Is India emerging or emerged? Minimal modifications to the country’s framework and trading data suggest the former

News of securities borrowing and lending coming out of India is best described as positive but slow, with regulators and exchanges announcing mainly minor changes over the past year or so.

The latest was the news that the Securities and Exchange Board of India (SEBI) had modified the country’s securities borrowing and lending framework to allow authorised intermediaries to directly enter into agreements with clearing members for the purpose of facilitating business.

Under the new rules, an agreement must specify rights, responsibilities and obligations, and include basic conditions for lending and borrowing. The agreement must also detail the “exact role” of authorised intermediaries and clearing members in relation to their clients.

Authorised intermediaries have to ensure that there will be no direct agreement between lender and borrower, despite market participants expressing a desire to move away from the country’s stock exchange settlement system to a bilateral format.

Martin Corrall, director of agency lending in Citi’s investor services business, is less than enthusiastic about the change. He says: “This just makes the documentation process more streamlined. I don’t believe this will have any significant impact.”

But Corrall, along with Citi, which began offering securities lending services on India’s National Stock Exchange (NSE) in October 2012, remain optimistic about the country’s potential.

“In terms of revenue it has a long way to go but strategically India could be a significant market,” says Corrall.

“India has the potential to be one of the most attractive markets in the region, and whilst currently restrictive, we considered it to be an important launch. I think if we can build activity and balances it might encourage further development.”

The barriers to be overcome in India are many, with numerous infrastructure nuances in effect.

Corrall says: “From an offshore borrower’s perspective, it is costly as they have to post India rupee as collateral and do not receive any rebate on the cash. From a lender’s perspective, probably the biggest issue is the fixed term contracts with market rate recalls, unless you effectively borrow to cover and could end up paying more than you earned in the first place.”

“I am in regular dialogue with the NSE but unfortunately I don’t think securities borrowing and lending is high on their list of priorities for change. I would hope to see this market develop over time, but I’m not sure when that is likely to happen.”

More encouraging was the insurance regulator’s decision last year to allow insurers to lend a maximum of 10 percent of their securities. Of course, in a country where the business is closely monitored, restrictions apply. On top of the 10 percent cap, insurers can only lend some 200 stocks listed in the futures and options segment for a maximum of 12 months.

“Citi was instrumental in lobbying the regulators to allow domestic insurance companies to participate in lending and I think this sector has potential for growth,” says Corrall.

“What we are seeing is selective trading rather than structured securities lending programmes due in main to the limited ability to effect an early recall and hence potentially restricting trading activity. We have yet to see any participation from offshore but hope to have our first offshore lender early next year.”

Corrall concludes: “The opening of India to securities borrowing and lending was eagerly awaited by market participants who together with industry associations such as the Pan Asia Securities Lending Association lobbied SEBI to introduce a structure to accommodate global standards.”

“India has a lot of direct retail investment into stock markets and understandably they were nervous to open up the market to foreign participation in one go. Unfortunately, as a result we see very little activity and participation to date is mostly from domestic entities including high net worth individuals, family offices and local licensed brokers.”

“What has also restricted securities borrowing and lending growth is the ability to gain short exposure for the same eligible list of securities by buying a derivative contract in the shape of exchange-traded single stock futures.”

As it stands

The net effect of India’s securities lending set-up is reflected in trading data. Indian common shares in the local market “are not often borrowed for securities lending transactions”, reports Chris Benedict, vice president and lead analyst at DataLend. “This could be due to existing restrictions on securities lending or because transaction costs are high.”

“Most institutions looking to short Indian securities or India as a whole do so through exchange-traded funds (ETFs) as well as American/global despository receipt shares.”

While “there isn’t a clear trend across Indian equities right now”—some securities “are exhibiting higher utilisation and fees while others seem to exhibit the reverse trend”—Indian ETFs and stocks “have bounced after last year’s sell off”, although “many of them are still very thinly, sporadically traded in the securities lending world”, says Benedict.

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