Pledged Securities: Key Concepts

A pledged security refers to a financial asset—such as shares, bonds, government securities, mutual funds, or other dematerialised instruments—that is offered as collateral to a lender against a loan. When a borrower pledges securities, they continue to remain the owner, but the lender (pledgee) gains the right to sell or take possession of the securities if the borrower fails to repay.

Key characteristics include:

• Securities remain in the borrower’s demat account but get marked as pledged.
  

• The borrower cannot sell or transfer pledged securities until the pledge is removed.
  

• The lender provides funds based on the value of securities and applicable loan-to-value (LTV) ratios.

Pledging is widely used for margin funding, overdrafts, LAP (Loan Against Shares), and business credit lines.

In banking, pledged securities serve as a secured loan mechanism. Customers can pledge approved securities to banks to obtain:

• Overdraft facilities
  

• Personal loans or business loans
  

• Margin trading limits
  

• Emergency liquidity

Banks maintain an LTV cap (often 20–70%) depending on:

• Volatility of the security
  

• Credit risk
  

• Regulatory guidelines

The bank becomes the "pledgee," while the customer becomes the "pledgor." If the borrower defaults or fails to maintain margins, the bank has the authority to sell the pledged securities to recover dues.

Shares are the most commonly pledged security. Investors pledge shares for short-term funding, trading margin, or working capital.

Why Shares Are Pledged

• To avoid selling long-term investments
  

• To unlock liquidity quickly
  

• To leverage portfolio value for trading or business
  

• To raise funds during emergencies

Key Points

• Shares must be held in demat form.
  

• Only approved securities can be pledged.
  

• LTV and haircut apply based on volatility.

The pledging process in the demat system (NSDL/CDSL) is digital and straightforward. Here’s the typical workflow:

1. Loan Request / Margin Requirement
   Borrower approaches a bank, NBFC, or broker to obtain funds.
   

2. Selection of Securities
   Borrower selects securities from their demat account to pledge.
   

3. Initiation of Pledge Request
   The lender raises a pledge request through the depository system.
   

4. Borrower Authorisation
   Borrower logs in to their demat account and confirms the pledge request using OTP or login credentials.
   

5. Pledge Creation
   Securities are marked as pledged and become non-transferable.
   

6. Funds Disbursal
   The lender releases loan funds or margin benefits.
   

7. Pledge Closure / Invocation
   

   • Upon repayment, the pledge is removed.
     

   • If a borrower defaults, the lender can invoke (sell) securities.

Here are the key rights and obligations for both parties:

Pledgor (Borrower)

• Must maintain margin requirements
  

• Continues to receive corporate benefits (dividends, bonuses) unless invoked
  

• Cannot sell pledged securities
  

• Must repay loan on time

Pledgee (Lender)

• Has right to sell securities if borrower defaults
  

• Must notify borrower before invocation
  

• Must follow regulatory guidelines
  

• Maintains LTV compliance

Here are the key benefits of pledging securities:

• No need to sell investments to access funds
  

• Quick liquidity at competitive rates
  

• Cost-effective borrowing compared to unsecured loans
  

• Retain ownership and market appreciation potential
  

• Flexible repayment structures
  

• Useful for traders needing margin funding

Here are the risks involved when securities are pledged:

• Market risk: Falling security prices can trigger margin calls
  

• Forced selling: Lender may sell pledged assets on default
  

• Limited access: Borrower cannot sell or transfer pledged shares
  

• Volatility restrictions: Only qualified securities are allowed
  

• Interest cost sensitivity: Borrowers must manage interest burden

Pledging of securities in India is governed by:

• SEBI Regulations
  

• NSDL/CDSL depository rules
  

• RBI guidelines for loans against shares
  

• LTV rules for financing companies
  

• Margin regulations for brokers

These rules ensure transparency, security, and protection of both borrowers and lenders.

Suppose you own shares worth ₹5,00,000 in your demat account.
A bank offers a loan with 50% LTV.

• Eligible loan amount: ₹2,50,000
  

• Shares remain in your demat but marked as pledged.
  

• After repayment, the pledge is removed and shares become free again.

If the share value falls, the lender may request additional margin.

Pledged securities offer an effective way to access liquidity while retaining ownership of investments. They support financial flexibility, especially when timely funding is required, but they also come with risks that depend on market movements and borrower discipline. By understanding how pledging works, the terms involved, and the safeguards available, investors can make informed decisions and manage their obligations confidently.

Key Points to Note:

• Provide liquidity without selling existing investments

• Can be pledged against shares, bonds, or mutual funds

• Carry risks such as margin calls and market-driven shortfalls

• Lenders may sell securities in case of default

• Knowing the process, regulations, and rights ensures safer use

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.