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

Mr. Rao pledged shares with a bank under the depository system. Until the pledge is closed, which statement about the pledged shares is correct?

Pledged shares stay in the pledgor's demat account but are blocked from free transfer and marked as pledged in favour of the pledgee. Ownership does not move to the lender, so the pledgor remains the beneficial owner until the pledge is invoked.

  1. AThey are debited from the pledgor's account and credited to the pledgee's account as owner
  2. BThey remain in the pledgor's account but are blocked from free transfer, being marked as pledgedCorrect
  3. CThey are cancelled and re-issued in the pledgee's name by the issuer
  4. DThey are held physically by the DP until the loan is repaid

Explanation

In a depository pledge, securities are not transferred in ownership. They stay in the pledgor's account, are blocked for free use and marked as pledged. The pledgor remains the beneficial owner.

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