Invoking a lien
Also written Lien invocation · Invocation of a lien · Exercising a lien · Enforcing a lien
The lender selling or redeeming the securities marked under its lien and taking the proceeds — the securities are never transferred into the lender's own name.
In plain language
An investor who borrows against his investments does not hand them over. The lender marks a lien on them instead. The units stay in the investor's folio, but he cannot redeem or transfer them.
Invoking the lien is what happens next if the loan is not repaid. The lender sells or redeems those securities and keeps the money.
One detail surprises people. The securities do not move into the lender's name at any stage. They are simply redeemed out of the investor's folio, and the sale proceeds go to the lender.
The investor finds out the way he finds out everything else about the folio — from his account statement.
How it works
Section 17.6.4 sets out the sequence, and invocation is the last step of it.
While the lien stands. The investor cannot redeem or transfer the securities until the lien holder gives written authorisation to revoke the lien. He may still do other things with the folio — change of address, change of bank details — unless specifically denied by the lien holder. Dividends and other benefits go to the investor, again unless the lien holder has specifically barred it. A lien can be marked over all or part of the securities in a folio.
Invocation. As long as securities are under lien, the lien holder can exercise or invoke it. Invoking the lien means redeeming or selling the pledged securities. The lien holder receives the proceeds of that sale or redemption. There is no transfer of securities from the investor to the lien holder. The investor receives information about the invocation through the account statement.
The same act on other assets. If the lien or charge is on a bank fixed deposit, the bank undertakes to pay the amount of the FDR to the lien holder when the lien is exercised. If a life insurance policy has been assigned, any payout by the insurer goes to the assignee until the loan is repaid and the insurer is so intimated.
Unmarking, the other ending. Once the investor repays, the securities become free and are unmarked. The lien holder sends a written communication to the company; if the request comes from the investor instead, it must also be signed by the pledgee or lender.
The workbook gives no figures for invocation — no notice period, no time limit, no charge. The only fee figure in this area belongs to a different act: marking a hold for a non-disposal undertaking in the depository. Do not carry a number into this answer.
A worked example
Illustrative figures. Rohan holds 40,000 units of an equity scheme in a single folio. In April the NAV is Rs 30, so the holding is worth Rs 12,00,000. He borrows Rs 7,00,000 from an NBFC against it, and the NBFC has a lien marked on the whole folio through the R&T agent. The lien shows up as a transaction on his account statement.
What he can and cannot do while it stands:
| Action | Allowed? |
|---|---|
| Redeem 5,000 units | No — not without the NBFC's written authorisation |
| Switch to another scheme | No — a transfer out of the folio |
| Change his registered address | Yes, unless the NBFC has barred it |
| Receive the dividend declared in June | Yes, unless the NBFC has barred it |
Rohan stops paying. In October the NBFC invokes the lien. The NAV is now Rs 33, and the outstanding with interest is Rs 7,50,000. The R&T agent redeems 22,728 units at Rs 33, which raises Rs 7,50,024, and pays it to the NBFC.
Two things follow. The 17,272 units left over stay Rohan's, in his own folio. And at no point did the NBFC own a single unit — it received money, not units. Rohan learns the whole thing happened from his next account statement.
Had he repaid instead, the NBFC would have sent a written communication to unmark the lien, and all 40,000 units would have become freely redeemable again.
Why NISM asks about it
Chapter 17 (Operational Aspects of Investment Management), section 17.6.4 (Marking a Lien), which ends with invocation before 17.6.5 moves on to transmission. Expect a question on what the lien holder actually receives — proceeds, not securities — or on who may authorise a redemption while a lien stands.
Common exam traps
- Invocation transfers money, not securities. The workbook is explicit: there is no transfer of securities from the investor to the lien holder.
- A lien is not a pledge invoked into the lender's account. Under a pledge in the depository system the pledgee can have securities moved into its own account; on invoking a lien over mutual fund units the R&T agent redeems them instead.
- Only the lien holder can release it. The investor cannot redeem or transfer until he has written authorisation, and an unmarking request from the investor must also carry the lender's signature.
- Dividends still belong to the investor, unless the lien holder specifically barred them. Candidates assume the lender collects everything.
- Non-financial requests survive the lien. Address and bank-detail changes remain possible unless specifically denied.
- The account statement is the notice. There is no separate intimation route in the workbook.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- DepositoryAn institution that holds investors' securities in electronic form and provides the services needed to transact in them — the securities equivalent of a bank holding money rather than cash.
- LienA creditor's right to keep possession of a debtor's goods or securities until the debt is repaid, unless a contract says otherwise; in the depository, liens are recorded as encumbrances.
- MarginThe money a buyer or seller must deposit before a trade is allowed to stand, so that the clearing corporation is covered if they fail to bring in funds or to deliver securities.
- PledgeA charge created over demat securities in favour of a lender who may appropriate them unilaterally on default — created by book entry under section 12 of the Depositories Act, not by handing over anything.
- Bank mandateThe record of the bank account linked to an investor's trading, demat or mutual fund folio, used to move money in and out of investments; changed by submitting a form with a cancelled cheque.