For most retail investors in India, investing in the stock market has always been a waiting game. They buy quality stocks, keep them in their demat account for years, and wait for the price to go up. Yes, there are companies that pay dividends, but apart from that, the stocks remain inactive.
They appear to be productive on paper, but they don’t create any active cash flow. What if that stock portfolio were like a real estate investment, where investors owned the asset, but they collected monthly rent on it?
Smart investors are now doing just this. They are earning a consistent additional income from their current investments, without selling any shares. In this blog, we will be exploring how investors can rent stocks to earn an extra layer of returns from their dormant portfolio.
The productivity gap in traditional investing
If investors are investing in some quality stocks with a time frame of 5 to 10 years, those stocks spend most of the time just sitting idle in the investors’ demat accounts. The capital value may be increasing, but the asset is not working for investors on a day-to-day basis.
In real estate, when an investor purchases a home to hold onto for the long haul, they rent it out to a tenant to generate additional cash flow in the meantime. Until recently, retail equity investors in India did not have an easy and convenient avenue to implement this rental concept in their stock portfolio.
That’s changing fast, with the assistance of the SLBM framework, regulated by SEBI specifically for this purpose.
What is stock renting?
The SLBM stands for Stock Lending and Borrowing Mechanism (SLBM). It is an exchange-based mechanism in which an investor with idle shares can lend them to other market participants (borrowers) for a fixed period of time against a rental fee.
Borrowers, usually traders who require some specific stocks for a short term for short selling or meeting delivery requirements, borrow them. They borrow the shares, pay a rental fee, and return the same number of shares at the end of the contract.
How does the stock lending mechanism work?
The SLBM is a structured and regulated process to safeguard the lender. The stock lending mechanism is explained below:
- The offer: The investors check their demat holdings and decide which eligible stocks they want to lend, their quantity, and the time period (usually a few days to a few months).
- The transaction: Then they offer them on the exchange’s SLB platform via their broker.
- Yield: Borrower accepts the offer and pays a lending fee. This fee is based on the market demand and supply.
- Return: At the end of the tenure, the borrower returns the same number of shares to the lender.
For example, if an investor has 1000 shares of a company whose share price is ₹500 and they want to lend them out at ₹5 per share for a month, they will receive ₹5,000 as rental income. At the end of the month, they will receive back their 1,000 shares, irrespective of whether the price of the stock rose to ₹550 or fell to ₹450.
Who gets corporate action benefits?
One of the most common concerns among investors regarding rent stocks is that they will not receive the benefits of corporate actions if they rent out their idle holdings. This is a misconception.
Investors still retain the ownership rights of the stock they rent out via SLBM and continue to receive all the corporate actions benefits. If the company pays a dividend, bonus shares, or a stock split during the lending period, those benefits are credited to the investors. They sacrifice none of the long-term wealth-creation benefits of invest in stocks.
Is SLBM safe?
When it comes to long-term assets, safety is the number one concern for investors. In India, SLBM transactions are not peer-to-peer transactions, but are routed through and guaranteed by exchange clearing corporations like NSE Clearing Ltd.
The borrower has to deposit 125% of the stock value as collateral with the exchange. In case the borrower defaults, the clearing corporation liquidates the collateral and ensures that the lender’s shares are returned. This structure removes counterparty risk for the retail investor.
The bottom line
If an investor invests in quality stocks for the long term for wealth creation, leaving them idle in their demat account means leaving additional income on the table. By utilising the Stock Lending and Borrowing Mechanism, investors can rent their idle stocks to generate a steady, low-risk additional income stream.
It transforms their portfolio from a dormant asset into a cash-generating engine, all without impacting their long-term wealth plan. SLBM turns investors’ idle holdings into productive ones by working just as hard as investors do.
