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

Pledge of Securities in the Depository System

Updated 11 October 2026 · Fact-checked

A pledge in the depository system lets a demat account holder (the pledgor) offer dematerialised securities as security for a loan from a lender (the pledgee). The securities are blocked in the pledgor's account through a depository instruction. Steps: creation, confirmation, then closure on repayment or invocation on default.

Understand Pledge of Securities in Depository System

A pledge is a way of giving securities as security for a loan. The borrower keeps ownership of the securities. The lender gets a right to deal with them only if the borrower defaults.

The borrower is the pledgor. The lender is the pledgee. Both need a demat account. In the depository system, the securities do not move on paper. The depository records the pledge electronically. Section 12 of the Depositories Act, 1996, the SEBI (Depositories and Participants) Regulations and the depository bye-laws allow this.

The Depository Participant (DP) is the link. The pledgor instructs their own DP to create the pledge. When the pledge is created, the securities are blocked (frozen) in the pledgor's account. The pledgor cannot sell or transfer them while they are blocked. The pledgee, through their DP, must confirm the pledge within the stipulated time. If the pledgee does not confirm within that time, the pledge instruction is cancelled and the securities are unblocked.

The process has three stages: creation (pledgor starts it, pledgee confirms it), closure (normally started by the pledgor when the loan is repaid and confirmed by the pledgee) and, on default, invocation (pledgee starts it through its DP and the depository processes it; the pledgor has no role in confirming it). On invocation, the pledged securities are transferred to the pledgee's account, or sold, as per the rules. Until then, the securities stay in the pledgor's account, blocked.

A key idea for the exam: the pledgor remains the beneficial owner during the pledge. Rights such as dividends and bonus normally remain with the pledgor, while the pledgee holds the security interest. Always check which party and which DP must act at each stage.

Key formulas to remember

Pledge roles
Pledgor = borrower (gives securities); Pledgee = lender (holds the security interest)
Exam options often swap the two terms.
Pledge life cycle
Creation → Confirmation → Closure (or Invocation on default)
Creation is initiated by the pledgor and confirmed by the pledgee. Closure is normally initiated by the pledgor and confirmed by the pledgee. Invocation is initiated by the pledgee through its DP and processed by the depository; the pledgor does not confirm it. Securities are blocked at creation. If the pledgee does not confirm creation within the stipulated time, the instruction is cancelled and the securities are unblocked.
Effect on pledgor's holding
Pledged securities are blocked in the pledgor's account from creation until closure or invocation
The pledgor remains the beneficial owner during the pledge but cannot transfer the blocked securities. On invocation, they are transferred to the pledgee's account or sold, as per the rules.
Who instructs whom
Pledgor → own DP (creation, closure); Pledgee → own DP (confirmation of creation and closure, initiation of invocation)
Each account holder deals only through their own DP.

How to solve Pledge of Securities in Depository System questions

Use this method for any question on pledge of dematerialised securities.

  1. 1Identify who is the pledgor (borrower) and who is the pledgee (lender) in the question.
  2. 2Find the stage being asked: creation, confirmation, closure or invocation.
  3. 3Ask who initiates that stage and through which DP.
  4. 4Check the effect on the securities: blocked in pledgor's account, not transferred, until closure or invocation.
  5. 5Check who keeps ownership and benefits such as dividend. The pledgor remains the owner.
  6. 6Eliminate options that say a pledge needs physical documents, or that ownership passes at creation.
  7. 7Pick the option that matches the stage order: creation, confirmation, closure.

Quickest way: Role and stage check

When to use it: Use this when you have under a minute per MCQ and the options look similar.

  1. Mark the borrower as pledgor and the lender as pledgee.
  2. Link the verb to the party: creation is started by the pledgor and confirmed by the pledgee. Closure is normally started by the pledgor and confirmed by the pledgee.
  3. For invocation, the pledgee starts it through its DP and the depository processes it. The pledgor does not confirm it.
  4. Remember the order: create, confirm, close.
  5. Reject any option that moves ownership at creation.
  6. Choose the remaining option.

Common mistakes in Pledge of Securities in Depository System

  • Swapping pledgor and pledgee

    The two words sound alike.

    Fix: Pledgor gives (or 'pledges') securities. Pledgee receives the security interest.

  • Thinking ownership passes to the lender on creation

    Students mix pledge with a sale or transfer.

    Fix: In a pledge the pledgor remains the beneficial owner during the pledge. Only on invocation after default are the securities transferred to the pledgee's account or sold, as per the rules.

  • Saying the pledgee creates the pledge

    The lender drives the loan, so it feels natural.

    Fix: The pledgor instructs their DP to create it. The pledgee then confirms it.

  • Believing pledged securities can still be sold freely

    Students forget the blocking effect.

    Fix: Pledged securities are blocked in the pledgor's account. They cannot be transferred until closure or invocation.

  • Mixing up pledge and hypothecation

    Both are ways of giving security for a loan.

    Fix: Treat them as separate topics. In a pledge, securities are blocked at creation and the pledgee must confirm within the stipulated time, or the instruction is cancelled and the securities are unblocked. Study hypothecation separately.

  • Skipping the DP's role

    Students think the account holders deal directly with the depository.

    Fix: Account holders act only through their DPs. The DP records the instruction in the depository system.

Worked examples

Example 1

Ramesh borrows from a lender and offers his dematerialised shares as security. Who is the pledgor, who initiates the pledge creation, and who confirms it?

Show the solution
  1. Ramesh is the borrower giving the securities, so he is the pledgor.
  2. The lender receives the security interest, so the lender is the pledgee.
  3. The pledgor instructs his own DP to create the pledge.
  4. The pledgee then confirms the pledge through the pledgee's DP.

Answer: Ramesh is the pledgor and initiates creation through his DP. The lender, as pledgee, confirms it.

Example 2

After a pledge is created and confirmed, what is the position of the pledged securities in the pledgor's account, and what happens when the loan is repaid?

Show the solution
  1. The securities are blocked in the pledgor's account when the pledge is created. The pledgee confirms the pledge within the stipulated time.
  2. The pledgor stays the owner but cannot transfer or sell the blocked securities.
  3. When the loan is repaid, the pledgor initiates closure and the pledgee confirms it.
  4. On closure the securities are released and become freely available to the pledgor again.

Answer: The securities stay blocked in the pledgor's account while the pledge is on. After repayment, the pledgor initiates closure, the pledgee confirms it, and the securities are released to the pledgor.

Exam tips

  • Expect direct questions on who is the pledgor and who is the pledgee. Learn the two definitions word for word.
  • Remember the order of the process: creation, confirmation, closure.
  • Watch for options that say ownership transfers at creation. They are traps.
  • Do not confuse pledge with hypothecation or with margin pledge. Read the question for the exact term used.
  • NISM-Series-VI has negative marking of 25% of the marks assigned to a question. Guess only after you have eliminated at least one or two options. Skip a question if you cannot narrow it down.

Practice questions from Special Services - Pledge and Hypothecation

Pledge of Securities in Depository System in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Pledge of Securities in Depository System: frequently asked questions

What is a pledge in the depository system?

It is the creation of a security interest in dematerialised securities in favour of a lender. The securities are blocked in the borrower's demat account. The borrower stays the owner.

Who is the pledgor and who is the pledgee?

The pledgor is the borrower who offers the securities. The pledgee is the lender who accepts them as security.

Can a pledgor sell pledged securities?

Not while the pledge is in force. The securities are blocked in the account. They become available again only after closure.

Does a pledge need physical documents in the depository system?

The pledge is created through electronic instructions given via the DPs and recorded by the depository. This is the key advantage over paper securities.