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

Under the depository system, which statement about hypothecation of demat securities is most accurate?

In hypothecation the securities remain in the borrower's demat account and ownership does not change. The lender holds a charge over them and, on default, can have the hypothecation converted into a pledge and then invoke it to realise the security.

  1. AHypothecation moves ownership of the securities to the lender on creation
  2. BThe hypothecatee is the one who creates the instruction, and the securities are removed from the account
  3. CHypothecation is the same as invocation of a pledge
  4. DThe securities stay in the hypothecator's account, a lien-like marking is made, and the hypothecatee can convert it into a pledge on defaultCorrect

Explanation

In hypothecation, securities stay with the borrower (hypothecator) and are not blocked as in a pledge; the lender (hypothecatee) has a charge. On default the hypothecatee can have the hypothecation converted into a pledge and then invoke it. Ownership does not move on creation.

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