In a move that could infuse more liquidity in the markets and make it more dynamic, the Securities and Exchange Board of India on Wednesday extended the tenure of contracts in securities lending and borrowing to 12 months from one month.
The regulatory move has come at a time when the country is heading for its Union Budget in a month and a half.
In its second revision of the SLB framework since its operationalisation in April 2008, the market regulator said, "The tenure of contracts in SLB may be up to a maximum period of 12 months. The approved intermediary (clearing corporation/clearing house) shall have the flexibility to decide the tenure." It further added that lender and borrower of share would be provided with a facility for early recall and repayment of shares.
At the beginning, the tenure was of only seven days, which was later increased to 30 days.
Motilal Oswal, managing director of Motilal Oswal Financial Services, said, "Earlier, the tenure was too short a period to make this window attractive. With the extended period, there will be more activities and liquidity in the market. Non-F&O stocks will see the most activities."
Market observers said that with the 30-day period of contract, it was not easy to take the benefit of SLB. This was basically the reason why it could not take off in a big way. "Extension of period will boost the market and liquidity will take off," said Dharmesh Mehta, head-broking, Enam Securities.
According to Jagannadham Thunuguntla, equity head at SMC Capitals, the move would act as a fillip for the recovery of the market and hedge funds, and would be able to encash on the benefits out of it since a month's time was too short for them.
If the lender of the shares recalled the securities anytime before completion of the contract, the intermediary would try to borrow the security for the remaining period and pass it to the lender. However, in this case the lender who had sought early recall, would have to pay lending fee to the intermediary.
In a scenario of early recall, the original contract between the lender and the intermediary would exist till the contract with the new lender for the remaining period was executed and the securities returned to the original lender, said Sebi in a note on Wednesday.
Mohan Natrajan, executive vice president of Edelweiss Securities, said, "The step is in the right direction from the market point of view. It may substantially trigger the volumes in the market as with extended contract period flexibility between lender and borrower will increase. It may act as a spark, which would make future arbitrage more effective. But it is yet to be seen how the market participants take it."
If the borrower of shares wished to do early repayment of securities, the margins would be released on the securities being returned by the borrower to the intermediary. However, if the intermediary was unable to find a new borrower for the balance period, the original borrower would have to forego lending fee for that tenure.
In both cases, early recall or early repayment of securities, the lending fee for the balance period would be at a market determined rate, added Sebi.
