Rights of the pledgor
The 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.
In plain language
A pledge does not strip an investor of ownership. The lender only holds a claim on the securities, not the securities themselves. So when a company pays a dividend or gives bonus shares, Chapter 10 asks one simple question: is the pledgor entitled, or the pledgee?
The answer favours the pledgor. Right up until the pledge is invoked, every corporate benefit — cash or non-cash — belongs to the person who put up the collateral, not the one who lent against it. But this right carries one condition tied to timing.
How it works
From Chapter 10, section 10.3.5 ("Rights of Pledgor/hypothecator"): ownership of pledged or hypothecated securities remains with the pledgor until the pledge is invoked, so all corporate benefits — cash and non-cash, like dividends, bonus and rights — accrue to the pledgor. Dividends are paid to the pledgor in the usual manner. Securities arising from corporate actions such as bonus issues, splits, consolidation or a merger/acquisition exchange are credited to the pledgor's account, with pledge marked in favour of the pledgee, provided that on the execution date of the corporate action, pledge exists for at least one share.
Chapter 9's own version of this rule (section 9.2.8) states the general principle — dividends and bonus shares go to the pledgor as pledged balance — without spelling out this "at least one share" timing condition, which is specific to how Chapter 10 frames the corporate-action interaction.
A worked example
Mr Bhandari has pledged all 1,000 shares he holds in Vertex Ltd with a bank as loan collateral. Vertex announces a 1:1 bonus with a record date of 15 September.
On 15 September, Mr Bhandari's pledge is still live over all 1,000 shares — at least one share is under pledge on the execution date — so Vertex credits 1,000 bonus shares to his account, marked as pledged in favour of the bank, just like his original holding.
Had Mr Bhandari instead unpledged all 1,000 shares on 10 September, days before the record date, no share would remain under pledge on the corporate action's execution date — so this specific proviso would not be met through the pledge route at all, and the bonus would instead simply follow the ordinary, unpledged-holder rule.
Why NISM asks about it
Chapter 10, section 10.3.5, immediately follows the monetary and non-monetary benefit procedures. Expect a question on who gets a corporate benefit on pledged shares (the pledgor) and on the timing proviso specific to this section — a pledge must cover at least one share on the execution date.
Common exam traps
- Corporate benefits on a pledge always go to the pledgor, never the pledgee, until invocation — a rule Chapter 9 also states, without this section's timing condition.
- Chapter 10 adds a proviso Chapter 9 does not spell out: the pledge must cover at least one share on the corporate action's execution date.
- Do not confuse this with pledged balance itself — that entry covers the account status; this rule covers entitlement to a fresh benefit arising on an already-pledged holding.
Where this is taught
Free preparation for NISM Series VIRelated terms
- Record dateThe date on which a company looks at its register and decides who gets the bonus, dividend, rights or split — you must be holding the shares in your demat account at the end of that day.
- Book closureThe period an issuer sets, with a start and end date, during which the depository determines beneficial owners entitled to a corporate benefit as those holding as of the end of the day before the start date.
- 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.