Sebi eyes SLBM reforms; may allow net settlement to boost market liquidity

Sebi chairman Tuhin Kanta Pandey said on Monday, at sidelines of a symposium on cyber security, that the regulator will soon come up with a consultation paper on SLBM, in its efforts to stabilise CAS

Reforms are under way to deepen India’s securities lending and borrowing (SLB) market as the Securities and Exchange Board of India (Sebi) is stepping up efforts to improve liquidity in the cash market and strengthen its infrastructure, which underpins its recently introduced closing auction session (CAS).

 

It is discussing a set of changes to the securities lending and borrowing mechanism (SLBM), including expanding the universe of eligible stocks, allowing net settlement within the SLB segment and with the cash market, enabling interoperability between stock exchanges, and improve the links between the cash and derivatives markets, according to people familiar with the developments.

 

Sebi chairman Tuhin Kanta Pandey said on Monday, at the sidelines of a symposium on cyber security, that the regulator will soon come up with a consultation paper on SLBM, in its efforts to stabilise CAS. “It will definitely help in CAS because it would need more participation. SLBM improves CAS participation and that has been our goal. We have a working group and we must get to the reformed SLBM very soon… I can only say very soon, that means there is a sense of urgency that we need. At the same time different market participants need to be heard before we put out a consultation paper,” he added. 

 

SLB refers to a mechanism where investors can lend their idle shares to others for a fee.

 

Starting Monday, the exchanges also launched shorter-tenor contracts under the SLB scheme, giving traders an option to settle the reverse leg of a transaction within three days.

 

A deeper SLB market would allow investors to borrow securities more efficiently for short-selling and arbitrage, strengthening the link between the cash and derivatives markets while potentially reducing distortions in closing prices. 

 

The proposals have been discussed in two meetings with market participants and members of Sebi committees, sources said. Further deliberations could take place next month, they added.

 

Globally, well-developed markets for lending securities are an important part of mature equity markets, supporting short-selling, arbitrage, market-making and efficient price discovery. In India, however, the market faces a structural constraint: Mutual funds are not permitted to undertake short-selling, limiting one of the largest potential sources of demand for borrowed securities.

 

“Net settlement within the SLBM is one of the measures which may be implemented. For instance, one borrows in the morning and by the afternoon the requirement is done so I can spread it out then. The other is netting it directly with the cash. For example, one goes short in the cash market and borrows in the SLBM — and it gets netted at the clearing corporation level,” said a person in the know.

 

Another source added that interoperability among the exchanges for SLB might also be allowed.

 

“For net settlements, it is better to have interoperability — one may trade at any one and settle at the other exchange. Currently trading members and custodians keep money at both the places. With interoperability, it would mean they would churn out more wherever there is an opportunity and there will be some differentiation in terms of securities or the cycles,” said another person familiar with the developments.

 

Emailed queries to Sebi remained unanswered till the time of going to press.

 

Further, it is expected to bring in more participation and stability in the recently introduced CAS mechanism.

 

A few industry players have urged that for SLB to gain popularity, mutual funds need to be allowed to borrow.

 

“Wherever there is a CAS, there is a robust SLB segment. But what we have done is to try to test the CAS before launching SLB reforms. Liquidity is not there and SLB is also not robust — that’s why we are getting these spikes in closing rates,” said an industry player.

 

“The mechanism has to be made simple. There has to be a commercial sense to lend and scope. At present, there is not much awareness and even different interpretations on the taxation side cause some apprehension,” the person said.

 

“On days like the rebalancing of any index or near expiry contracts, volumes surge in the last half an hour and the opportunity for SLB is high. The opportunity comes for a very short window and a large part of the borrowing is done by prop traders who are doing arbitrage on it. Retail traders are on the lending side but their proportion in entire lending is very low. Over the last year, the volumes in SLB have surged,” said another player.

 

According to data from the exchanges, the lending fee on the exchange in the SLB segment in 2025-26 surged to ₹697 crore as against ₹425 crore in the previous year. In the first quarter this financial year, it stood at ₹346 crore.

 

“The regulator wants to push volumes from futures & options to the cash segment. More stocks in the SLBM would help in directing volumes here,” said a broker.