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

Rohan pledges shares held in his demat account with a bank. Which statement correctly describes what happens to the shares in the depository system when the pledge is created?

When a pledge is created, the shares remain in the pledgor's demat account but are marked as pledged and frozen in favour of the pledgee. The pledgor continues to be the beneficial owner, and there is no transfer of ownership to the lender.

  1. AShares are transferred to the pledgee's demat account permanently
  2. BShares are blocked/marked as pledged in the pledgor's account, with ownership staying with the pledgorCorrect
  3. CShares are cancelled and re-issued in physical form
  4. DShares move to the issuer's account until the loan is repaid

Explanation

In a depository pledge, the securities stay in the pledgor's account but are blocked (lien marked) in favour of the pledgee, and the pledgor remains beneficial owner. Hence no permanent transfer to the pledgee occurs. Physical conversion and issuer account movement are not part of the process.

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