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Investors who lend idle shares earn good interest
India's Sebi has prescribed certain norms for securities lending and borrowing
- PUBLISHED: Sun 29 Apr 2018, 7:04 PM UPDATED: Sun 29 Apr 2018, 9:07 PM
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- N.R.I. Problems by H.P. Ranina
Q: A broker has approached me suggesting that I can lend shares from my demat account and earn some income. I want to know whether this is permitted legally and is it safe to do so. What safeguards should I take to protect myself?
A: The Securities & Exchange Board of India has now prescribed certain norms and guidelines for securities lending and borrowing (SLB) mechanism. If you wish to lend your shares and securities, you may inform your broker, mentioning the name of the shares, the quantity which you wish to lend and the period for which you would like to do so. As a lender, you will be asked to deposit 25 per cent of the total value of the shares which you wish to lend. This is to ensure that you do not default once you agree to lend the shares.
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In order to protect the interest of lenders, the borrower of the shares is required by Sebi rules to deposit 125 per cent of the value of the shares as margin. The borrower must also deposit the lending fees over and above the margin amount. The stock exchange will monitor on a daily basis the mark-to-market losses in order to ensure that the borrower does not default. At the end of the period of the contract, you will get back the shares and the borrower's margin will be released. Generally, investors who lend their idle shares and securities earn, on an average, interest of 6 to 8 per cent on an annualised basis.
Q: Recent problems faced by certain CEOs of banks and institutions have cast a doubt in the minds of investors regarding suitability of such persons. Are there any regulations to ensure that fit and proper persons are appointed?
A: The Securities & Exchange Board of India is likely to frame guidelines applicable to reappointments where the chief executive officers have served their full term. This will also apply to managing directors. At present, the board of directors extend the term of office of the senior executives based on recommendations of the nomination and remuneration committee. Sebi would like to ensure that the CEOs do not use their influence at the board level for getting extensions.
Hence, a committee headed by a former Deputy Governor of the Reserve Bank of India has been set up by Sebi. Based on recommendations of this committee, the regulations will be framed by Sebi. In large public companies, it is necessary for the nomination and remuneration committee to have a thorough performance appraisal made of the CEOs whose tenure of office is about to end. The committee has to give cogent reasons to justify extension of the tenure of office. Generally, under the law, the appointment is for 5 years and may be extended for a further period by the board of directors. Currently, the company takes a decision first and in case of public institutions, the recommendation is sent to Sebi for approval before the reappointment is made.
Q: Some of my NRI friends, together with our associates in India, wish to bid for a highway project. We will enter into a concession agreement with the state government which will allow us to levy toll for a certain number of years. Can we set off the costs which we will incur in constructing the highway against the income which we will earn during the concession period by way of toll? Under the agreement, the land and the highway constructed thereon will belong to the government.
A: The highway which you will construct falls under the definition of 'infrastructure facility'. This is eligible for the tax holiday benefit whereunder 100 per cent of the profits will be exempt from income-tax for a period of 10 years. This 10-year period has to be of consecutive years within the initial 15 year period commencing from the date of the new highway becoming operational.
After the tax holiday is availed of by your company in India, you can claim depreciation on the costs which you have incurred in constructing the highway. Courts have taken the view that though the highway/road does not belong to the entity which has set up the infrastructure project, the costs incurred would be eligible for depreciation since the company has obtained a business or commercial right to operate the highway. Therefore, depreciation at the rate of 25 per cent on reducing balance method would be allowed as a deduction from the revenue earned by way of toll.
The writer is a practising lawyer specialising in tax and exchange management laws of India. Views expressed are his own and do not reflect the newspaper's policy.
