Portfolio investors have suggested to the Securities and Exchange Board of India (Sebi) that the stock lending and borrowing (SLB) facility be extended to even those stocks in which derivatives trading is not yet permitted, in other words, the cash segment. Currently, SLB is allowed only in F&O stocks.

Stock lending and borrowing is a mechanism which allows investors to sell shares which they think are overvalued, without owning those shares. They do so by borrowing the shares for a certain duration by paying an interest charge, and selling them in the market. These investors are betting that they will be able to buy back the shares at a lower rate and return them to the lender at maturity.

If we have SLB extended to non F&O stocks, it would allow an investor to go short. Currently, one cant short a stock which is not in the derivative segment, said the head-derivatives at a
domestic broking firm.

Sebi made SLB operational in April 2008 with a seven-day tenure, but there were few takers for this. The regulator then extended the tenure for SLB to 30 days in November 2008, which meant that investors borrowing shares would have a three-month window to return the shares to the lender. A couple of weeks back, the regulator further extended the tenure to 12 months, in the hope of infusing some interest in the product which has failed to take off so far.

People familiar with the issue told ET that following the regulators recent modification on the SLB framework, select foreign investors have not only expressed their concern on some of the modifications but also discussed with Sebi on what could help make this instrument more successful.

Some of the foreign investors had met with whole-time member Prashant Saran in Hong Kong at a roadshow conducted by Sebi, said an official at a foreign fund on condition of anonymity. It is learnt that these investors had discussions on a whole host of issues, including SLB. Under the latest guidelines, the Approved Intermediary (clearing houses) have been given the flexibility to decide the tenure. The regulator had also said that the lender/borrower would be provided with a facility for early recall /repayment of shares.

However, institutional investors are concerned about the best effort clause in case of an early recall of securities by the lender. There has to be a buy in mechanism which kicks in case of an early recall which is the international best practice. As of now, the AI doesnt have to provide complete support, said an investor. Currently, in case a lender recalls the securities anytime before completion of the contract, the AI on a best effort basis will try to borrow the security for the balance period and pass it onward to the lender.

Portfolio investors are also concerned as to how a borrower will be able to buy back shares from the market (to repay his obligation) in case the FII limit in the stock is already reached.