The Colombo Stock Exchange (CSE) has introduced regulations permitting stock borrowing and lending (SBL). The Central Depositary System (CDS) facilitates SBL transactions and lenders and borrowers can engage in SBL only through an "eligible participant", being a member of the CSE or custodian bank, which meets with the criteria stipulated by the CDS.
SBL is permitted only in respect of a selected basket of securities published by the CDS. The maximum quantity that can be lent or borrowed for each security is limited to 10% of the shares issued. Entering into an SBL agreement by the lender, borrower and the participant(s) is a prerequisite and such an agreement cannot be of more than six months' duration. The borrower will have the legal title to the securities but all corporate benefits must be passed on to the lender except the voting rights. The borrower is free to deal with or dispose of the securities, subject to the rules of the CSE and the CDS, but is liable to return all dividends, interest, rights and bonuses to the lender. If the lender wishes to exercise the voting rights s/he must recall the securities subject to the SBL agreement.
The borrower must deposit collateral to the value of 120% of the market value of the securities borrowed with the participant and maintain this required minimum level throughout the time of borrowing. The collateral must be in the form of cash, irrevocable bank guarantees, government securities, quoted securities (listed in the Milanka Price Index), or certificates of deposit. The participant must mark to market on a daily basis the securities borrowed and the collateral offered and ensure that the value of the collateral is maintained as specified in the SBL Rules.
The participant guarantees the return of equivalent securities together with corporate benefits to the lender. Therefore, if the borrower fails to return the securities and/or corporate benefits, the participant is liable to return the securities and/or corporate benefits by liquidating the collateral. The participant is entitled to take any appropriate action against the defaulting borrower to make good its loss. A separate procedure applies if the borrowed securities are suspended or de-listed.