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

Mr. Raman pledged 500 shares of an Indian company with a bank, and the pledge was confirmed. During the pledge, the company declares a cash dividend. To whom is the dividend normally paid?

The dividend goes to the beneficial owner, Mr. Raman. A pledge only creates a lien and does not transfer ownership, so the shares remain in the pledgor's account and the corporate benefit belongs to him, not to the pledgee bank.

  1. AThe pledgee bank, because it holds the lien on the shares
  2. BThe depository, until the pledge is closed
  3. CThe beneficial owner (pledgor), since the pledge does not transfer ownershipCorrect
  4. DThe DP of the pledgee, as a service fee

Explanation

In a pledge of dematerialised securities the shares stay in the pledgor's account with a pledge marking; ownership is not transferred. The pledgor therefore remains entitled to dividends and other benefits. The pledgee has only a lien over the securities, so option A is wrong.

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