Your investment in shares not only provides you with regular income and increment in wealth, but it can also be used as collateral for loans during your rainy days. While the banks and financial institutions grant you the loan against your shares after valuation, your Depository Participant has a crucial role to play in this share loan process.
Among many services provided by the Depository Participants, they also facilitate the DEMAT Account Holders with convenient and secure electronic procedures for pledging dematerialized securities. Whenever any loan is availed against securities by a person, the pledge of securities needs to be setup and accepted through CDS and Clearing Limited (CDSC) System. For this, both the pledgor (investor) and the pledgee (loan giving entity) must have DEMAT accounts with CDSC. The DEMAT accounts are opened and the pledge is done through a Depository Participant (DP) of CDSC.
The procedure for pledging securities are as follows:
Step 1: After an agreement for share loan has been made between the pledgor and the pledgee, the pledgee should provide the required documents to the pledgor, such as:
- Pledge Letter/ Cover Letter (addressed to the Pledgor DP by the pledgee requesting pledge setup)
- Loan Deed (Loan agreement between the Pledgor and the Pledgee)
- Form as per Annex 19 filled out by the pledgee
Step 2: The Pledgor should then submit the Pledge Request Form (PRF) as per Annex 18 filled out by the pledgor along with the above mentioned documents provided by the pledgee, and if the pledgor takes loan against promoter shares of a company, a ‘No Objection Letter’ from concerned RTS Company or signed by the Company Secretary has to be submitted to the Depository Participant (Pledgor DP) where the client has maintained DEMAT account.
Step 3: Upon receiving the application for Pledge of Securities as above, the Pledgor DP processes the request for pledge setup. After checking the pledgor’s share statement and making other verifications, the Pledgor DP makes necessary entries for pledge setup and confirmation to the pledgor.
Step 4: Pledgor sends a copy of the Pledge Request Form and provides confirmation/s of Pledge Setup to the pledgee.
Step 5: The pledgee then submits the PRF and other required documents mentioned above to the DP where the pledgee has opened the DEMAT account (Pledgee DP).
Step 6: The Pledgee DP checks the submitted documents and if they are proper and adequate, it accepts the pledge and provides the confirmation of pledge acceptance to the pledgee.
Step 7: After the setup and acceptance of pledge, the pledged securities are blocked in the pledgor’s DEMAT account till they are unpledged.
- Separate confirmation statements for pledge setup and pledge acceptance are required for separate companies whose shares are to be pledged.
- For each company whose shares are pledged, the Pledgor DP charges the pledgee with a nominal amount as processing fee.
- The pledge setup must be accepted within four working days else a new setup needs to be placed.
- While pledging the securities, the pledged securities do not need to get transferred from the pledgor’s account to the pledgee’s account. They are simply locked in the pledge’s account.