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

Which of the following is a key distinction between a pledge and hypothecation of securities?

In a pledge, the lender takes possession or the securities are blocked in its favour as security. In hypothecation the borrower retains possession and the lender only has a charge over the securities. Ownership does not pass in either arrangement, and both require an agreement.

  1. AIn pledge, securities are blocked and the pledgee holds them as security, while in hypothecation the borrower retains possession and control without the lender taking possessionCorrect
  2. BIn pledge ownership passes to the lender, but not in hypothecation
  3. CPledge is allowed only for physical shares
  4. DHypothecation does not require any agreement

Explanation

In a pledge the securities are delivered or blocked in favour of the lender, who takes possession. In hypothecation the borrower keeps possession and the lender has a charge. Ownership does not pass in either, and both need an agreement.

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