Sebi changes rule of dividend transfer under SLB

Lenders of shares under Securities Lending and Borrowing (SLB) programme will now get dividend on the record date instead of the current practice of receiving it at the time of taking back securities.

Market regulator the Securities and Exchange Board of India (Sebi) today changed these norms for dividend transfer SLB programme, which is a mechanism to help investors sell shares without owning them in a cash market.

"The dividend amount would be worked out and recovered from the borrower on the book closure/ record date and passed on to the lender," the Sebi said in a circular.

Under the SLB mechanism, since the borrower is in the possession of share, he gets the dividend.

Currently, the borrower transfers the dividend to the lender at the time of repayment of the shares borrowed.

The Sebi has now asked the stock exchanges to ensure that the payments are made at the time of record date or the date of deciding the number of shares eligible to receive dividend.

"Exchanges are now advised to make necessary amendment... for the implementation... And communicate to Sebi the status of the implementation of this circular in the Monthly Development Report," the circular added.

SLB was introduced in April 2008, starting with a contract tenure of seven days. In November it had increased the tenure to 30 days.

In January 2010, the regulator increased the tenure of contracts to 12 months to in attract investors to the SLB window. The size of the SLB market is still roughly only 0.02 per cent of the cash market.

The advantage for the lender in the SLB framework is that he can earn a steady income on idle shares in his portfolio. The borrower is betting that the price of shares will decline, so that he can then buy them at a lower price from the secondary market and return them to the lender on contract expiry.