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

Ms. Rao has pledged 500 shares of a company in favour of a bank through her DP. Before the pledge is closed, what happens to the shares in her demat account?

The shares stay in Ms. Rao's account but are blocked from free transfer under pledge status. She remains the beneficial owner, and the bank holds only a security interest, not ownership, until the pledge is closed or invoked.

  1. AThe shares are transferred to the bank's demat account and ownership passes to the bank
  2. BThe shares are extinguished and later re-issued
  3. CThe shares are moved to a separate pledge-related status and are blocked from free transfer, while she remains the beneficial ownerCorrect
  4. DThe shares stay freely transferable but the bank gets a lien on sale proceeds

Explanation

On pledge creation, the securities are marked as pledged and frozen in the pledger's account, and ownership is not transferred. The pledgee gets a security interest only, so the shares are not free for sale or transfer until closure.

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