Lien

A lien is a right to hold on to something that belongs to someone else until they pay what they owe.

Chapter 9 defines it as the right of a creditor in possession of goods, securities or any other assets belonging to the debtor to retain them until the debt is repaid, provided there is no contract, express or implied, to the contrary. Ownership stays with the debtor. The creditor only has the right to keep possession until the debt or obligation is discharged. In the workbook's words, it is a legal claim by one person on the property of another as security for payment of a debt.

Everyday Indian life has the idea built in. A tailor who keeps your finished suit until you pay the stitching charges is exercising a lien.

In the depository system a lien is one of several encumbrances, alongside pledge, hypothecation and non-disposal undertakings. SEBI requires depositories to record encumbrances so that anyone looking at a holding can see what claims sit on it.

The legal gate (Chapter 4). DPs must keep clients' accounts separate under Regulation 42 of the SEBI (Depositories and Participants) Regulations, 2018. A lien on securities can be created only as per Regulation 58 of those regulations and the procedure in the depository's Bye-Laws and Business Rules. A DP cannot simply decide to hold a client's shares against unpaid dues.

Recording encumbrances (Chapter 9, 9.3).

• The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 require promoters to disclose their encumbered shares, including NDUs.
• By circular dated July 24, 2020, SEBI told depositories to record all types of encumbrances specified under Regulation 28(3) of the Takeover Regulations.
• A non-disposal undertaking (NDU), a promise not to transfer or alienate securities, is described as being in the nature of a negative lien in favour of another party, usually a lender. When a hold is created for an NDU, the DP of the client is charged 0.01% of the value of the securities, subject to a minimum of Rs 25.
• In CDSL, encumbrances other than the specified types are recorded as Other Encumbrances. The PAN of the ultimate lender must be given, and the NDU / lien / encumbrance reason is compulsory.

Lien versus pledge. Under a pledge (Chapter 9), the pledgee can invoke and have securities moved into its own account. A lien, as defined, is a right to retain until payment. An NDU is a negative lien: the lender holds nothing, but the owner has promised not to sell.

Lien in dematerialisation (Chapter 7). If the R&T Agent's master file shows a stop recorded under a bank lien, statutory authority or court order against certificates sent for demat, the R&T Agent confirms the request only for the valid quantity. It treats the request as under objection for the total or partial quantity, and may keep the documents received from the DP.

Illustrative figures; the percentages and minimum charge are the workbook's.

Case 1 — a negative lien recorded as an NDU. Mr Rao, a promoter, borrows from a bank. Instead of pledging, he signs a non-disposal undertaking over 2,00,000 shares worth Rs 250 each.

• Value: 2,00,000 x 250 = Rs 5,00,00,000
• Charge to Mr Rao's DP at 0.01%: 5,00,00,000 x 0.0001 = Rs 5,000 (above the Rs 25 minimum, so Rs 5,000 applies)

The shares stay in Mr Rao's account. He has promised not to transfer them, and the depository shows the encumbrance, with the lender's PAN and the reason recorded.

Case 2 — a small hold. A holder records an NDU over 50 shares at Rs 300, worth Rs 15,000. At 0.01% the charge to the DP would be Rs 1.50, so the minimum of Rs 25 applies.

Case 3 — a bank lien meets a demat request. Mrs D'Souza sends 1,000 physical shares for dematerialisation. The R&T Agent's records show a stop under a bank lien on 400 of them. The R&T Agent confirms demat for the 600 valid shares and treats the rest as under objection. Mrs D'Souza must deal with the bank's claim before those 400 can come into the depository.

Chapter 9 (Special Services - Pledge and Hypothecation, 10% weightage) defines lien in section 9.3, alongside non-disposal undertakings and SEBI's July 2020 direction to record all encumbrances. Chapter 4 (12%) ties any lien on client securities to Regulation 58 and the depository bye-laws. Chapter 7 (9%) covers the R&T Agent's handling of certificates stopped under a bank lien. Expect definition questions, and questions that make you tell a lien, a pledge and an NDU apart.

• Possession, not ownership. The creditor keeps possession; ownership stays with the debtor.
• "No contract to the contrary." The right exists only if no express or implied contract excludes it.
• An NDU is a negative lien, not a pledge. Nothing moves to the lender; the owner undertakes not to dispose.
• A DP cannot create a lien on its own terms. Only as per Regulation 58 of the SEBI (D&P) Regulations, 2018 and the depository's bye-laws and business rules.
• 0.01% subject to a minimum of Rs 25 is what the client's DP is charged on creation of an NDU hold. Don't apply it to pledges.
• July 24, 2020 is when SEBI directed depositories to record all encumbrances under Regulation 28(3) of the Takeover Regulations.
• CDSL's "Other Encumbrances" needs the ultimate lender's PAN and a compulsory reason.