NISM-Series-VI: Depository Operations · Special Services - Pledge and Hypothecation

Invocation and Closure of Pledge in a Demat Account

Updated 11 October 2026

Invocation is when the pledgee enforces the pledge after default: the pledgee instructs its DP, and the securities are debited from the pledgor's account and credited to the pledgee's demat account. Closure is when the borrower repays and the securities return to free balance. The pledgee initiates invocation. The pledgor initiates closure; the pledgee must confirm.

Understand Invocation and Closure of Pledge

A pledge in the depository system lets a holder (the pledgor, or borrower) offer securities as security for a loan from a lender (the pledgee). The pledge is created when the pledgor instructs and the pledgee confirms. The securities stay in the pledgor's demat account, but they move from the free balance to a pledged balance (lien marked). The pledgor cannot sell or transfer them while the pledge is on.

A pledge ends in one of two ways. If the borrower repays, the pledge is closed (also called released). If the borrower defaults, the pledgee invokes the pledge to recover dues from the securities.

The key idea: invocation is initiated by the pledgee. Closure is initiated by the pledgor and must be confirmed by the pledgee. The pledge is closed only after the pledgee confirms, because the pledgee holds the security interest. The pledgor cannot invoke a pledge, and cannot close it without the pledgee's confirmation. The depository system carries out the instructions through the DPs.

On invocation, the pledgee gives its instruction through its own DP. The pledged securities are debited from the pledgor's account and transferred to the pledgee's demat account. The pledgee can then deal with them to recover its dues. On closure, the lien marking is removed and the securities return from the pledged balance to the free balance in the pledgor's account.

Partial amounts are possible. A pledge can be invoked or closed for only part of the pledged quantity, so the rest stays pledged.

A related term is hypothecation. There the securities remain with the borrower and the lender has a charge, but the process and details differ. Do not mix the two when answering.

Key formulas to remember

Who initiates invocation: Invocation request = made by pledgee through its DP; The pledgor does not invoke. Trap options often name the pledgor.
Who initiates closure: Closure request = initiated by pledgor; confirmed by pledgee; The pledge is closed only after the pledgee confirms. Until then the securities stay in the pledged balance.
Effect of invocation: Pledged securities: debited from pledgor's account → credited to pledgee's demat account; Securities are transferred out of the pledgor's account. The pledgee can invoke part of the pledged quantity.
Effect of closure: Pledged securities: pledged balance (lien marked) → free balance in pledgor's account; No change of ownership. Only the lien marking is removed.

How to solve Invocation and Closure of Pledge questions

Use this method for any MCQ on invoking or closing a pledge.

1Read the scenario and find the trigger: repayment of the loan or default by the borrower.
2If repayment, the answer is closure. If default, the answer is invocation.
3Identify who acts. For invocation, the pledgee instructs through its DP. For closure, the pledgor initiates the request and the pledgee confirms it.
4Decide what happens to the securities: invocation debits them from the pledgor's account and credits the pledgee's demat account; closure returns them to free balance in the pledgor's account.
5Check quantity. If only part is invoked or closed, the remaining securities stay pledged.
6Eliminate options that let the pledgor invoke, that close the pledge without the pledgee's confirmation, or that confuse pledge with hypothecation.

Quickest way: Trigger and Direction Check

When to use it: Use when you have under a minute and the options look alike.

Ask: repaid or defaulted?
Repaid means closure: the pledgor initiates, the pledgee confirms, and the securities stay with the pledgor and go back to free balance.
Defaulted means invocation: the pledgee initiates through its DP and the securities are debited from the pledgor's account and credited to the pledgee's demat account.
Only invocation is initiated by the pledgee. Closure needs the pledgee's confirmation.

Common mistakes in Invocation and Closure of Pledge

Saying the pledgor can invoke the pledge
Students think the owner of the securities controls them.
Fix: Only the pledgee invokes, because the pledgee holds the security interest. The pledgor cannot invoke, but the pledgor does initiate closure, and the pledge closes only after the pledgee confirms.
Thinking the pledgee initiates closure, or that closure needs no confirmation
Students assume the lender controls both ways of ending a pledge.
Fix: Closure is initiated by the pledgor and confirmed by the pledgee. Invocation is the one initiated by the pledgee.
Mixing up invocation and closure
Both are ways of ending a pledge and the words sound similar.
Fix: Link invocation with default and closure with repayment.
Thinking securities move to the pledgee on closure
Students assume any end of a pledge means a transfer.
Fix: On closure nothing moves to the pledgee. The securities simply return from the pledged balance to the free balance in the pledgor's account.
Assuming the whole pledge must be invoked or closed
Students think a pledge is all or nothing.
Fix: Remember that a pledge can be invoked or closed for part of the quantity. The balance stays pledged.
Treating pledge and hypothecation as the same
Both create security for a loan.
Fix: For this topic, associate invocation and closure with pledge, where securities sit in the pledged balance (lien marked) of the pledgor's account.

Worked examples

Example 1

A borrower defaults on a loan secured by pledged shares. Which of the following correctly describes what happens when the lender enforces the pledge? (a) The pledgor requests the DP to close the pledge (b) The pledgee invokes the pledge through its DP and the securities are debited from the pledgor's account and credited to the pledgee's demat account (c) The securities are automatically sold by the depository (d) The pledge is cancelled and the securities are freed

Show the solution

Trigger: the borrower has defaulted, so this is invocation, not closure.
Option (a) is wrong because closure is for repayment, not default.
Option (c) is wrong because the depository does not sell securities on its own. It carries out the pledgee's instruction given through its DP.
Option (d) describes closure, which applies to repayment.
Option (b) matches: the pledgee invokes through its DP and the securities are debited from the pledgor's account and credited to the pledgee's demat account. The pledgee may invoke all or part of the pledged quantity.

Answer: (b) The pledgee invokes the pledge through its DP and the securities are debited from the pledgor's account and credited to the pledgee's demat account.

Example 2

A borrower repays a loan fully and the pledge on the shares is to be ended. Who initiates the closure request, who confirms it, and what is the effect on the shares? (a) Pledgee initiates; pledgor confirms; shares move to the pledgee's account (b) Pledgor initiates; pledgee confirms; shares are freed in the pledgor's account (c) Pledgor initiates; pledgee confirms; shares move to the pledgee's account (d) Pledgee initiates; pledgor confirms; shares are freed in the pledgor's account

Show the solution

Trigger: full repayment, so this is closure.
Closure is initiated by the pledgor and confirmed by the pledgee. The pledge is closed only after the pledgee confirms.
Closure removes the lien marking. No transfer of ownership takes place.
The shares return from the pledged balance to the free balance in the pledgor's account.
Option (a) has reversed roles and a wrong effect. Option (d) has reversed roles, although its effect is correct. Option (c) has the right roles but a wrong effect: a transfer to the pledgee belongs to invocation.

Answer: (b) The pledgor initiates the closure request, the pledgee confirms it, and the shares are freed in the pledgor's account.

Exam tips

Read the first line of the question for the trigger word: default points to invocation, repayment points to closure.
Remember that the pledgor cannot invoke a pledge, but does initiate closure, which the pledgee must confirm. Reject options that let the pledgor invoke, and options that close the pledge without the pledgee's confirmation.
Remember that NISM Series VI has negative marking of 25% of the marks of a question, so skip only if you cannot narrow to two options.
Do not carry over details of hypothecation into pledge questions. Keep the two separate.

Practice questions from Special Services - Pledge and Hypothecation

Invocation and Closure of Pledge: frequently asked questions

What is the difference between pledge invocation and pledge closure?

Invocation happens when the borrower defaults and the pledgee enforces the pledge, so the securities are debited from the pledgor's account and credited to the pledgee's demat account. Closure happens when the borrower repays and the pledge ends, so the securities return to free balance in the pledgor's account. The pledgee initiates invocation, while the pledgor initiates closure and the pledgee confirms it.

Who can invoke a pledge in a demat account?

Only the pledgee, who is the lender. The pledgee gives the instruction through its own DP, which processes it through the depository system. The pledgee can invoke all or part of the pledged quantity.

How is a pledge released in a demat account?

After repayment, the pledgor initiates the closure request through its DP. The pledgee then confirms it. Once the pledgee confirms, the lien marking is removed and the securities return to free balance in the pledgor's account.

Can a pledge be invoked for only some of the shares?

Yes. Invocation or closure can be for part of the pledged quantity. The remaining securities stay pledged.