SEBI Plans to Expand Stock Lending Framework to Boost Cash Market Participation

India’s market regulator, the Securities and Exchange Board of India (SEBI), is planning significant reforms to the Stock Lending and Borrowing (SLB) framework to improve liquidity in the cash equity market and encourage greater participation from institutional and retail investors. The proposed changes include nearly doubling the number of eligible stocks for lending and borrowing while also reducing collateral requirements for market participants.

According to people familiar with the proposal, the reforms are intended to make it easier for investors to borrow shares for legitimate market activities such as short selling and hedging. The move is expected to improve price discovery, increase market efficiency and attract more trading activity to the cash market, which has been overshadowed by India’s rapidly growing derivatives segment.

Under the proposed framework, the number of stocks eligible under the SLB mechanism could increase from around 500 to nearly 1,000 securities. SEBI is also considering lowering collateral requirements, making it less expensive for investors to participate in stock lending transactions. These changes could improve overall market liquidity while providing investors with greater flexibility in portfolio management.

Market experts believe a stronger stock lending ecosystem benefits both investors and the broader financial market. Increased availability of securities for borrowing can support efficient hedging strategies, improve market depth and reduce excessive volatility by enabling balanced trading activity.

The reforms also align with SEBI’s broader objective of encouraging greater participation in the cash market. In recent years, India’s derivatives market has witnessed rapid growth, prompting regulators to introduce measures that strengthen the underlying equity market and promote healthier market development.

Industry participants have largely welcomed the proposal, noting that a more accessible stock lending framework could attract institutional investors, improve trading volumes and enhance the efficiency of India’s capital markets. However, the proposed changes are still under consideration and will require regulatory approval before implementation.

If implemented, the revised SLB framework would represent another important step in modernising India’s securities market by improving liquidity, strengthening the cash equity segment and creating a more balanced investment ecosystem.