Pledge setup balance
The transient balance a pledgor's securities are shown under, in the depository system, between the pledgor submitting a Pledge Request Form and the pledgee confirming it.
In plain language
The moment a pledgor submits a Pledge Request Form, the securities involved cannot simply stay in the free balance — they are earmarked for a pledge that has not yet been agreed to by the lender. But they are not yet "pledged" either, because the pledgee has not confirmed anything.
The depository system has a name for this in-between state: pledge setup balance.
How it works
From Chapter 9, section 9.2.2: once the pledgor's request is entered in the DP system and a pledge sequence number is generated, the securities are debited from the free or locked-in balance and credited as pledge setup balance in the pledgor's demat account.
This status is genuinely provisional. It exists only until the pledgee confirms through its own DP — at which point the status moves to "Accepted-Verified" and the holding statement shows the quantity separately as pledged balance instead. If the pledgee never confirms, the securities remain shown as pledge setup balance rather than converting automatically; the workbook treats confirmation, not the passage of time, as what moves the status forward.
A worked example
Mr Oberoi submits his Pledge Request Form for 6,000 shares on a Monday. His DP verifies and accepts it the same day, generating a pledge sequence number.
| Stage | Status shown in Mr Oberoi's account |
|---|---|
| Before PRF | 6,000 free |
| PRF accepted, PSN generated | 6,000 pledge setup balance |
| Pledgee confirms (say, on Wednesday) | 6,000 pledged balance |
Between Monday and Wednesday, the 6,000 shares are neither free (he cannot sell or transfer them) nor formally pledged (the lender has not yet accepted them as collateral) — they sit in this intermediate pledge setup balance state, waiting on the pledgee's DP to act.
Why NISM asks about it
Chapter 9, section 9.2.2, introduces pledge setup balance as the immediate consequence of a pledgor's request being accepted, before the pledgee confirms. Expect a question distinguishing this from pledged balance — the status after confirmation — since the two are easily conflated.
Common exam traps
- Pledge setup balance exists only between the pledgor's request and the pledgee's confirmation — it is not the final pledged status.
- The trigger that moves the status forward is the pledgee's confirmation, not any fixed waiting period.
- Securities in pledge setup balance are debited from the pledgor's free or locked-in balance — they can come from either source.
Check yourself
1.When is a pledge transaction regarded as completed?
- a)When SEBI approves the proposal
- b)When the depository gives its nod
- c)When the confirmation advice is entered in the DP system
- d)When the pledgor's DP generates the pledge sequence number
Show the answer
Answer: (c) When the confirmation advice is entered in the DP system
The pledge will get credited only after the confirmation advice is entered in the DP system. That is the moment the transaction is complete.
Option D is the tempting one, because a great deal has already happened by then: the DP has verified the form, entered the details, generated a pledge sequence number, verified and confirmed the request, and securities have been debited from free or locked-in balances and credited as pledge setup balance. But all of that is the pledgor's side. The pledgee must still instruct its DP to confirm the creation, on which the status changes to "Accepted-Verified".
Options A and B invent approvals that do not exist. Neither SEBI nor the depository approves individual pledge transactions.
2.A pledge has been created over securities that are subject to a lock-in. The pledgor defaults while the lock-in is still running. What can the pledgee do?
- a)Invoke the pledge immediately, as default overrides the lock-in
- b)Invoke the pledge, but the securities are credited to him only after the lock-in ends
- c)The invocation request cannot be set up until the lock-in period is over
- d)The pledge itself was invalid, since locked-in securities cannot be pledged
Show the answer
Answer: (c) The invocation request cannot be set up until the lock-in period is over
If the pledge is for lock-in securities, then the invocation request cannot be setup till the lock-in period is over, and locked-in securities cannot be invoked before the lock-in release date. The request cannot even be entered — so option B, which imagines the request going through with delayed delivery, is wrong.
Option D fails at the first step. Securities — free balances or lock-in balances — held in a depository account can be pledged or hypothecated, and the creation step confirms it: securities are debited from the free or locked-in balances and credited as pledge setup balance. Lock-in is no obstacle to creating a pledge; it is an obstacle to invoking one.
That asymmetry is the whole point of the question, and it is a genuine trap for a lender: collateral that cannot be realised when you need it is not much use, which is why lenders check the lock-in status before accepting shares.
Where this is taught
Free preparation for NISM Series VIRelated terms
- 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.
- Pledge Request FormThe standardised form on which a pledgor initiates a pledge, carrying mandatory undertakings from both pledgor and pledgee to comply with the Indian Contract Act and give reasonable notice before invocation.
- Pledged balanceThe status a pledgor's securities show once the pledgee has confirmed the pledge — distinct from the pledgor's free balance, but still legally owned by the pledgor until invocation.
- PledgeeThe lender in a pledge or hypothecation — the party who confirms the pledgor's request through its own DP, and who is recorded as beneficial owner of the securities only on invocation.
- PledgorThe borrower in a pledge or hypothecation — the beneficial owner who offers demat securities as collateral, initiates the transaction through its own DP, and keeps ownership and corporate benefits until default.