SLB mechanism fails to take off

Source:fc: Kumar Shankar Roy Apr 06 2010 , Kolkata

The securities lending and borrowing (SLB) mechanism is yet to catch the fancy of the Indian market with no trades on 86 per cent of the 475 trading days since its launch on April 21, 2008, a study by SMC Capitals, a New Delhi-based merchant bank, revealed.

SLB mechanism allows investors to sell shares that they think are overvalued without owning them, or short selling. They do so by borrowing shares for a period by paying a charge and sell them in the market. These investors bet that they would be able to buy back shares at a lower rate and return them to the lender in time. Shares allowed in the SLB mechanism have to be a part of the futures and options (F&O) segment. NSE website lists around 190 stocks with derivatives.

After starting the SLB mechanism with seven-day contracts, Sebi revised the tenure to one month in October 2008 and 12 months in January 2010. However, the response to long-term contracts has been weak with monthly aggregate trade failing to cross Rs 1 lakh since January, data show. The highest trade of Rs 2.25 lakh was recorded in April 2009 with the help of 32 transactions.

"Unless the SLB mechanism adopts some practical initiatives, it will remain a non-starter. Margin requirements, better integration and solutions aimed at market participants are the needs of the hour. Once a mechanism is in place, continuous monitoring has to be done so as to see that the mechanism carries out its intended function," said Jagannadham Thunuguntla, equity head at SMC Capitals.

At present, clearing houses of exchanges act as authorised intermediaries of SLB transactions.

"The net needs to be widened for having authorised intermediaries. These could be large custodians. Plus, now SLB transactions can only be made in securities already trading in the F&O segment. Why should a borrower use the SLB route for keeping settlement obligations if he can utilise the single stock futures in the F&O market to cover his trades,” head of an equity brokerage asked.

In nearly two years of existence, the SLB market has seen only 136 trades with total value of Rs 8.03 lakh.

"Something or other is seriously missing with most new innovative products launched in the recent past. For instance, all markets such as SLB mechanism, interest rate futures and mutual fund trading platform are at a stand-still," said Thunuguntla.