Investors have the option to leverage their securities held in their demat accounts by pledging them as collateral to obtain a loan. This process, known as pledging, allows borrowers to access funds based on the value of their securities, including shares, debentures, bonds, and mutual fund units. By offering securities as collateral, borrowers can typically secure higher loan amounts at favorable interest rates, as lenders perceive lower risk due to the underlying asset. Moreover, the process of obtaining such loans involves minimal documentation and shorter processing times compared to traditional loan applications.
What is pledging of shares?
Pledging of shares provides a mechanism for shareholders to leverage their shareholdings to access financing, while lenders use the pledged shares as security to mitigate credit risk. It’s essential for shareholders to carefully evaluate the terms and conditions of the loan facility and understand the implications of pledging shares before entering into such arrangements. Additionally, shareholders should regularly monitor the status of pledged shares and ensure timely repayment of the loan to avoid potential consequences.
How to pledge shares from your demat account?
Pledging securities from your demat account involves a straightforward process, typically facilitated by your Depository Participant (DP) or broker.
Pledging securities involves two essential steps for successful execution. Firstly, the pledge request needs to be submitted on your trading account. Secondly, the pledge must be authorised on the CDSL portal before 7 PM. Failure to authorise the pledge by the specified time will result in the unavailability of margins for the securities. However, if the pledge is duly authorised, margins become available from the next trading day. To initiate the pledging process, follow these steps on your trading account:
– Navigate to Portfolio and select Holdings.
– Click on Options.
– Choose Pledge for margin.
– Agree to the terms of service for pledging.
– Enter the quantity of securities to be pledged.
– Click on ‘Submit’ to complete the process.
To authorise the pledge request on CDSL, follow these steps:
– Check the registered email ID or mobile number for CDSL’s notification regarding the pledge request.
– Log in to cdslindia.com/Authentication/OTP.aspx using your PAN (Permanent Account Number).
– Locate the checkbox containing the pledge details and select it.
– Click on “Generate OTP” to receive a one-time password (OTP).
– Enter the OTP received on your registered mobile number or email address.
– Click on “Submit” to complete the authorisation process.
By following these steps, you can successfully authorise the pledge request on CDSL and ensure the seamless processing of your securities pledge.
The cost associated with pledging securities is ₹30 plus GST per instrument, regardless of the quantity pledged. However, there are no charges incurred for unpledging securities. This fee structure ensures transparency and consistency in the pledging process, providing clarity to investors regarding the expenses involved in leveraging their securities for various financial purposes.
After pledging your securities, you can monitor the status of the pledged securities in your demat account. The pledged securities will typically be marked as ‘pledged’ or ‘encumbered’ in your demat holdings.
It’s essential to understand the terms and conditions of the pledge agreement, including any associated fees, interest rates, and margin requirements. Make sure to clarify any doubts or concerns with your DP or broker before proceeding with the pledge.
If you wish to release the pledged securities at a later date, you can submit a request to your DP or broker for the release of the pledge. The pledged securities will be released back to your demat account upon completion of the necessary formalities.
It’s important to note that the process of pledging securities may vary slightly depending on your DP or broker and the specific requirements of the pledge transaction. Therefore, it’s advisable to consult your DP or broker for detailed guidance tailored to your individual circumstances. Additionally, always ensure to thoroughly review and understand the terms and conditions associated with pledging securities before proceeding.
FAQs
How does pledging of shares work?
In pledging shares, the shareholder offers their shares as security to a lender in exchange for a loan. The lender provides funds based on the value of the pledged shares, and if the borrower defaults on the loan, the lender can sell the pledged shares to recover the outstanding amount.
Who can pledge shares?
Any individual or entity who owns shares in a demat account can pledge them, subject to the terms and conditions of the lender.
What types of securities can be pledged?
Securities that can be pledged include shares, debentures, bonds, and mutual fund units held in demat form.
Can pledged shares be traded or transferred?
Pledged shares can usually be traded or transferred with the consent of the lender, subject to any restrictions specified in the pledge agreement.
What happens if the loan is repaid?
Once the loan is repaid, the pledged shares are released back to the shareholder’s demat account, and the pledge is lifted.
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Published: 02 Apr 2024, 05:55 PM IST