Share pledging has become a common practice in the stock market. In this, company shares serve as collateral for securing loans from banks and financial institutions. This method is commonly utilised by individuals and companies to raise capital for various purposes such as meeting capital requirements or settling existing debts.
What is pledging of shares?
Pledging of shares means utilising shares as collateral to secure a loan. In this arrangement, a shareholder, known as the pledgor, offers their shares to a lender, or the pledgee, as security for a loan or credit. Despite using the shares as collateral, the ownership remains with the pledgor, enabling them to retain entitlements such as dividends and voting rights.
However, in the event of the pledgor defaulting on the loan obligations, the pledgee may have the authority to sell the pledged shares to recover the outstanding amount. This practice of using shares as collateral or margin against shares serves as a means for investors and promoters to secure capital while still maintaining ownership of their shares.
Also read: Demat account: How to pledge shares? Here’s a step-by-step guide
Here are five things to keep in mind while pledging shares from your demat account –
Holdings shall be approved
Typically, only shares of listed companies qualify for a loan, and they must not be entities that have been banned or delisted from stock exchanges. The same principle applies to mutual fund units.
Pledge partial or whole
You have the option to pledge either a portion or the entirety of your securities, depending on the amount needed. If the required sum is modest, you can choose to pledge only a fraction of your holdings. It’s advisable to conduct a preliminary assessment to determine the approximate collateral amount necessary to fulfill your requirement.
Can’t sell or trade pledged shares
Upon obtaining a loan against securities, your pledged shares units are subject to a lien. This signifies that you are unable to initiate any trading or selling activities until the borrowed amount is repaid to the lender.
Also read: How does a demat account facilitate margin funding in trading? MintGenie explains
Lenders can liquidate pledged shares upon default
If you are unable to repay the loan with its accrued interest within the specified tenure, lenders have the authority to liquidate your assets as a means to recover the outstanding amount.
Interest payment
Interest is incurred on loans taken against shares. Generally, the interest rates for loans secured against securities are considerably lower in comparison to personal loans. Depending on the bank, the interest rates typically range from 7% to 15% per annum. One advantageous aspect is that loans against equities are often provided as overdraft facilities, meaning you only pay interest on the amount utilised, offering flexibility and cost-effectiveness.
FAQs
Who can pledge shares?
Any person or organisation possessing shares in a demat account has the option to pledge them, contingent upon the terms and conditions set forth by the lender.
What types of securities can be pledged?
Securities eligible for pledging encompass shares, debentures, bonds, and mutual fund units, all held in dematerialised form.
Can pledged shares be traded or transferred?
Typically, pledged shares can be traded or transferred with the lender’s approval, contingent upon any limitations outlined in the pledge agreement.
What happens if the loan is repaid?
Upon repayment of the loan, the pledged shares are returned to the shareholder’s demat account, and the pledge is removed.
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Published: 08 May 2024, 11:15 AM IST