Pledging Feature Launched: Benefits and How to Use It

The pledging feature in the Indian securities market enables investors to borrow funds or meet margin requirements by using their existing shares as collateral, without having to sell them. This facility has gained popularity with the rise of digital demat platforms and online trading, offering flexibility and liquidity to investors. Whether used for trading or meeting personal finance needs, understanding how pledging works, its benefits, and the associated risks is essential for responsible investing.

Pledging refers to the process of offering your existing shares held in a demat account as security against a loan or margin requirement. The ownership of the shares remains with the investor, but the shares are marked as “pledged” and cannot be sold until the loan or margin obligation is settled and the pledge is released.

Pledging is commonly used for:

• Availing loans against securities
  

• Meeting margin requirements for futures and options (F&O) trading
  

• Accessing liquidity without selling long-term holdings

The pledging feature has been streamlined through depositories like NSDL and CDSL. Here's how it typically works:

1. The investor selects shares to pledge through their broker’s platform
   

2. A pledge request is initiated and authorised via OTP
   

3. The broker/lender evaluates the value and applies a margin haircut
   

4. Funds or margin credit are disbursed based on the net value of pledged shares
   

5. On repayment or margin closure, the pledge is released

The system ensures transparency, and the investor continues to receive corporate benefits like dividends and bonus shares during the pledge period.

While pledging offers flexibility, it is not without risks:

Market Volatility Risk

If the value of pledged shares falls significantly, the lender may issue a margin call or even liquidate the shares to recover funds.

Interest or Charges

Borrowing against pledged shares often incurs interest or margin funding charges. If not managed well, this can become a cost burden.

Restricted Trading

Pledged shares cannot be sold unless the pledge is removed. This limits liquidity in rapidly changing market conditions.

Limited to Approved Shares

Not all securities are eligible for pledging. Brokers typically maintain a list of approved shares based on liquidity and volatility criteria.

Investors can use online platforms to pledge their shares. The general process is as follows:

Step 1: Log in to your trading or demat platform.

Step 2: Select the shares and quantity you want to pledge.

Step 3: Submit the pledge request and note the transaction number.

Step 4: Approve the pledge using the OTP received from NSDL/CDSL.

Step 5: The broker credits margin or funds after verification.

The pledge remains active until the margin obligation is met or the loan is repaid. Once settled, the investor must initiate a release request to unpledge the shares.

Pledging is suitable in a variety of scenarios:

For Traders

To meet margin requirements for F&O trading without blocking cash.

For Investors

To avail of short-term funding without disturbing long-term investments.

For Business Owners

To raise working capital while retaining control over company shares.

SEBI has implemented a revised framework for margin pledging to protect investor interests. As per the new norms:

• Shares remain in the investor’s demat account
  

• A pledge is created in favour of the clearing corporation via the broker
  

• OTP-based authentication ensures explicit consent
  

• Brokers are restricted from misusing pledged shares
  

These reforms increase transparency and mitigate the risk of broker defaults or misappropriation.

Pledging is commonly used as a financial arrangement in certain situations, such as:

• Short-term liquidity needs
  

• Margin funding for well-planned trades
  

• Avoiding capital gains tax from premature share sales
  

However, it is essential to use this feature judiciously. Over-leveraging, especially in volatile markets, can lead to losses and forced liquidation of assets.

The pledging feature provides a convenient and efficient way to unlock liquidity from your existing equity portfolio. Whether used for margin trading or personal financing, it offers flexibility without forcing investors to exit their long-term holdings. Understanding the associated risks, costs, and regulatory framework helps investors evaluate the pledging feature and its implications more effectively.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.