Authorized Intermediary

Lending out your shares to a stranger for a fee sounds risky — what stops the borrower from simply not returning them? In Stock Lending and Borrowing (SLB), the answer is that no one ever lends directly to a stranger.

Every SLB deal is routed through an Authorized Intermediary (AI) — an entity SEBI has approved to run the lending and borrowing market and guarantee it. The lender deals with the AI, the borrower deals with the AI, and the AI matches them and stands behind the trade. Neither side ever has a direct claim against the other.

The Clearing Corporations of NSE and BSE are the entities approved as Authorized Intermediaries, under the framework SEBI laid out through its Securities Lending Scheme, 1997 and later circulars. Trading runs on an automated, screen-based, order-matching platform, kept independent of the ordinary trading platforms used for buying and selling securities outright — so an SLB order never mixes with a normal market order.

Why an AI is needed at all — its guarantee function. The borrower must deposit 100% of the lending price as margin upfront, plus the lending fee and value-at-risk and extreme-loss margins, with daily mark-to-market after that. The lender deposits a smaller margin of its own, typically 25% of the lending price — unless lending on the transaction date itself, when none is required.

If a borrower fails to return the securities at the end of the tenure, the Authorized Intermediary itself steps in: it liquidates the borrower's deposited collateral and uses the proceeds to buy equivalent securities from the open market, which are then returned to the lender. The lender is made whole by the AI's process, without having to chase the borrower directly — that guarantee is the entire reason SLB is routed through an AI rather than being left to private, bilateral agreements.

Illustrative figures.

Mrs Patel lends 10,000 shares worth Rs 200 each (Rs 20,00,000) for three months through her broker, on the NSE Clearing Corporation's SLB platform — the Authorized Intermediary. She never learns who the borrower is; her only counterparty, as far as the trade is concerned, is the AI.

Suppose the borrower, hit by a sharp rally in the stock, is unable to arrange equivalent shares to return at the end of the three months. Mrs Patel does not need to pursue the borrower. The Authorized Intermediary liquidates the borrower's upfront collateral — deposited at 100% of the lending price plus margins — and uses it to buy 10,000 equivalent shares from the market, which are credited back to Mrs Patel's account. Her position is restored by the AI's guarantee mechanism, regardless of what happened to the borrower.

Chapter 13 (Tax Provisions for Special Cases), section 13.6 — Taxation in case of Stock Lending and Borrowing — introduces the Authorized Intermediary as the mandatory, guaranteeing route for SLB, alongside the Stock Lending and Borrowing entry's coverage of tenure, margins and tax treatment. Expect a question naming NSE's and BSE's Clearing Corporations as the Authorized Intermediaries, or asking what happens if a borrower fails to return the securities.

• Neither party contracts directly with the other in SLB — both deal with the Authorized Intermediary, which is what makes the fee genuinely different from an informal private loan of shares.
• NSE and BSE's Clearing Corporations are the AIs, not the exchanges' regular trading systems.
• On default, the AI liquidates collateral and buys replacement shares from the market — the lender is not left to sue the borrower personally.
• The margin structure (borrower 100% plus fees and risk margins, lender 25% or nil) exists specifically to fund this guarantee, not merely as a general risk-management formality.