How to pledge demat securities

Investors can take a loan against securities (shares, debentures, bonds, mutual fund units) that are held in their demat accounts. The securities are offered as collateral to the lender by the borrower. This is known as pledging. The borrower can take a higher loan at better rates since there is very little risk of contesting the ownership of the securities. The time and documentation required to process such loans are also lesser.

In order to pledge dematerialised securities, both the borrower and lender should have demat accounts with the same depository (CDSL or NSDL). However, the demat accounts can be held with the same or different depository participant (DP).

Information

The borrower is required to fill up a form with details like the names and DP IDs of the borrower and lender, details of securities offered for pledging (ISIN, ISIN name, quantity), date and value of pledging, and the expiry date.

Acceptance

After verification, the borrower’s DP sets up the pledge in the system. A system generated pledge sequence number (PSN) is recorded on the pledge request form (PRF) and a copy sent to the lender for acceptance.

Closure

On repayment of the loan, a request for closure of the pledge can be registered in the depository system by the borrower or lender. The request needs the confirmation of the lender to take effect.

Points to note

> Financial transactions between the borrower and lender are handled outside the depository system.lOne can un-pledge either part or entire quantum of pledged securities.

>Till invocation, the borrower continues to be the owner of the pledged securities. Hence, he continues to receive corporate benefits like dividends, bonus, rights, etc.
The content on this page is courtesy Centre for Investment Education and Learning (CIEL).