The Bank, one of the largest share custodians in India, which is currently working out the final modalities has decided to undertake the activity in the demat mode given the absence of risk involved of the like in the paper based system. Deutsche Bank in addition to Reliance Capital and Stock Holding Corporation of India Ltd (SHCIL) have received approvals from SEBI to carry out the task of an intermediary for stock lending.

"We have decided to perform the activity only in demat form. We have filed the final papers with SEBI and should be able to kick off the stock lending business in the very near future," said Louise H Neville, first vice-president, regional head, Securities Lending Asia of Deutsche Bank, while speaking to The Financial Express.

Stock lending in the demat form has been described by experts as an absolutenecessity.

In a panel discussion on "Securities Lending in India" at the Securities Summit, 1998, Ajay Shah, a leading market expert, said that that the failure of stock lending to take off in India despite the SEBI approval over a year back, can be attributed to the apprehensions pertaining to carrying out the activity in a paper-based form.

"Nobody is prepared to take the settlement risk involved in lending in the paper based segment. If stock lending takes place in the demat mode this problem will be taken care of. Stock lending is important for the securities market and will only take off in a demat environment," said Shah.

His view was seconded by Anil Narang, executive director, Morgan Stanley Trust Company, who too felt that both derivatives and stock lending will be non-starters if not developed in a demat regime.

He however felt that the depository would need to reach a certain critical mass, though Shah felt that there was enough mass right now to kick-off stock lending solely in dematform.

In the physical environment, a lender has the fear of not getting back a clean title for his shares by the borrower. He is also not sure of getting a clean title on the collateral which is deposited with him by the borrower.

All this is eliminated in the demat form, where a clean title is ensured. The National Securities Depository Ltd (NSDL) is in the process of putting in place a stock lending module which will facilitate stock lending in the dematerialised form.