The lender retains all the benefits of ownership, other than the voting rights. Securities lending occurs when a holder of securities or his agent lends eligible securities to borrowers in return for a fee. The absence of a formal market for securities lending had been felt for a while. Responding to market needs, Sebi introduced a scheme for securities lending and borrowing in 1997. A securities lending programme is used by the lenders to maximise yields on their portfolio.
Borrowers use the securities lending programme to avoid settlement failures.
Securities lending provides income opportunities for securities holders and creates liquidity to facilitate trading strategies for borrowers. Securities lending is particularly attractive for large institutional holders of securities, as it is an easy way of generating income to offset custody fees and requires little, if any, of their involvement or time. Securities lending gives borrowers access to lender portfolios, which provide the flexibility necessary when borrowing for strategic positioning and financing inventories. From the point of view of the markets, stock lending and borrowing facilitates timely settlement, increases the settlements, reduces market volatility and improves liquidity. The borrower has to deposit the collateral securities, which could be cash, bank guarantees, government securities or certificates of deposit or other securities, with the approved intermediary.