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

Ms. Kavita has pledged shares of an Indian company to a bank through her DP. The company later announces a cash dividend. Under the usual depository pledge framework, what is the position on corporate benefits while the pledge is active?

The pledgor stays the beneficial owner because pledged shares are only blocked in her account and not transferred. So she remains entitled to dividends and other corporate benefits, while the pledgee holds just a security interest in the shares until the pledge is closed.

  1. AThe pledgee becomes the registered owner and receives the dividend
  2. BThe pledgor remains the beneficial owner and is entitled to the corporate benefits, as the shares stay in her accountCorrect
  3. CThe depository retains the dividend until the pledge is closed
  4. DCorporate benefits are cancelled for pledged shares

Explanation

In a pledge, the securities are only marked as pledged (blocked) in the pledgor's account; ownership does not transfer. The pledgor therefore continues to receive benefits like dividends. The pledgee only holds a security interest.

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