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

A lender has accepted pledged shares from a borrower who defaults on the loan. Which action correctly describes invoking the pledge in the depository system?

On borrower default, the pledgee invokes the pledge through its DP, and the pledged securities are transferred to the pledgee's account, where they can be sold to recover the dues. The pledgor's confirmation is not needed and the issuer or exchange is not involved.

  1. AThe pledgee requests invocation, and the DP of the pledgee processes it so that the securities move to the pledgee's account, which may then sell themCorrect
  2. BThe issuer company cancels the pledge and pays the lender in cash
  3. CThe pledgor is required to confirm the invocation before the DP can act
  4. DThe stock exchange invokes the pledge automatically on default

Explanation

On default the pledgee, through its DP, invokes the pledge. The pledged securities are transferred to the pledgee's account, who can then sell or appropriate them to recover dues. The pledgor's consent is not required at that stage, and neither the issuer nor the exchange acts.

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