Pledge
Also written Pledge of securities · Pledging of demat shares
A 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.
In plain language
Section 12 of the Depositories Act, 1996 allows securities held in a demat account to be pledged against a loan, credit or other facility. Nothing physically moves and nothing is handed over; the pledge is a set of book entries.
What separates a pledge from a hypothecation is only the degree of control the lender has. If the lender — the pledgee — has the unilateral right, without reference to the borrower, to appropriate the securities to its own account on default, the transaction is a pledge. If the lender needs the borrower's concurrence to do that, it is a hypothecation.
One structural rule matters more than any other: both parties must have accounts with the same depository, because inter-depository pledge is not permitted. They need not be with the same DP.
How it works
The pledgor — the borrower — initiates through its DP on a Pledge Request Form, giving the securities, the agreement number, the pledgee's details and a closure date indicating the duration. The system generates a pledge sequence number (PSN) for each transaction; several pledge instructions may run off one agreement, in which case the same agreement number is quoted on all of them.
The securities are then debited from the free or locked-in balance and credited as pledge setup balance. The pledgee must confirm through its own DP before anything is created — the status moves to "Accepted-Verified" and the holding statement shows a separate pledged balance. The workbook is emphatic that the pledge is complete only when the confirmation advice is entered in the DP system, and that the pledgor's DP cannot cancel the order once the pledgee has confirmed.
On repayment the pledgor initiates closure (CDSL calls it unpledge) and the pledgee confirms; the securities return to the free or locked-in balance. The pledgee may also close unilaterally, in which case the pledgor does nothing.
On default the pledgee files an Invocation Request Form. On verification the securities move from the pledgor's pledged balance straight to the pledgee's free balance — and for a pledge, no confirmation is required from the pledgor's DP. Stamp duty on invocation is collected from the pledgee on the market value of the securities, so consideration has to be captured.
Throughout, ownership stays with the pledgor until invocation: dividends go to the borrower, and bonus shares are credited to the borrower's account as pledged balance.
A worked example
A borrower pledges 5,000 shares at Rs 600 — Rs 30,00,000 — against a loan of Rs 18,00,000, a 60% loan-to-value.
| Stage | Pledgor's account | Pledgee's account |
|---|---|---|
| Before | 5,000 free | — |
| PRF entered, PSN generated | 5,000 pledge setup balance | pending confirmation |
| Pledgee confirms | 5,000 pledged balance | — |
| Company pays a Rs 8 dividend | Rs 40,000 to the borrower | nothing |
| 1:1 bonus declared | 5,000 bonus credited as pledged balance | nothing |
| Loan repaid, unpledge confirmed | 10,000 free | — |
Now run the other branch. The borrower defaults. The pledgee files an IRF, and on verification the 10,000 shares move from the pledgor's pledged balance to the pledgee's free balance without any confirmation from the pledgor's side. Stamp duty is collected from the pledgee, on the market value of what it has taken.
One trap built into the same facts: if those 5,000 shares had been locked-in rather than free, the pledge could still have been created — but the invocation request cannot even be set up until the lock-in release date.
Why NISM asks about it
Chapter 9 (Special Services — Pledge and Hypothecation) is a compact, heavily examined chapter. Its own review questions ask when a pledge transaction is complete (when the confirmation advice is entered in the DP system), whether pledgor and pledgee may be with different depositories (no) and whether a pledge may be set up with a future execution date (yes). Expect all three.
Common exam traps
- Same depository, different DPs is fine. Different depositories is not — inter-depository pledge is not permitted. The workbook's own true/false question turns on this.
- The pledge is complete on confirmation, not on request. Until the pledgee's confirmation advice is entered, nothing has been created.
- Corporate benefits go to the pledgor until invocation. Dividends to the borrower, bonus shares credited as pledged balance. The lender gets nothing while the loan performs.
- On invocation of a pledge the pledgor's DP confirms nothing. That confirmation step exists only for hypothecation.
- Stamp duty on invocation is paid by the pledgee, on market value, under the Indian Stamp Rules, 2019.
- Locked-in securities can be pledged but cannot be invoked before the lock-in release date.
- PRFs, URFs and IRFs must be preserved for a minimum of five years — not the eight years that applies to the DP's general records.
Where this is taught
- Series VI · Chapter 9: Special Services - Pledge and Hypothecationintroduced here
- Series X-A · Chapter 4: Debt Management and Loansintroduced here
- Series SEBI-ICE · Chapter 5: Investment in Securities Marketintroduced here
Related terms
- Margin pledgeThe only permitted way for a client to give securities as margin — a special pledge created in the depository system that leaves the shares in the client's own demat account instead of transferring them to the broker.
- HypothecationA charge over demat securities where the lender needs the borrower's concurrence to appropriate them — the same book entries as a pledge, with one extra confirmation, and a term used only in NSDL.
- Invocation Request FormThe form the pledgee submits to his DP to invoke a pledge on the pledgor's default, transferring securities from the pledgor's pledged balance to the pledgee's free balance.
- Pledge Request FormThe prescribed form on which the pledgor asks his DP to create a pledge.
- PledgeeThe lender — the party in whose favour the pledge or hypothecation is created.
- PledgorThe borrower — the beneficial owner who offers his securities as collateral for a loan, credit or other facility.
- Standing instructionA one-time authority, usually given at account opening, for the DP to credit securities into the account without a fresh instruction each time — the alternative is a Receipt Instruction for every single receipt.