1. Introduction

Failure to enforce timely recall of lent securities is an important issue in securities lending and borrowing transactions, investment management, banking operations, stock market activities and financial risk management.

It refers to a situation where securities have been lent by an investor, financial institution, mutual fund, intermediary or other eligible participant to a borrower, but the lender or responsible intermediary fails to exercise its contractual or regulatory right to recall those securities within the prescribed or appropriate period.

Securities lending generally involves the temporary transfer of securities by a lender to a borrower in return for a lending fee or other agreed consideration. The borrower is ordinarily required to return equivalent securities of the same type and class in accordance with the applicable agreement and settlement mechanism.

A recall mechanism enables the lender to request the return of securities before the originally scheduled maturity date, where such early recall is permitted.

Failure to exercise the recall facility in a timely manner may expose the lender to:

Risk of non-return of securities.

Counterparty default risk.

Market price fluctuations.

Loss of liquidity.

Loss or delay in receiving corporate benefits.

Increased replacement costs.

Settlement and operational risks.

Financial losses arising from delayed recovery.

The fundamental principle is that a lender must exercise its contractual and regulatory rights relating to the recall and recovery of lent securities in accordance with the applicable agreement, SEBI framework and stock exchange or clearing corporation procedures.

The following discussion primarily considers Indian securities lending and borrowing arrangements (SLB/SLBS).

2. Meaning of Lending and Recall of Securities

Securities lending is an arrangement under which an investor temporarily lends securities to a borrower through an authorised mechanism in return for a lending fee.

The borrower is required to return equivalent securities of the same type and class within the stipulated period.

For example:

An investor owns 10,000 shares of a listed company and lends them through the Securities Lending and Borrowing Scheme (SLBS) for six months.

The agreement provides that the investor may seek early recall through the prescribed mechanism.

After three months, the investor requires the shares for sale or another investment purpose.

The investor submits a recall request, which must be processed through the applicable system and settlement mechanism.

If the lender or responsible intermediary fails to initiate or process the recall despite being authorised and required to do so, the securities may remain unavailable to the investor beyond the intended period.

This may cause financial loss, particularly where the market price changes or the investor loses an opportunity to sell the securities.

3. Meaning of Failure to Enforce Timely Recall

Failure to enforce timely recall occurs when:

The securities have been lent under a valid lending arrangement.

The lender has a contractual or regulatory right to recall them, subject to applicable conditions.

Circumstances arise requiring the exercise of that right.

The lender, intermediary or responsible institution fails to initiate the recall or take appropriate action.

The securities remain with the borrower beyond the period intended by the lender or the relevant contractual process.

Such delay results in financial, operational or investment-related consequences.

It is important to distinguish between a failure to exercise an available recall right and a failure by the borrower to return securities after a valid recall or at contractual maturity.

These are different situations and may attract different legal consequences.

4. Objectives of Timely Recall of Lent Securities

A. Protection of ownership-related economic interests

Timely recall helps the lender regain possession of equivalent securities and exercise the rights associated with holding them.

B. Maintaining liquidity

Investors may require securities for sale, portfolio rebalancing, collateral arrangements or other investment activities.

C. Preventing counterparty risk

Delayed recall may increase exposure to the financial condition of the borrower or intermediary.

D. Protecting against market fluctuations

If the market price rises significantly, replacement of securities may become more expensive in the event of a failure to return them.

E. Ensuring corporate benefits

The lending arrangement must appropriately account for corporate benefits, such as dividends and other benefits, in accordance with the applicable scheme and agreement.

F. Compliance with contractual and regulatory requirements

Timely recall ensures that the lender's rights are exercised in accordance with the prescribed lending and settlement arrangements.

5. Regulatory Framework Governing Securities Lending and Borrowing in India

The principal regulatory framework includes:

SEBI (Securities Lending Scheme), 1997, as amended and supplemented by subsequent regulatory directions.

SEBI's framework for Securities Lending and Borrowing Scheme (SLBS).

SEBI circulars governing early recall and early repayment.

Stock exchange and clearing corporation rules and procedures.

Relevant client, participant and intermediary agreements.

Applicable provisions of the Indian Contract Act, 1872 and other relevant laws.

Important SEBI regulatory principles

The securities lending framework provides for:

Lending through the prescribed authorised intermediary mechanism.

Return of equivalent securities of the same type and class.

Protection of corporate benefits accruing during the lending period.

Early recall facility for lenders, subject to applicable procedures.

Early repayment facility for borrowers.

Margin and collateral arrangements.

Settlement procedures.

Mechanisms for dealing with failure to return securities.

Under the SLBS framework, early recall is not necessarily an unconditional demand for immediate physical return. It must be exercised through the prescribed mechanism and settlement process.

6. Detailed Legal Analysis of Failure to Enforce Timely Recall

6.1 Failure to Exercise the Early Recall Facility

Under the SLBS framework, lenders are provided with an early recall facility, subject to the applicable procedures.

Where the lender decides that securities are required before the contractual maturity date, it may initiate a recall request through the prescribed mechanism.

Failure to exercise this facility when necessary may result in the securities remaining unavailable to the lender.

Legal implications:

The lender may lose an opportunity to sell the securities.

The lender may be unable to rebalance its investment portfolio.

Market movements may affect the economic value of the investment.

The lender may suffer liquidity constraints.

However, the existence of an early recall facility does not necessarily mean that the securities must be returned immediately. The prescribed matching and settlement procedure must be followed.

6.2 Failure to Act After Receiving a Recall Request

An intermediary or authorised participant may be responsible for processing the lender's recall instructions.

If a valid recall request is received but is not processed within the applicable timeframe, it may constitute an operational failure or breach of the relevant contractual or regulatory obligations.

The following aspects should be examined:

Date and time of receipt of recall instructions.

Whether the recall request was valid and eligible.

Whether the request was entered into the prescribed platform.

Whether the required matching process was completed.

Whether the settlement instructions were issued.

Whether the securities were returned within the applicable settlement period.

Reasons for any delay or failure.

6.3 Failure to Monitor Contractual Maturity

Apart from early recall, securities must be returned on the scheduled reverse-leg settlement date.

The responsible intermediary should maintain a proper system for monitoring:

Original lending date.

Contractual maturity date.

Reverse-leg settlement date.

Outstanding quantity of securities.

Borrower-wise outstanding positions.

Margin and collateral requirements.

Actual return of securities.

Failure to monitor maturity dates may result in securities remaining outstanding beyond the stipulated contractual period.

6.4 Failure to Enforce Return of Securities Following Default

Where the borrower fails to return the securities on the scheduled settlement date, the applicable SLBS framework provides mechanisms for dealing with the shortage.

These may include:

Buy-in auctions.

Utilisation of collateral.

Financial close-out.

Recovery of applicable charges and losses.

Other measures prescribed by the clearing corporation.

Failure to initiate or implement the prescribed default-management procedures may increase the lender's exposure.

6.5 Failure to Protect Corporate Benefits

Under securities lending arrangements, the lender's entitlement to corporate benefits must be protected in accordance with the scheme and contractual terms.

Corporate benefits may include:

Dividends.

Bonus shares.

Rights entitlements.

Interest.

Redemption proceeds.

Other benefits accruing on the securities.

Failure to monitor such benefits may result in financial loss or disputes regarding the lender's entitlement.

7. Important Case Laws and Judicial Decisions

Case 1. Satya Prakash Aggarwal v. National Stock Exchange of India Ltd. (2005)

BOMBAY HIGH COURT · DECIDED 15 DECEMBER 2005

Citation: (2006) 134 Comp Cas 324 (Bom); (2006) 69 SCL 115 (Bom).

Facts of the case:

The dispute arose from securities-related lending and borrowing transactions under the Automated Lending and Borrowing Mechanism (ALBM) of the National Stock Exchange.

Individual investors had placed funds with trading members for investment under the ALBM arrangement.

However, certain trading members improperly utilised the investors' funds and failed to fulfil their obligations.

Investors approached the National Stock Exchange seeking compensation from its Investor Protection Fund.

The dispute concerned the responsibility of the stock exchange, clearing corporation and other concerned entities in dealing with defaults and investor claims.

Judgment:

The Bombay High Court examined the Securities Lending Scheme, ALBM arrangements and the relevant NSE bye-laws.

The Court held that claims arising from money placed with a trading member pending investment or money improperly dealt with by the trading member were covered under the applicable Investor Protection Fund provisions.

The Court directed the National Stock Exchange to compensate the investors for their actual losses, subject to the prescribed limits and deduction of amounts already received.

Important legal principles:

Securities lending arrangements must operate in accordance with the applicable regulatory framework.

Obligations of approved intermediaries must be examined under the relevant scheme and agreements.

Investor protection provisions must be implemented in accordance with applicable bye-laws.

Actual losses arising from qualifying defaults may be compensable under the relevant investor protection arrangements.

Relevance to failure to enforce timely recall:

This judgment is relevant to situations involving failure to return lent securities or money under securities lending arrangements.

It demonstrates the importance of ensuring that securities lending transactions are conducted through the authorised mechanism and that the obligations of participants and intermediaries are properly discharged.

The judgment is not specifically about failure to exercise an early recall request under the present SLBS framework. Its relevance is to intermediary obligations, securities lending arrangements and investor protection following defaults.

Case 2. SEBI v. Mega Millennium Securities Pvt. Ltd. (2007)

SEBI REGULATORY PROCEEDINGS · ORDER DATED 3 SEPTEMBER 2007

Nature: Securities market regulatory enforcement proceedings.

Facts:

Investors had entered into securities lending arrangements with Mega Millennium Securities Pvt. Ltd.

The investors alleged that the intermediary had failed to return securities and had also failed to pay the agreed yield on the securities.

Complaints were received concerning non-delivery of shares and non-payment of amounts due to investors.

SEBI examined whether the entity was authorised to operate as an approved intermediary under the Securities Lending Scheme, 1997.

Findings:

The proceedings examined the obligations of an approved intermediary, including:

Return of equivalent securities of the same type and class.

Protection of corporate benefits.

Compliance with the Securities Lending Scheme.

Proper handling of investors' securities and funds.

Redressal of investor grievances.

The proceedings highlighted that an entity cannot claim the status of an approved intermediary without the requisite registration.

Relevance:

This regulatory decision is important in demonstrating the consequences of failure to fulfil securities lending obligations.

It also illustrates the importance of ensuring that securities lending activities are carried out through authorised intermediaries and in compliance with the applicable regulatory framework.

Legal significance: An intermediary's failure to return securities or discharge its obligations can result in regulatory action and investor protection concerns.

This is a SEBI regulatory order, not a Supreme Court judgment.

Case 3. SEBI v. MCI Securities Pvt. Ltd. (2005)

SEBI REGULATORY PROCEEDINGS · ORDER DATED 15 SEPTEMBER 2005

Facts:

Two investors alleged that they had lent securities worth approximately ₹4.17 crore to MCI Securities Pvt. Ltd. and a sub-broker.

The investors alleged that the securities had been mismanaged and that the intermediary had failed to discharge its obligations under the relevant lending arrangements.

SEBI examined the status of the intermediary and its compliance with the Securities Lending Scheme, 1997.

Findings:

SEBI observed that the entity had represented itself as an approved intermediary even though it was not registered with SEBI in that capacity.

The proceedings highlighted the importance of:

Authorisation and registration of intermediaries.

Compliance with securities lending regulations.

Protection of investors' securities.

Proper discharge of contractual obligations.

Maintaining the credibility and integrity of the securities market.

Relevance:

The decision demonstrates the regulatory risks associated with unauthorised securities lending operations and failure to protect investors' securities.

It is relevant when examining whether the lender or intermediary adopted appropriate safeguards for recovery and return of lent securities.

This is a regulatory enforcement decision rather than a judicial precedent specifically on delayed early recall.

Case 4. Bajaj Finance Ltd. v. Seetha Kumari (2025)

DELHI HIGH COURT · 2025

Citation: 2025 Supreme(Del) 836.

Facts:

The dispute arose from loan facilities secured by pledged shares.

The financing agreement provided for maintenance of margin and gave the lender contractual rights to recall the loan and liquidate pledged securities upon specified events of default.

The relevant default events included failure to pay interest, breach of contractual conditions and failure to maintain the required margin.

Legal relevance:

The decision concerns the exercise of contractual rights relating to loans secured by securities.

It is useful by analogy when considering the importance of acting upon contractual default triggers and exercising available rights over securities in accordance with the agreement.

However, a lender's right to recall a loan secured by pledged shares is legally distinct from the early recall facility under the SLBS framework.

Accordingly, this case should not be treated as a direct ruling on securities lending recall procedures.

8. Important SEBI Provisions Relating to Early Recall

The SEBI framework for securities lending and borrowing specifically recognises the early recall facility.

The relevant principles include:

A. Facility for Early Recall

The lender is provided with a facility to recall securities before completion of the original contract, subject to the applicable mechanism.

B. Best-Efforts Arrangement by the Approved Intermediary

Where the lender seeks early recall, the approved intermediary is required to make efforts to borrow the relevant securities for the balance period and pass them on to the lender.

C. Continuation of Original Contract

The original contract between the lender and approved intermediary continues until the arrangement with the replacement lender for the balance period is executed and the securities are returned to the original lender.

This is an important feature of the early recall mechanism.

D. Lending Fee

The lending fee for the balance period in an early recall arrangement is determined in accordance with the applicable market-based mechanism.

E. Borrower Default

Where the borrower fails to meet the applicable margin obligations or return securities, the prescribed intermediary and clearing corporation mechanisms for obtaining securities and financial close-out become relevant.

Important distinction: Early recall and contractual maturity are separate mechanisms. The intermediary's best-efforts obligation following early recall should not be confused with the borrower's obligation to return securities on the scheduled reverse-leg settlement date.

9. Practical Illustration

Consider the following hypothetical situation.

An institutional investor lends 50,000 shares of a listed company through an authorised securities lending arrangement for a period of six months.

After three months, the investor decides to recall the securities because it intends to sell them.

The investor submits a valid early recall request.

However, the concerned intermediary fails to process the request promptly and does not take the necessary steps under the applicable mechanism.

As a result, the investor does not receive the securities within the anticipated period.

During this period, the share price increases significantly.

The investor is unable to sell the securities at the intended time.

Financial impact

The potential difference in value is ₹50 lakh.

However, this amount is not automatically recoverable as damages.

The investor must establish:

A valid recall request was submitted.

The intermediary had an obligation to process it.

The intermediary failed to comply with that obligation.

The failure caused the investor's inability to sell the securities at the relevant time.

The claimed financial loss is real, foreseeable and legally recoverable.

The loss was not caused by other factors or the investor's own failure to follow the applicable procedure.

10. Legal and Financial Consequences of Failure to Enforce Timely Recall

11. Documents Required to Establish Failure to Enforce Timely Recall

Proper documentation is essential to determine whether the recall mechanism was properly implemented.

The following records should be examined:

12. Preventive Measures and Internal Controls

The following measures should be adopted by lenders, intermediaries, asset management companies and financial institutions.

1. Maintain a recall monitoring system: Every recall request should be recorded with its date, time and status.

2. Establish responsibility: Clearly identify the officer or department responsible for processing recall requests.

3. Monitor contractual maturity: Maintain a centralised register of all outstanding securities lending positions and reverse-leg settlement dates.

4. Track outstanding securities: Reconcile securities lent, securities recalled and securities actually returned.

5. Ensure prompt processing: Recall instructions should be processed within the applicable operational and settlement timelines.

6. Monitor intermediary performance: Review whether the approved intermediary is fulfilling its obligations under the agreement.

7. Monitor borrower defaults: Identify failures in margin maintenance and non-return of securities.

8. Enforce collateral arrangements: Ensure that the applicable collateral and default-management procedures are implemented.

9. Protect corporate benefits: Maintain records of dividends, bonus shares and other corporate benefits.

10. Maintain escalation procedures: Unresolved recall requests should be escalated to senior management and the compliance department.

11. Conduct periodic audits: Review recall requests, outstanding positions and settlement failures.

12. Preserve documentary evidence: Maintain all transaction records, communications and settlement confirmations for future legal and regulatory scrutiny.

13. Consolidated Legal Position

The following legal principles emerge from the regulatory framework and decisions discussed above:

14. Conclusion

Failure to enforce timely recall of lent securities can expose investors and financial institutions to substantial operational, contractual and financial risks.

The early recall facility is an important safeguard under the securities lending and borrowing framework. It enables lenders to seek the return of securities before the scheduled maturity date, subject to the prescribed mechanism.

Failure to initiate or process valid recall requests, monitor outstanding lending positions, enforce contractual obligations or implement the applicable default-management procedures may result in securities remaining unavailable to the lender and may expose the concerned parties to financial losses.

The Bombay High Court's decision in Satya Prakash Aggarwal v. National Stock Exchange of India Ltd. (2005) provides useful judicial guidance concerning the obligations arising under securities lending arrangements and investor protection mechanisms.

The SEBI regulatory proceedings against Mega Millennium Securities Pvt. Ltd. and MCI Securities Pvt. Ltd. further demonstrate the importance of authorised intermediaries, proper handling of securities and compliance with securities lending obligations.

Accordingly, timely recall of lent securities is not merely an operational formality. It is an essential component of investment risk management, contractual compliance, investor protection and preservation of liquidity.

15. Suggested Wording for an Internal Audit / Inspection Report

Writing

Failure to Enforce Timely Recall of Lent Securities

It was observed that adequate monitoring and timely enforcement of recall requests relating to lent securities were not ensured. Securities lent under the Securities Lending and Borrowing Scheme were required to be returned in accordance with the contractual maturity schedule or through the prescribed early recall mechanism, wherever applicable.

However, adequate controls were not evident to ensure timely processing of recall instructions, monitoring of outstanding securities, follow-up with borrowers and implementation of the prescribed settlement and default-management procedures.

The failure to enforce timely recall may expose the institution to counterparty risk, market price fluctuations, liquidity constraints, loss or delay in receipt of corporate benefits and additional costs arising from non-return of securities.

The matter is significant in view of the obligations under the SEBI Securities Lending Scheme, 1997, and the subsequent regulatory framework governing early recall and return of securities. The decision in Satya Prakash Aggarwal v. National Stock Exchange of India Ltd., (2006) 134 Comp Cas 324 (Bom), also highlights the importance of compliance with securities lending arrangements and investor protection obligations.

Accordingly, the institution should strengthen its recall monitoring mechanism, maintain a centralised record of outstanding securities, ensure timely processing of valid recall instructions, monitor contractual settlement dates and initiate appropriate corrective and recovery measures in cases of delay or default.

Legal clarification: There is an important difference between failure to exercise an available early recall right and failure to return securities after a valid recall or contractual maturity. Liability in either situation depends on the relevant agreement, the applicable SEBI framework, the intermediary's role and proof of actual loss. The cited Bombay High Court judgment and SEBI orders are relevant supporting authorities, but they should not be represented as direct judicial rulings that every delayed early recall automatically constitutes a statutory violation.