Capital markets regulator Securities & Exchange Board of India, or Sebi, has increased the tenure for lending and borrowing of stocks from seven days to 30.

The move comes at a time of heavy short selling in the Indian markets, led by entities who borrow stocks from foreign institutional investors, or FIIs. Stocks worth over $1 billion have been shorted in the Indian markets through this route so far.

Under the stock lending and borrowing scheme, which started in April this year, securities could so far be borrowed only for seven days, after which the borrower had to return securities of the same type and class.

If you borrowed shares of company A, the approved intermediaries provided an automated screen-based platform, where the borrowing and lending transactions took place by order-matching on price and time priority. The first-leg settlement takes place on the first day after the transaction, called T+1 in trade parlance, and the reverse-leg settlement on the T+8 day.

Under the scheme, a person who owns securities can lend them through an approved intermediary, or AI, which also acts as the central counterparty.

Sebi has authorised the clearing houses of both the Bombay Stock Exchange and the National Stock Exchange to act as AIs.

The extension of the tenure of the scheme will mean that shares can be returned on the last day of the month, which could coincide with expiry in the futures and options segment. The time for the SLB session has been extended from one hour (10 am to 11 am) to the normal stock trading hours of 9.55 am to 3.30 pm.

Sebi said the longer SLB tenure of 30 days will result in the need for appropriate adjustments for corporate actions like dividends, stock splits, bonus, merger, amalgamation and open offers. Accordingly, the dividend amount would be worked out and recovered from the borrower at the time of the reverse leg (in 30 days) and passed on to the lender.

Similarly, in the case of a stock split, the positions of the borrower would be proportionately adjusted so that the lender receives the revised number of shares.

"The scheme will see some participation from domestic institutions, which can earn money by lending stocks in the current market as well as FIIs," said Dun & Bradstreet president & CEO Manoj Vaish.

According to Divyesh Shah, chief executive officer at Indiabulls [Get Quote] Securities, "The extension of the SLB tenure to 30 days will help increase the interest in the scheme. It opens a window for FIIs to borrow. Whether they will borrow in this market remains to be seen� As for the extension of the timings of the SLB session itself, any move to short sell stocks is likely to be a pre-determined move. So it will not really matter."

Experts said this was just the beginning and Sebi may revisit the scheme in a couple of months.

SLB can be used only in the case of stocks present in the futures and options segment. Analysts say there is no incentive or compulsion for a trader to use the SLB route for F&O stocks for the purpose of short selling. The F&O segment itself does not create any need for stock borrowing, as this segment is settled purely in cash.

Even though the extension of the tenure may help traders in reverse arbitrage in F&O stocks, the borrower may still be discouraged, given the high margins that he will have to cough up. The potential arbitrage gains may be eaten up by the cost of the SLB transaction: the margin payment and borrowing fee.