Pledging hypothecation of securities for borrowing

[Fredric Swinski]

In any stock share trading market, dematerialized securities can be pledged for borrowing like the physical securities. In fact, the pledging of dematerialized securities may entitle the borrower a preferential interest rate. It is inexpensive, easy and expeditious compared to that of the physical securities. Lock-in securities can also be pledged, but they cannot be invoked before the lock-in release date.

After pledging the securities, the investor (pledgor) continues to remain as a beneficiary holder and receives the benefits of corporate action. In case the securities are ‘pledged’, the ‘pledgee’ can exercise his prerogative to invoke and instruct the ‘pledgor’s’ depository participant to transfer securities without the ‘pledgor’s’ consent.

There are three main aspects related to pledging securities:
1. Pledging of securities
2. Release of Lien on securities
3. Invocation by the lender

The salient features of this process are as follows:
• An investor (pledgor) holding securities in an account with a depository participant can pledge or hypothecate it for a loan/credit facility extended through the pledge. The pledge so created can either be closed on repayment of a loan or invoked on default
• The creation of pledge/hypothecation has to be initiated by the pledgor through his depository participant. The depository participant has to confirm the creation of the pledge
• On repayment of the loan, the pledgor initiates the closure of the pledge or its hypothecation through the depository participant. The pledge will arrange with its depository participant to confirm the closure of the pledge or its hypothecation
• In case of default by the pledgor, the pledgee has the option to initiate an invocation of the pledge or its hypothecation. The invocation procedure is as follows:
o Hypothecation: Confirmation from the pledgor for the invocation of the hypothecation of the pledge
o Pledge: Confirmation of the pledgor’s depository participant is not required for invocation