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

A lender holds a confirmed pledge over 1,000 shares of a company in the demat account of borrower Meena, who defaults. The lender invokes the pledge. What is the correct effect of the invocation?

On invocation of a pledge after default, the pledged shares are taken out of the pledgor's account and transferred to the pledgee's account, or sold, so the lender can recover its dues. This right exists because the securities were blocked in the lender's favour earlier.

  1. AShares are transferred from the pledgor's account to the pledgee's account, or sold, to recover dues, subject to the pledgee's request and the DP's processingCorrect
  2. BPledge is automatically cancelled and the shares are released to Meena
  3. CShares are extinguished by the depository
  4. DMeena must first approach SEBI for permission

Explanation

On invocation the pledgee requests its DP, and the pledged securities are moved to the pledgee's account (or sold) to realise the dues; the pledged lien gives this right. Release to the pledgor occurs on closure, not invocation. Depository does not extinguish shares, and SEBI permission is not required.

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