Auto-pledge

An ordinary margin pledge is something a client actively creates — the client tells the depository, "pledge these shares." Auto-pledge works differently: it happens on its own, without the client having to give that instruction each time.

It exists specifically for funded stocks bought under margin trading. The moment those shares reach the client's own demat account, they are automatically pledged again, in favour of the broker's margin-funding account, with a note explaining why.

The workbook (Chapter 8, section 8.7) explains the mechanism precisely: funded stocks held by the trading member or clearing member under margin trading must be held only by way of pledge. For this, the TM/CM opens a separate demat account tagged "Client Securities under Margin Funding Account," in which only funded stocks are kept or transferred, with no other transactions allowed in it.

Those funded stocks are first transferred to the client's own demat account, and then an auto-pledge is created — defined in the workbook as a pledge created "without the requirement of a specific instruction from the client" — with a suitable reason recorded, in favour of the "Client Securities under Margin Funding Account."

This is the custody mechanism that makes the rest of the funded-stock margining framework possible: because the pledge is automatic, the broker always has a recorded security interest over the exact shares its own funding paid for, without depending on the client remembering, or agreeing, to pledge them each time.

A client buys shares worth Rs 1,00,000 under margin trading, funding Rs 72,500 of the price through the broker and putting up the rest as margin.

Once the shares are received from the clearing corporation, they are transferred into the client's own demat account — the client, on paper, now holds the shares. Immediately, an auto-pledge is created over those exact shares, without the client separately signing off on a pledge instruction, in favour of the broker's "Client Securities under Margin Funding Account."

The client can see the pledge reflected against the shares in their own demat holding statement, tagged with a reason identifying it as a margin-funding auto-pledge. Only once the client repays the funded amount does the broker release this auto-pledge, freeing the shares for the client to deal with as they wish.

Chapter 8 (section 8.7, Margin Trading) introduces auto-pledge as part of the custody rules for funded stocks, right after describing the dedicated "Client Securities under Margin Funding Account." Expect it tested as the answer to how a broker gets a pledge over funded stock without a fresh instruction each time, and the exact name of the account the pledge runs in favour of.

• Auto-pledge needs no fresh client instruction — that is the entire point of the "auto" in its name, distinguishing it from an ordinary margin pledge, which the client actively creates.
• It applies specifically to funded stock, held in favour of the "Client Securities under Margin Funding Account" — not to ordinary collateral the client separately pledges.
• The shares still pass through the client's own demat account first, before the auto-pledge attaches — the broker never simply keeps them in its own name.
• Do not assume auto-pledge removes the client's ownership; it creates a pledge (a security interest), exactly like the general margin pledge mechanism, not a transfer of title.