How to Earn Passive Income by Lending Your Shares: A Complete Guide

In India, equity investing has moved far beyond simply buying shares and waiting for capital appreciation. As markets mature and more sophisticated mechanisms become accessible to retail traders, investors now have opportunities to generate additional passive income from their long-term holdings even without selling them.

One such opportunity is the Securities Lending and Borrowing Mechanism (SLBM), a regulated framework by the National Securities Clearing Corporation Ltd. (NSCCL). It allows investors to lend their shares to traders who need them temporarily for trading strategies like short-selling, arbitrage, or hedging. In return, lenders earn a lending fee similar to earning rent on an idle asset.

This article explains how SLBM works, the benefits, the risks, real examples, and why low-volume transactions often lead to poor returns, helping you decide whether lending your shares is a smart strategy for your portfolio.

What Is SLBM and How Does It Work?

The Securities Lending and Borrowing Mechanism (SLBM) is a market framework where:

• Long-term investors lend their shares
• Traders borrow them for a fixed period
• A lending fee is paid to the investor
• The entire transaction is guaranteed by NSCCL, removing counterparty risk

Think of it like renting out your equity portfolio. Your shares remain yours, but temporarily move out of your demat account. After the agreed period, the shares are automatically returned to you.

Borrowers typically request shares during:

• Short-selling opportunities
• Hedging derivatives positions
• Arbitrage trades across market segments
• Covering delivery shortfalls

SLBM allows these transactions to happen smoothly, while enabling the lender to earn passive income.

Why Would Someone Borrow Shares?

Borrowers benefit in various ways:

• Short sellers need shares to deliver before buying them back at a lower price.
• Arbitrage traders exploit price differences between futures and spot markets.
• Institutional traders hedge their positions.
• Market makers need temporary inventory.

This demand creates a marketplace where share lending becomes profitable.

How Investors Make Passive Income

When you lend shares:

• You select the stock and quantity you want to lend
• You receive a lending fee per share (depends on stock demand)
• Shares are moved out of your demat temporarily
• You retain all dividends, bonuses, and splits

After the contract period, shares return automatically

The lending fee is your income.

For example:

If you lend 1,000 shares of RVNL at a lending fee of Rs 5/share, you earn:

1,000 × Rs 5 = Rs 5,000 gross income

This is "rent" earned without selling your investment.

Benefits of Lending Shares (Pros)

Earn Rental Income on Idle Stocks: Your long-term holdings may sit untouched for years. SLBM allows you to generate extra yield, boosting your portfolio’s total return.

Risk-Free Principal (Guaranteed by NSCCL): Lenders do not face counterparty default risk because NSCCL guarantees the return of shares.

Keep All Corporate Benefits: Even while lending, you retain Dividends, Bonuses, Rights issues and stock splits. This is a major advantage you earn income without sacrificing ownership benefits.

Zero Impact on Your Long-Term Investment Plan: You do not need to sell shares or change your portfolio strategy.

New-Age Brokers Are Enabling Easy Access: Platforms like Dhan and others are enabling online SLBM access with lower commissions (5% in some cases).

Drawbacks and Risks (Cons)

High Transaction Costs: Fees can be heavy, involving; Broker commission (up to 20%), GST and Depository participant (DP) charges. High costs can eat into your net returns, especially for small trades.

Poor Returns for Small Quantities: Lending small volumes is usually unprofitable because fixed charges swallow most of the gains.

Low Market Liquidity: Only a small number of stocks see high SLBM demand. Borrowers are not always available.

Manual Monitoring Required: You must regularly check NSE SLBM market; Look for demand, Match contract dates and Review fees. Passive investors may find this cumbersome.

Not Available for Mutual Funds: Mutual funds cannot lend shares only individual demat account holders and institutions can participate.

Why Low-Volume SLBM Trades Often Fail

Low-volume lending usually produces very small or even negligible profits.

Here’s why:

Fixed DP charges kill returns: DP charges + 18% GST apply per execution, regardless of quantity. Example: A DP charge of Rs 15.34 is the same whether you lend 5 shares or 5,000 shares.

High brokerage eats income: Brokerage of 15% + GST applies on the lending fee.

Gross income looks good; net income often does not.

The Voltas example illustrates a reality. Lending very small volumes is pointless. Even though the lending fee was high per share, the absolute volume was too low to generate meaningful profit.

When Does SLBM Make Sense?

High-demand stocks: Popular F&O stocks see more borrowing interest.

Large quantities: Because fixed charges get diluted across more shares.

Long-term portfolios: If you hold shares for years, why not earn extra income?

Investors comfortable with monitoring: Because SLBM still requires active participation.

Which Investors Should Avoid SLBM?

• Very small retail investors
• People holding only small stock quantities
• Investors unwilling to monitor SLBM contracts
• Mutual fund investors (ineligible)

If your holdings are small or infrequent, SLBM may not be worth your time.

How to Start Lending Shares

To begin lending, you need:

• An active demat account
• A broker that supports SLBM
• Access to the SLBM segment
• To review available lending contracts
• Select the stock, quantity, and settlement period

Common SLBM contract durations:

1-month contracts. 3-month contracts and Rolling settlements

Your shares move from your demat to the lending pool and return automatically after expiry.

Taxation on SLBM Income

• The lending fee is taxed as income from other sources (IFOS)
• It does not affect your capital gains tax. 
• Corporate actions (dividends, bonuses) are taxed normally
• There is no GST for the lender

Should You Lend Your Shares? Final Verdict

SLBM is a genuine passive income opportunity for long-term investors with large, stable holdings, especially in high-demand stocks. It allows you to:

• Earn additional return
• Retain ownership
• Gain corporate benefits
• Generate low-risk income (guaranteed by NSCCL)

However, SLBM is not suitable for small investors because:

• Transaction costs are high
• Market liquidity is low
• Returns on small quantities are negligible

Bottom Line

SLBM is profitable only when volume is large, stocks are in demand, and you are willing to monitor the process. For investors with long-term positions in F&O-heavy stocks like HDFC Bank, Tata Motors, Reliance, or ICICI Bank, SLBM can become a steady, low-risk passive income stream essentially "renting out your shares" while enjoying the full benefits of ownership.

 

Disclaimer: The article is for informational purposes only and not investment advice.