, which acts as a central counterparty, eliminating direct counterparty risk between lender and borrower.
• Collateral: Borrowers must provide collateral (cash or approved securities) equal to 125% of the value of borrowed securities.
• Securities must be returned by the settlement date or be automatically settled by NSCCL at the last closing price.

Why SLB exists

Borrowers of securities in SLB are typically:

• Short sellers who want to sell shares they do not own; they borrow shares to deliver.
• Arbitrageurs and options traders who need shares for delivery obligations (e.g., covered call writers during expiry).

Lenders benefit by earning a lending fee (lending income) on shares that would otherwise be idle in the demat account.

How SLB works on Zerodha

Eligibility

Zerodha participates in SLB as an Approved Intermediary. Investors holding eligible securities in their Zerodha demat account at CDSL can lend those securities through Zerodha’s SLB platform.

Not all securities are eligible for SLB. NSCCL’s eligible securities list includes stocks in the F&O permitted list and other high-liquidity securities. The list is updated periodically.

Lending process

1. The investor (lender) accesses the SLB section on Zerodha’s platform (Console or a dedicated SLB module).
2. The investor places a lending offer specifying:
   • The security (ISIN).
   • Quantity to lend.
   • Tenure (1 month to 12 months; SLB sessions run monthly, bi-monthly, and quarterly).
   • Lending fee (price per share per session, quoted as an annualised percentage or per-session fee).
3. NSCCL matches lending offers with borrowing requests.
4. On match:
   • The lender’s shares are debited from the demat account via NSCCL.
   • The lending fee is blocked by the borrower and held in escrow by NSCCL.
   • The borrower receives the shares.
5. At tenure end (or when the borrower returns shares early):
   • Equivalent shares are returned to the lender’s demat account.
   • The lending fee is credited to the lender’s trading account.

Lender protections

• NSCCL guarantees settlement; if the borrower defaults, NSCCL procures replacement shares in the auction market or pays cash equivalent.
• Corporate actions (dividends, rights issues, bonuses) during the lending period: The borrower must compensate the lender for dividends declared during the loan period. Bonus shares and rights issues are handled by adjusting the loan quantity.
• Voting rights: The lender loses voting rights during the lending period since shares are temporarily with the borrower.

Lending fee income

The lending fee is the primary economic benefit for the lender. Fees vary based on:

• Demand from short sellers for the specific stock.
• SLB tenure (longer tenures typically command higher fees).
• Market conditions (high short-selling demand increases fees).

SLB fees in India are relatively low compared to some global markets. Typical fees for liquid large-cap stocks range from 0.5% to 2% per annum. Stocks in high short-selling demand (e.g., in the context of event-driven short selling or F&O arbitrage) can command higher fees of 3% to 10% per annum.

Brokerage and charges

The lending fee received is subject to income tax (see tax treatment below).

Tax treatment

Lending income

The SLB lending fee is taxable as “Income from Other Sources” under Section 56 of the Income Tax Act, 1961. It is not treated as capital gains. The fee is taxed at the investor’s applicable slab rate.

Corporate action adjustments

Compensation received from the borrower for dividends missed during the lending period is also taxable as “Income from Other Sources.” This is not treated as dividend income and does not qualify for the Rs 10 lakh LTCG exemption or the dividend deduction rules applicable to qualified dividends.

Capital gains on shares

The lending of shares under SLB does not constitute a transfer of shares for capital gains purposes under Section 47(xv) of the Income Tax Act. Therefore, there is no capital gains tax event when shares are lent or returned. The original acquisition date and cost are preserved.

Limitations of SLB in India

• Low liquidity on NSCCL platform: The Indian SLB market is significantly less developed than in the US or Europe. Trading volumes are low, meaning lenders may not find matching borrowers quickly or may receive below-desired fee rates.
• Limited securities list: Only F&O-eligible and select other securities can be lent.
• Manual process: SLB on Zerodha is not as seamlessly integrated as delivery trading. Investors must actively manage offers and track tenure ends.
• Lock-up risk: Shares are unavailable to the lender during the lending period. If the lender needs to sell, they must wait for the return or negotiate an early recall (which may not be guaranteed).

Comparison with pledge for margin

See pledge and collateral margin on Zerodha for the pledge framework that generates margin without transferring shares.

References

1. SEBI Circular SEBI/MRD/SE/Cir-27/2007, Securities Lending and Borrowing framework.
2. NSCCL, Securities Lending and Borrowing Scheme (SLBS) operational guidelines.
3. Income Tax Act, 1961, Section 47(xv), Non-transfer for SLB; Section 56, Lending income.
4. NSE, Eligible securities list for SLBS.
5. SEBI, Approved Intermediary registration for SLB participation.