YES Bank shares attract hefty SLB premium, high volatility can add risk

The difference in price between the cash market and the futures segment has contributed to the premium amid troubles at the bank, said experts.
Those holding YES Bank shares are charging a significant premium for lending them through the securities lending and borrowing (SLB) scheme.

The difference in price between the cash market and the futures segment has contributed to the premium amid troubles at the bank, said experts. The annualised cost of borrowing YES Bank shares is as high as 244.6 per cent, showed the data from brokerage house Motilal Oswal Securities.

Yogesh Radke, head of alternative and quantitative research at Edelweiss Securities, said the premium is largely because of the difference in cash-market and futures-market prices. The futures market has been trading at a 20-30 per cent discount to the cash market price.

The large premium in the SLB segment is a reflection of this difference, as arbitragers look to sell in the cash market and buy in the futures segment. They borrow shares using the SLB mechanism to complete their trades.  

“Cash-based buying is happening in YES Bank, but the futures market is still not convinced,” said Radke.

“I think such activity will continue,” said Motilal Oswal Securities Derivatives & Technical Analyst Chandan Taparia, although he warned that the high volatility can add risk.

The SLB mechanism allows traders to borrow securities that they may not have to meet their obligations. It allows long-term investors to generate additional yield on their portfolios by charging a fee to lend their securities.

Other stocks which have a notable yield include Indiabulls Housing Finance, Bank of Baroda, RBL Bank, and Power Grid Corporation of India.  The annualised yield for them ranges between 17 per cent and 34 per cent.

The authorities imposed restrictions on YES Bank after its finances deteriorated. The government is bringing together investors, including State Bank of India, to help tide over its capital requirements. The stock has been volatile since. The stock is up 35.53 per cent on the BSE on Wednesday. Its 52-week high has been ~285.9, while the low was ~5.55 per share.  

The transition to physical settlement, where a trader has to supply the shares rather than merely settle in cash, is likely to boost the segment, noted the  Motilal Oswal Securities report of March 11, which pointed out the high yield on YES Bank.

“…rather than buying shares from the open market to cover position, a trader can go to the SLB platform and borrow the required shares for covering. At a later stage when the share prices are favourable, he could purchase the shares from cash markets and return them to the lender. This process is known to be more cost-efficient than buying shares from the open market,” noted the ‘Securities Lending and Borrowing’ report under the names of Head of Retail Research Siddhartha Khemka, Research Analyst Arpit Beriwal, and Taparia.


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