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
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.
Such transitions enabled a smooth and more
transparent share trading ecosystem for the share holders and the stock