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

A pledgor defaults on a loan. The pledgee wants to realise the pledged securities held in a pledge. What is the correct step?

The pledgee must raise a pledge invocation instruction through its DP. After confirmation, the pledged securities move to the pledgee's account for sale or adjustment against the dues. It cannot sell directly from the pledgor's account, and cancellation or rematerialisation is not part of invocation.

  1. ASell the shares directly from the pledgor's account without any instruction
  2. BSubmit an invocation request to the DP, so the pledged securities are moved to the pledgee's account or sold, as the arrangement permitsCorrect
  3. CAsk the issuer to cancel the shares
  4. DRematerialise the shares and deliver the certificates

Explanation

On default the pledgee raises a pledge invocation instruction with its DP. Following confirmation, the securities are transferred to the pledgee's account, from where they can be sold, without needing the pledgor's consent. Direct sale from the pledgor's account, cancellation and rematerialisation are not the invocation process.

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