Unilateral closure
Also written Unilateral Closure (Unpledge) of Pledge
The facility letting a pledgee alone close a pledge, with no confirmation or rejection needed from the pledgor or the pledgor's DP.
In plain language
Closing a pledge normally needs both sides. The pledgor asks for closure; the pledgee's DP still has to confirm it before the securities actually come free.
Unilateral closure removes half of that requirement. Here it is the pledgee itself who starts the closure, and once it does, the pledgor need not do anything at all. No confirmation, no rejection, nothing — the process simply completes.
How it works
From Chapter 9, section 9.2.5: the facility for unilateral closure (unpledge) of a pledge by the pledgee is provided by the depositories. The pledgee submits an instruction in the prescribed form to its own DP to initiate the unilateral closure. The process otherwise follows the same steps as an ordinary pledgor-initiated closure (section 9.2.4), except that no action — confirmation or rejection — is required from the pledgor or the pledgor's DP at all. In CDSL terminology, pledge closure generally is referred to as "unpledge."
A worked example
A bank holds a confirmed pledge over 2,000 shares from a borrower whose loan has now been fully repaid outside the depository system, through a separate settlement.
Rather than waiting for the borrower to initiate closure through his own DP, the bank itself submits an unpledge instruction to its own DP to release the 2,000 shares — a unilateral closure. The borrower's DP is not asked to confirm or reject anything; the 2,000 shares simply move from pledged balance back to the borrower's free balance once the bank's instruction is processed.
Why NISM asks about it
Chapter 9, section 9.2.5, sets out unilateral closure immediately after the ordinary pledgor-initiated closure procedure. Expect a direct contrast question: who initiates ordinary closure (the pledgor) versus unilateral closure (the pledgee), and the fact that no pledgor-side confirmation is needed for the latter.
Common exam traps
- Unilateral closure is initiated by the pledgee — the opposite of the ordinary closure procedure, which the pledgor initiates.
- No confirmation or rejection is required from the pledgor's DP under unilateral closure — exactly what makes it "unilateral."
- Do not confuse this with invocation of a pledge on default: unilateral closure releases the pledge, typically after repayment; invocation transfers ownership to the pledgee after default.
Check yourself
1.The pledgee has confirmed creation of a pledge. The pledgor now asks his own DP to cancel the pledge order because he has found another lender. What is the position?
- a)The pledgor's DP can cancel it at any time before the closure date
- b)The pledgor's DP can cancel it only if both parties hold their accounts with the same DP
- c)The pledgor's DP cannot cancel the pledge order after the pledgee has confirmed its creation
- d)The pledgor's DP can cancel it unilaterally, as with a unilateral closure
Show the answer
Answer: (c) The pledgor's DP cannot cancel the pledge order after the pledgee has confirmed its creation
The workbook: "The pledgor's DP cannot cancel the pledge/hypothecation order after confirmation of creation of the pledge/hypothecation by the pledgee." Once confirmed, the pledge can end only through closure (unpledge) on repayment or invocation on default.
- A invents a cancellation window.
- B is wrong because having the same DP changes nothing: "It remains the same irrespective of whether or not they have accounts with different DPs. Even if both have their accounts with the same DP, the procedure of receiving the pledge confirmation from the lender has to be followed."
- D gets unilateral closure backwards. It is initiated by the pledgee, and then no action is required by the pledgor or the pledgor's DP. The pledgor has no unilateral route.
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.
- 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.
- 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.