What Is Pledging Of Shares

By definition, pledging refers to the process of using your stocks as securities to enjoy the benefits of a loan. It operates like any other mortgage loan, like gold jewellery in a gold loan, where you use an asset as collateral. Traders in the F&O segment also use pledging to acquire the broker's margin financing to invest in transactions that require substantial initial investment.

With effective from September 1, 2020, the pledging of shares was made mandatory in the capital markets

What Is Margin Pledge

In the world of stock trading, margin is a common term. It enables investors, at the first level, to leverage and invest in deals without taking high risk. Your risk exposure is limited to the securities you have used as leverage when you use pledges. The broker liquidates the stocks in the margin account to recover its debt if you are unable to repay the margin. The Stock broker serves as a custodian for the securities or funds in the margin account.

In addition to their trading account cash balances, stockbrokers offered their clients trading limits based on their Demat account holdings prior to the new mandate. Effectively, the broker considered these as margin collateral, since, they were entitled to swipe shares from the Demat accounts of the customers, if needed. At the moment of account opening, this privilege was based on a power of attorney (POA) signed by the customer.

This mechanism was considered risky by the regulator and the system of pledging of shares was therefore instituted as a financial cushion for investors. The pledging process is initiated by the customer via his broker under the new system and executed by the depositories (NSDL/CDSL) and must be confirmed by the investor with OTP authentication.

The regulator had made it mandatory for investors to maintain a minimum margin of 20 percent before any trade is carried out. The settlement of trade is normally on the basis of T+2 (2 days after the trading day). So, now, if you want to buy stocks worth Rs 50,000, you need a compulsory Rs 10,000 margin, even if you're selling the same stock within next two days.

Here are the key points

1) Until sold, shares continue to remain in the Demat account of customers.

2) As long as customers have stocks in their Demat account, they have access to margins through pledge.

3) The entire pledging process is completely digital and smooth.

4) As the stocks remain in their Demat account, investors continue to be liable for all corporate acts such as dividends, etc. accumulating on their pledged stocks.