A pledge of shares lets you use stocks as security for a loan or trading margin. You do not sell the stocks. They stay in your demat account and are marked as pledged. The bank, broker, or lender gets a legal claim on them. This makes it vital to know the rules, costs, and risks.
Under SEBI rules, stocks used for trading margin stay in the client’s demat account. They do not move to the broker’s account. The pledge also needs the client’s consent.
Who Takes Part?
The person who offers the stocks is the pledgor. The bank, broker, or lender is the pledgee. The pledgor still owns the stocks when the pledge starts. The pledgee only holds a claim against them.
A pledge of shares is often used for two needs. It can back a loan against stocks. It can also meet a trading margin need. In a margin pledge, the broker may re-pledge the stocks to a clearing member or clearing firm. The demat system keeps a clear record of each step.
How to Pledge Shares
1. Check Which Stocks Are Allowed
Ask the lender or broker for its approved list. Not every stock or fund may qualify. Also check the haircut. A haircut is a cut in the market value used for the loan or margin.
For example, a 20% haircut means 80% of the stock value counts as security. The approved list and haircut may change over time.
2. Start the Pledge Request
Open the broker or lender app. You may also contact your depository participant, called a DP. Select the stock and quantity. Check the pledgee name and demat details. CDSL also allows a holder to file a pledge form with the DP.
3. Check the Message
The depository may send an OTP, link, or consent request. It goes to the mobile number or email linked to the demat account. Read all details before you approve it. Never share your OTP, password, or PIN.
4. Approve the Pledge
Give consent within the stated time. The stocks will then show as pledged. They will stay in the demat account. Yet, you cannot sell or move them while the pledge is active.
5. Watch the Value
The value of pledged stocks can rise or fall. A fall may cause a margin gap. The lender or broker may ask for cash or added stock. If the gap is not met, it may invoke the pledge as per the deal.
6. Ask for Release
Once the loan is paid or the margin need ends, ask for release. The pledgee must confirm it through the DP. After the release, the stocks become free holdings again. A pledgor may swap the pledged stocks if the pledgee agrees.
What Happens to Dividends?
A pledge does not shift title at the start. The pledgor keeps the right to company benefits while the stocks stay pledged. These may include cash dividends, bonus stocks, and rights offers.
This can change after invocation. Invocation lets the pledgee take the stocks when the set terms are not met. The stocks may move from the pledgor’s account to the pledgee’s account.
Pledge Is Not a Sale
A sale sends stocks to a buyer and ends the seller’s hold. A pledge works in another way. The stocks stay in the demat account and are blocked for the pledgee. This lets the holder use the stock value without an early sale. Yet debt and market risk remain. The pledgee may invoke the stocks if the terms are not met.
Before You Approve
Save the pledge terms and note the request number. Record the stock, quantity, haircut, fees, and end date. Ask how the lender handles a price fall and how long release may take. Keep your mobile number and email current in the demat account.
Main Risks to Check
Share prices can fall fast. This can cut the value of the security. A pledge tied to one stock may also face a sharp gap if that stock drops.
Check the haircut, rate of interest, pledge fee, late fee, and release time. Read the default clause and notice terms. Review each SMS and email from the depository. Match the pledged quantity with the demat account statement.
Do not send stocks to a broker just to meet margin. SEBI’s pledge and re-pledge route keeps the stocks in the client’s account. It also records the client’s consent.
Conclusion
A pledge of shares can turn demat holdings into security without a sale. The steps are simple, but the risks need care. Check the haircut, fees, price risk, default terms, and release process. Approve a pledge only after all details match your demat account.