Securities and Exchange Board of India (Sebi) brought changes to the Securities Lending and Borrowing (SLB) contract framework on Wednesday. The tenure of contracts in securities lending and borrowing would be extended to 12 months from the current 1 month.

The modification comes after the board received feedbacks from the market participants and the Union Budget is to be presented in a month and a half. The market insiders expect the change to bring in more liquidity in the markets and make it more dynamic in addition to facilitating better price discovery.

"The tenure of contracts in SLB may be upto a maximum period of 12 months and the intermediary shall have the flexibility to decide the tenure. The lender and the borrower shall be provided with a facility for early recall/repayment of shares,” said the release from SEBI. In addition it said that the facility of early recall and repayment of shares would also be provided to that lender and borrower of the share.

SLB framework was implemented in April 2008 and since then it has been revised twice. First the tenure was of only seven days, which was later raised to 30 day period. The reason why SLB wasn’t a big success is because the tenure was too short; believe some of the market experts. Dharmesh Mehta, head-broking, Enam Securities agrees and said, “Extension of period will boost the market and liquidity will take off.”

If a situation arises where the lender recalls the securities before the completion of the contract, the approved intermediary would try to borrow it for the remaining period and give it onward to the lender. The intermediary would collect a lending fee from the lender who demanded the recall before contract completion.

A Sebi note further said, in a scenario of early recall, the original contract between the lender and the intermediary would exist till the contract with the new lender for the remaining period was executed and the securities returned to the original lender.

In case, the borrower decides for a repayment of securities before contract completion the margins would be released to the intermediary. In either case, early recall or early repayment of securities, the lending fee for the balance period would be at a market-determined rate, added Sebi.

Other brokerage houses and their executives spoke in favor of the modification and said it would make future arbitrage more effective, and markets more flexible and liquid.