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

Mr. Iyer has pledged shares to a bank through his DP. After the pledge is created in the depository system, what is the status of the pledged shares in his demat account?

The shares stay in Mr. Iyer's demat account but are blocked or earmarked as pledged, so he cannot sell or transfer them while the pledge subsists. Ownership does not pass to the bank until the pledge is invoked.

  1. AThey are transferred to the bank's demat account and ownership passes to the bank
  2. BThey are extinguished and the loan is treated as repaid
  3. CThey remain in his account but are blocked, so he cannot sell or transfer them while the pledge is onCorrect
  4. DThey remain freely transferable until the bank invokes the pledge

Explanation

On creation of a pledge, the securities stay in the pledgor's account but are marked as pledged and blocked from free transfer. Ownership does not pass to the pledgee at this stage. Hence the idea that they stay freely transferable is wrong.

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