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

A bank, as pledgee, wants to enforce its security after the borrower defaults on a loan secured by pledged demat shares. What is the correct step in the depository system?

The pledgee invokes the pledge by instructing its DP, and the pledged securities are then transferred from the pledgor's demat account to the pledgee's account. No rematerialisation or issuer involvement is needed, and the pledgee cannot debit the account unilaterally.

  1. AThe pledgee invokes the pledge through its DP, and the shares are moved to the pledgee's accountCorrect
  2. BThe pledgee directly debits the pledgor's account without any instruction
  3. CThe issuer company cancels the shares
  4. DThe pledgor must first rematerialise the shares

Explanation

On default the pledgee gives an invocation instruction to its DP, and the depository transfers the pledged securities from the pledgor's account to the pledgee's account (or as specified). No rematerialisation or issuer action is needed. The pledgee cannot debit without invoking the pledge.

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