India’s markets regulator, Sebi, plans a major overhaul of securities lending rules, potentially making short-selling easier and improving liquidity through wider stock pools, net settlement allowances, and cross-exchange interoperability.
India’s markets regulator is preparing a wider overhaul of the securities lending and borrowing framework, in a move that could make short-selling easier and improve liquidity in the cash market, according to people familiar with the discussions cited by Business Standard.
Sebi chairman Tuhin Kanta Pandey said on Monday that the watchdog would soon publish a consultation paper on reforms to the securities lending and borrowing mechanism, or SLBM, as part of efforts to support the closing auction session and draw in more participants. He said the regulator had to hear from market players before putting the paper out.
The planned changes under discussion include broadening the pool of stocks available for lending, allowing net settlement within the SLB segment and against cash market positions, and enabling interoperability between exchanges. Market participants said such changes could help traders offset positions more efficiently and reduce the need to move cash between venues.
A deeper lending market is seen as important for short-selling, arbitrage and market-making, all of which can help price discovery. But India’s market still faces a basic constraint: mutual funds, which are major holders of equities, are not allowed to short-sell, limiting a key source of demand for borrowed stock, according to industry participants.
One person familiar with the talks said net settlement could allow a trader to borrow in the morning and close out the need later in the day, while another said netting SLB trades directly with cash market positions at the clearing corporation level would reduce friction. A separate source said interoperability between exchanges would make the market more flexible, although it could also lead to differences in securities availability and settlement cycles.
The consultation comes after exchanges introduced shorter-tenor SLB contracts on Monday, giving traders a way to settle the reverse leg of a trade within three days. That is intended to make the segment more responsive during periods of heavy activity such as index rebalancing and contract expiry, when borrowing demand often spikes.
Industry players have argued that for SLBM to gain scale, mutual funds may eventually need permission to borrow securities as well. They also say the system needs to be simpler and more commercially attractive, with tax treatment and awareness still acting as barriers to wider use.
Exchange data show the segment has already been gaining ground. Lending fees in the SLB market rose to ₹697 crore in 2025-26, compared with ₹425 crore in the previous year, and stood at ₹346 crore in the first quarter of the current financial year.
The proposals also fit a broader regulatory push towards more efficient settlement. In April, Sebi set a December 31, 2026 deadline for implementing net settlement of funds for foreign portfolio investor cash market trades, a step meant to ease liquidity stress and lower transaction costs. Market participants say the same logic could support reforms in SLBM if the regulator decides to proceed.
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