Subdued start to stock lending scheme

The stock lending and borrowing (SLB) scheme has failed to pick up momentum in the first week after its introduction following a lack of active participation from top domestic institutions, which hold a chunk of shares in listed companies.

Stock market experts are of the view that not allowing Life Insurance Corporation (LIC), one of the biggest investors in the domestic market, to participate in SLB is a major hurdle for the scheme to take off.

"Today, LIC is said to have an investment portfolio of over $40 billion. Not allowing an investor with a strong holding in all blue-chip companies to participate in this scheme is not a good sign," said a stock broker.

While the Securities and Exchange Board of India (Sebi) has allowed local mutual funds (MFs) to participate in the scheme, the government is yet to give a go-ahead to insurance companies to take part in the scheme. Apart from LIC, other public sector insurance companies too hold a multi-billion-dollar portfolio in the domestic stock market.

Brokers are of the view that a large number of mutual funds too have stayed away from the SLB since its introduction last week.

"Custodians of institutional investors are still studying the minute details of how SLB would work and institutions are trying to figure out the margin requirements since payment of a higher margin would mean a high impact on the cost of transaction," said a research head at a listed brokerage firm.

According to the figures available at the National Stock Exchange (NSE), only eight contracts changed hands in the five trading sessions last week.

The counters of Reliance Industries, State Bank of India and Reliance Natural Resources were the only ones that witnessed some action. On the Bombay Stock Exchange (BSE) too, contracts comprising a couple of shares were traded.

Market experts believe that high margins were keeping away fund houses from the scheme. Markets are already in a credit crunch after the recent crash in stock prices as investors are stuck at higher levels. Foreign institutional investors too do not have access to cheaper loans as a result of the global credit turmoil.

The SLB scheme requires participants to deposit margins as high as 140 per cent of the transaction value before the trade. The SLB mechanism also provides for a T+8 settlement and only a one-hour window to borrow shares every day. A borrower has to take an eight-day view on the market, which analysts say is a risky proposition given the current market trend.

"Whether one would want to lock up such a sum for eight days when he can take the same call in the futures segment is a question a fund manager would ponder over. It (margin) does not stop at 140 per cent as it is marked to market," said a fund manager.

Margins include the value at risk (VaR) margin, the ELM margin and the mark-to-market margin. Stock exchange officials are optimistic that the scheme will pick up as they compare it with the now well-entrenched demat accounts that faced teething troubles when they were introduced.