Pledgor
The 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.
In plain language
Someone has to be the one putting up the collateral. In a pledge or hypothecation of demat securities, that person is the pledgor — the borrower.
The pledgor does not hand anything physically to the lender. Everything happens by book entry: the pledgor initiates the transaction through its own DP, and the securities are debited from its free or locked-in balance and re-shown as a separate balance in its own account, not the lender's.
How it works
From Chapter 9, sections 9.2.2–9.2.3: the pledgor submits a request in the prescribed form — the Pledge Request Form — through its DP, giving details of the securities, the agreement number, the pledgee's details, and a closure date indicating the duration. The DP verifies the form, and on acceptance, the system generates a pledge sequence number (PSN); the securities move out of the pledgor's free or locked-in balance into pledge setup balance.
A pledgor can set up a pledge request even with insufficient or nil balance in the account, and can specify a future date as the execution date; if no execution date is given, the business date on which the pledgor's DP verifies the pledge is used instead. At NSDL, a pledgor registered for e-Token-based SPEED-e access can also submit the instruction that way, and at CDSL, a pledgor registered for easiest can pledge (and the pledgee accept) entirely through that facility.
Throughout the life of the pledge, ownership and corporate benefits stay with the pledgor — dividends are paid to the pledgor, and bonus shares are credited to the pledgor's account as pledged balance — right up until the pledgee actually invokes on default.
A worked example
Mr Oberoi, holding 6,000 shares worth Rs 36,00,000, wants to borrow Rs 20,00,000 against them. As the pledgor, he initiates the pledge through his own DP, filling in the Pledge Request Form with the lender's (pledgee's) details, an agreement number, and a closure date six months out.
His DP generates a pledge sequence number and moves the 6,000 shares from his free balance into pledge setup balance. Once the lender confirms, the shares show as pledged balance in Mr Oberoi's own account — not the lender's.
While the loan is outstanding, the company declares a Rs 6 dividend per share: the full Rs 36,000 goes to Mr Oberoi, the pledgor, not to the lender. Only if Mr Oberoi defaults and the lender invokes the pledge do the shares finally move out of his account.
Why NISM asks about it
Chapter 9 (Special Services — Pledge and Hypothecation) builds its entire procedural narrative around the pledgor initiating and the pledgee confirming. Expect a question on who initiates a pledge (the pledgor, always) and on the fact that the pledgor keeps ownership and corporate benefits until invocation.
Common exam traps
- The pledgor always initiates — a pledgee cannot start a pledge unilaterally.
- A pledgor can set up a pledge with insufficient or nil balance, and with a future execution date — the securities need not already be sitting free at the moment of the request.
- Corporate benefits belong to the pledgor throughout, right up until invocation — dividends paid, bonus shares credited as pledged balance.
- Both pledgor and pledgee need accounts with the same depository; inter-depository pledge is not permitted, though the DPs can differ.
Check yourself
1.A pledgor submits a Pledge Request Form on 4 June leaving the execution date blank. The DP verifies the pledge on 6 June. What is the execution date?
- a)4 June, the date of submission
- b)5 June, the next business day after submission
- c)6 June, the business date on which the pledgor DP verifies the pledge
- d)The date on which the pledgee confirms the creation
Show the answer
Answer: (c) 6 June, the business date on which the pledgor DP verifies the pledge
If the execution date is not mentioned in the Pledge Request Form, then the business date on which the Pledgor DP verifies the pledge will be taken as execution date. That is 6 June.
Option A is the intuitive answer and the standard trap — the date of submission is simply not the reference point. Option B invents a business-day convention that does not exist here.
Option D confuses two different stages. Verification by the pledgor DP is what fixes the execution date; confirmation by the pledgee is a later, separate step that completes the pledge — the pledge will get credited only after the confirmation advice is entered in the DP system.
The underlying flexibility is worth remembering alongside it: the pledgor BO shall have the facility to set up a pledge request with a future date as the execution date, and may do so even in case of insufficient or nil balance in the pledgor BO account.
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.
3.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.
- 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.
- 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.
- 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.
- Pledge sequence numberThe unique number the DP system generates for each pledge or hypothecation request, identifying that transaction for confirmation, closure and invocation even when many pledges exist between the same parties.
- 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.
- 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.
- Re-pledgeA further pledge of securities already pledged to a Trading or Clearing Member, moving the same margin pledge down the TM-to-CM-to-CC chain without the shares ever leaving the original client's demat account.
- 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.
- Unilateral closureThe facility letting a pledgee alone close a pledge, with no confirmation or rejection needed from the pledgor or the pledgor's DP.