INCOME TAX

Securities lending scheme of Securities and Exchange Board of India

Circular 751

Dated 10/2/1997

All Chief Commissioners of Income-tax,

All Directors-General of Income-tax.

Subject : Securities lending scheme of Securities and Exchange Board of India.

In order to improve the liquidity in the stock market, facilitate the timely settlement of transactions in securities and help in correcting the temporary imbalances in supply and demand in the stock market, a securities lending scheme has been framed by the Securities and Exchange Board of India (SEBI). The scheme has come into force with effect from the 6th February, 1997.

2. The scheme would permit the lending of securities by an approved intermediary to a borrower under an agreement for a specified period with the condition that the borrower would return equivalent securities of the same type or class at the end of the specified period along with the corporate benefits accruing on the securities borrowed. The lender would enter into an agreement with the approved intermediary for depositing the securities and the borrower would enter into an agreement with the approved intermediary for the purpose of borrowing of securities and as such there would be no direct agreement between the lender and the borrower. The approved intermediary shall be entitled to lend the securities deposited by the lender to the borrower from time to time. The title (ownership) of the securities shall rest with the borrower who will be entitled to deal with or dispose of the securities so borrowed. The lender shall be entitled to receive, in consideration for the lending of the securities an agreed amount of fees for depositing the securities for the specified period. The agreements between the approved intermediary and the lender or borrower as the case may be shall provide for the following terms and conditions : _

(a) the period of depositing/lending of securities,

(b) charges or fees for depositing/lending,

(d) provision for the return including premature return of the securities deposited or lent ; and

(e) mechanism for resolution of the disputes through arbitration.

3. The following taxation issue may arise in respect of transactions under the scheme of securities lending :

' Whether the lending of shares under the securities lending scheme will amount to "transfer" under section 2(47) of the Income-tax Act in the hands of the lender ? '

4. As far as the stock market is concerned, shares are fungible assets. "Fungible" has been defined in the Shorter Oxford English Dictionary on Historical Principles as "said of a thing which is the subject of an obligation when another thing of the same or another class may be delivered in lieu of it". One share of a company is good replacement for another share of the same company. The market does not lay any emphasis on the distinctive numbers. It is only for the purpose of reckoning the holding period of any particular share or to distinguish between an original share and a bonus share, that the Income-tax Department relies on the distinctive numbers. The Board are advised that when the lender gets back equivalent number of shares of the company with different distinctive numbers, it is not a case of exchange of assets. This is so because once the asset is fungible, when the lender receives back the same number of shares of the same company of the same face value and carrying the same rights, it is immaterial whether they have different distinctive numbers. He will be in a ready position to either sell the shares and realise their value or send them to the company for transfer to his name. The transaction of lending shares of some distinctive numbers and receiving back shares of some other numbers is not "exchange" of assets within the meaning of "transfer" as defined in section 2(47) of the Income-tax Act. The meaning of the word "exchange" necessarily involves exchange of two different assets. The asset received back in the aforesaid type of transaction is no different from what was lent so long as it represents the same fraction of the ownership of the company. At no stage, the lender or borrower intended to "exchange" different assets. Hence, the transaction of lending of shares or any other security under the securities lending scheme would not result in "transfer" for the purpose of invoking the provisions relating to capital gains under the Income-tax Act.

5. The contents of this circular may be brought to the notice of all the officers in your region. A copy of the scheme is enclosed herewith.

(Sd.) Krishna Saini,

Secretary, Central Board of Direct Taxes.

[F. No. 149/104/95-TPL]