The Shares You Bought 20 Years Ago Can Now Earn You Rent Too

How securities lending and borrowing can help long-term investors generate additional income without selling their investments.

There are many investors who bought shares 15 or 20 years ago and simply forgot about them. Let us take a simple example. An investor invested ₹10 lakh in a good company two decades ago. Because of the growth of the company and the power of compounding, those shares are today worth around ₹2 crore. The investor has already created enormous wealth. But there is one problem: he does not want to sell.

Selling the shares would reduce his ownership in a company he still believes in, and it could also result in a substantial capital gains tax liability. So, what if the investor could continue holding those ₹2 crore worth of shares and, in addition to the normal benefits of ownership, earn some income from them? This is where the Securities Lending and Borrowing Mechanism, or SLBM, becomes interesting.

Think of Your Shares Like a Property

SLBM can be understood through a very simple analogy. If you own a house worth ₹2 crore and do not want to sell it, you can rent it out and earn rent while continuing to own the property. The house remains yours, and at the same time, it generates an additional stream of income.

Similarly, under SLBM, an investor can lend eligible shares through the exchange mechanism for a specified period and receive a lending fee. The lending and borrowing orders are matched through the exchange platform and the lending period can extend for a defined duration, subject to the applicable framework. There is also a mechanism through which lenders may request an early recall of their securities.

So, in our example, the investor continues to hold a long-term investment worth ₹2 crore, while a portion of those shares may potentially generate additional income when lent through the SLBM mechanism. The important point is that the investor is not selling the shares simply to generate cash flow.

Turning Long-Term Wealth Into Potential Income

Now consider the same investor who has held these shares for two decades. Suppose he earns ₹2 lakh as a lending fee during a year by lending some of his eligible shares. His original ₹10 lakh investment is still represented by shares worth around ₹2 crore. He has not converted his investment into cash merely because he wanted an additional source of income.

This creates an interesting distinction between selling an asset and generating income from an asset while continuing to hold it. Under the SLB framework, the transaction is structured differently from an ordinary sale of securities. NSE Clearing has also referred to the relevant CBDT clarification under which transactions under the SLB scheme are not regarded as a “transfer” for income-tax purposes.

This is one of the reasons SLBM can be particularly interesting for investors sitting on very large unrealised gains. Instead of thinking only in terms of “buy, hold and sell,” investors can also explore the idea of “buy, hold and lend.”

What Happens to the Dividend?

The next obvious question is: what happens if the company declares a dividend while the shares are under an SLBM transaction? An investor should not simply assume that the dividend is lost because the shares have been lent.

Under the mechanism prescribed for securities lending and borrowing, the economic benefit relating to the dividend is addressed through the prescribed settlement process. The dividend amount relating to the borrowed securities is collected from the borrower and passed on to the lender. Therefore, an investor may continue to receive the economic benefit associated with the dividend while also potentially earning lending income.

However, investors need to understand that corporate actions can have specific implications for an SLB transaction. Different corporate actions may be treated differently, and certain events can result in adjustments or foreclosure of the lending position. This means SLBM is not simply a matter of lending shares and forgetting about them. The rules governing corporate actions, settlement and recall need to be understood before participating.

The Tax Question Investors Should Not Ignore

There is another important consideration: taxation. The ₹2 lakh lending income in our example should not be confused with the long-term capital gains on the ₹2 crore investment. The lending fee represents a separate stream of income, and its tax treatment may differ from the tax treatment applicable to long-term capital gains arising from listed equity investments.

Therefore, an investor in a higher tax bracket should not automatically assume that the lending fee will receive the same tax treatment as equity LTCG. The attraction of SLBM is not that it magically creates tax-free income. Rather, its attraction lies in the possibility of generating additional cash flow without having to sell a long-held investment and trigger a conventional sale transaction.

The exact tax treatment will depend on the applicable law and the investor’s individual circumstances, so this is an area where professional tax advice becomes important.

Who Is This Opportunity Really For?

The real opportunity may be particularly interesting for investors who have accumulated substantial wealth in a few shares over many years. Imagine again the investor whose ₹10 lakh investment has grown to ₹2 crore. If he sells, he gives up part of his ownership and may trigger capital gains tax. If he simply continues to hold, he remains invested and participates in the future performance of the company, but apart from dividends, the shares may not generate regular cash flow.

SLBM potentially gives him another option. If the shares are eligible and there is sufficient borrowing demand in the market, he may be able to lend them for a period and earn a lending fee while continuing to maintain his long-term investment strategy. The availability and attractiveness of this opportunity, of course, will depend on the particular security and the demand for borrowing it.

There Is No Guaranteed Income

It is important not to view SLBM as a risk-free or guaranteed source of income. Not every stock will have meaningful borrowing demand, and lending fees can vary significantly depending on market conditions and the demand for a particular security. The investor also needs to understand the operational rules relating to lending periods, recall, settlement and corporate actions.

Therefore, SLBM should not be seen as a replacement for dividends, fixed income or other traditional sources of cash flow. Instead, it is another tool that may be available to investors holding eligible securities.

A Different Way to Think About Existing Wealth

The bigger idea behind SLBM goes beyond simply lending shares. Traditionally, investors have been taught to think about wealth in a relatively linear manner: invest, allow the investment to grow, and eventually sell when money is required.

But as portfolios become larger and investors accumulate substantial unrealised gains, financial planning needs to become more sophisticated. The question is no longer simply, “When should I sell?” It can also become, “How can I make my existing assets more productive without necessarily selling them?”

Just as a house can generate rent without being sold, certain long-term shareholdings can potentially generate lending income without requiring the investor to exit the investment. For investors who have held quality stocks for 15 or 20 years and are sitting on substantial capital gains, this can be an interesting addition to the financial-planning toolkit.

Chintan Kamdar, QPFP, CFP®
Founder & Director
Digi-Finmart Private Limited
Rajkot, India