Pledged balance
The 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.
In plain language
Once a pledgee confirms a pledge, the securities involved stop being merely "set up" and become genuinely pledged. The holding statement reflects this with its own balance type: pledged balance.
It is important what pledged balance is not: it is not a transfer of ownership to the lender. The securities still sit in the pledgor's account, under the pledgor's name — pledged balance is simply a separate line within that same account, distinguishing encumbered shares from free ones.
How it works
From Chapter 9, sections 9.2.2–9.2.6: once the pledgee's DP confirms the pledge, the status becomes "Accepted-Verified" and the holding statement shows the quantity as pledged balance, separate from free balance, in the pledgor's own account.
While a pledge is live, dividends still go to the pledgor, and bonus shares are credited to the pledgor's account as pledged balance — corporate benefits follow the pledgor, not the pledgee, right up until invocation. Locked-in securities can be pledged and shown as pledged balance, but the invocation request cannot be set up before the lock-in release date.
On invocation, pledged balance moves straight to the pledgee's free balance on verification, with no confirmation required from the pledgor's DP (for a pledge; hypothecation needs the borrower's confirmation). On repayment, the pledgor initiates closure (CDSL: unpledge), the pledgee confirms, and the pledged balance reverts to free or locked-in balance.
A worked example
Once the lender confirms Mr Oberoi's pledge of 6,000 shares, his holding statement shows 6,000 pledged balance instead of 6,000 free.
| Event while the pledge is live | Effect |
|---|---|
| Company pays a Rs 6 dividend | Rs 36,000 credited to Mr Oberoi, the pledgor |
| 1:1 bonus declared | 6,000 bonus shares credited to Mr Oberoi as pledged balance |
| Mr Oberoi repays the loan | Pledgee confirms closure; 12,000 shares revert to free balance |
Had Mr Oberoi instead defaulted, the lender's invocation would have moved the pledged balance straight to the lender's free balance — with no say required from Mr Oberoi's own DP.
Why NISM asks about it
Chapter 9 uses pledged balance as the anchor status throughout sections 9.2.2 to 9.2.6 — creation, corporate benefits, invocation and closure all reference it. Expect a question on where corporate benefits go while a balance is pledged (to the pledgor), and on what happens to pledged balance on invocation versus on repayment.
Common exam traps
- Pledged balance still legally belongs to the pledgor — ownership does not shift to the pledgee until invocation.
- Dividends and bonus shares during a live pledge go to the pledgor, with bonus shares specifically credited as pledged balance, not as free balance.
- Locked-in securities can carry pledged balance, but cannot be invoked before the lock-in release date.
- On invocation, pledged balance moves to the pledgee's free balance; on repayment (unpledge), it moves back to the pledgor's free or locked-in balance — two different destinations for two different endings.
Check yourself
1.A company declares a dividend on shares that are currently pledged. Who receives the dividend?
- a)The pledgee, since he holds the security interest
- b)The pledgor (borrower), in the usual manner
- c)The depository, which holds it in trust until the pledge is closed
- d)It is credited to the pledgor only after the pledge is closed
Show the answer
Answer: (b) The pledgor (borrower), in the usual manner
Ownership of the pledged/hypothecated securities remains with the pledgor (borrower) until the pledge is invoked. Hence, all corporate benefits — cash and non-cash — like dividends, bonus, rights etc. will accrue to the borrower. Specifically, dividends will be given to the borrower in the usual manner.
Option A borrows intuition from a mortgaged property let out on rent, where the lender often does take the income. That is not how a demat pledge works — the securities never leave the pledgor's account until invocation.
Option D confuses cash benefits with securities benefits. Cash goes straight out to the borrower with no waiting. It is the securities benefits that stay locked in: bonus shares will be credited to his account as pledged balances, and shares from splits, consolidation or a merger scheme are credited to the account of the pledgor with pledge marked.
2.A pledgor submits an unpledge request after repaying his loan, and the pledgee rejects it. What happens to the securities?
- a)They are automatically credited to the pledgor's free balance after seven days
- b)They continue to remain as pledged balances in the pledgor's account
- c)They are transferred to the pledgee's account
- d)The depository releases them on the pledgor's written representation
Show the answer
Answer: (b) They continue to remain as pledged balances in the pledgor's account
In case of rejection by the pledgee, the securities continue to remain as pledged balances in the pledgor's account.
This is the point of the whole confirmation architecture: the pledgor can request un-pledging or closure after the performance of the underlying agreement — request, not effect. Repaying the loan does not release anything by itself. There is no automatic timer, so option A is wrong.
Option C confuses closure with invocation. Securities move to the pledgee only on invocation, where they are transferred from the "pledged balance" of the pledgor's beneficial owner account to the "free balance" of the pledgee's beneficial owner account.
The pledgor is not left in the dark: the reasons for rejection are displayed in the DP system of the pledgor's DP, from a defined list including "agreement number differs from that on the agreement", "market value of pledged ISINs insufficient" and "POA not received from all holders". In CDSL those coded reasons are absent and the pledgee DP enters the reason in a remark field.
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.
- Invocation Request FormThe form a pledgee submits to its DP to invoke a pledge after the pledgor defaults, moving the securities from the pledgor's pledged balance to the pledgee's free balance without the pledgor's confirmation.
- Pledge setup balanceThe 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.
- 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.
- Unilateral closureThe facility letting a pledgee alone close a pledge, with no confirmation or rejection needed from the pledgor or the pledgor's DP.
- Unpledge Request FormThe prescribed form on which a pledgor asks its DP to close a pledge and release the securities, which the DP must retain for at least five years along with the PRF and IRF.
- Rights of the pledgorThe rule that a pledgor keeps every corporate benefit on pledged securities until invocation, provided the pledge still covers at least one share on the corporate action's execution date.