Frequently Asked Questions (FAQs) related to pledge in NSDL: (from a pledgee’s perspective)

To help the lenders (pledgees) understand the pledge system in NSDL, the frequently asked questions and answers related to pledge are given below: Q. Does a pledgee bank needs a separate depository account for each branch (for pledging)? A. Both pledgor and pledgee must have a beneficial owner account in NSDL. A pledgee bank can either operate through a single account for all its branches or open a separate account for each branch (with the same DP or with different DPs.).

1. If a pledgee is also a DP, can it open multiple house accounts. i.e. one house account per branch?

Ans. Yes, the pledgee can open multiple house accounts i.e. one house account for every branch.

2. What is the procedure for pledging securities in NSDL?

Ans. The procedure for pledging in NSDL is explained below: Pledgor and the pledgee must have a beneficial owner account in NSDL. These accounts can be with the same DP or with different DPs. Pledgor will instruct its DP to create a pledge request by submitting a "Pledge Form" with a tick on "Create Pledge". Pledgor will inform the pledgee about the creation of pledge request by giving a copy of the pledge report obtained from its DP. Pledgee may instruct its DP to confirm the creation of pledge by submitting a "Pledge Form" with a tick on "Confirm creation of Pledge". The pledge gets created in favour of the pledgee only when the pledgee’s DP confirms the creation of pledge in the system. Disbursement of the loan to the pledgor is outside the depository system.

3. What precaution should be taken before disbursing loan to the pledgor?

Ans. The pledgee may disburse the loan only after the pledgee’s DP confirms the creation of pledge. Pledge does not get created in the system until the pledgee’s DP confirms the pledge. Pledgee may obtain pledge report from its DP and verify creation of pledge.

4. After the loan is repaid, how is the pledge closed in the depository system?

Ans. After the loan is repaid, the pledgor will instruct its DP to close the pledge by submitting the "Pledge Form" with a tick on "Close Pledge". The pledgee will instruct its DP to confirm the closure of pledge by submitting the "Pledge Form" with a tick on "Confirm Closure of Pledge". The pledge is closed in the system on executing the instruction in the system by both the DPs. A pledgor's DP alone cannot close the pledge.

5. If the loan in not repaid how does the pledgee take control of the securities?

Ans. If the loan is not repaid, the pledgee, after giving notice to the pledgor as per the terms of the agreement, may instruct its DP to invoke the pledge by submitting the "Pledge Form" with a tick on "Invoke Pledge". On execution of this instruction, the securities are transferred into the pledgee's account. This does not require any confirmation from the pledgor.

6. Is there a facility in the NSDL system to close or invoke "part quantity" of the pledge?

Ans. Yes. A request can be made for closing or invoking the pledge either in full or in parts.

7. Who will receive dividend on the pledged securities?

Ans. The pledgor will continue to receive dividend on the pledged securities. The pledgee will get the benefits only if a pledge is invoked and on record date the shares are in the pledgee's account.

8. How will the distribution of bonus shares for pledged shares happen?

Ans. The software in NSDL has been modified to handle distribution of bonus entitlements through Automatic Corporate Action (ACA) Module. From April 27, 2002, the module will work as follows:
The holdings as of the record date / book closure, (including those holdings which are pledged) are considered for computing bonus entitlements. At the time of effecting the credit of bonus shares, the system checks whether pledge is still open or closed. Where pledge orders are not closed / invoked or partially closed / invoked, the bonus entitlements in such cases are credited to the pledgor’s account with pledge marked in favour of the pledgee. If the pledge is closed/invoked fully, the bonus entitlements will be credited to the pledgor’s account as free balances.

9. How will corporate actions like split, mergers, consolidation, etc. be treated?

Ans. The securities arising out of corporate actions like split, mergers, consolidation, etc. will be credited to the account of the pledgor with pledge marked in favour of the pledgee.

10. What is the procedure for substitution of pledged securities?

Ans. Ans. Pledge on the securities to be substituted must be created first. After this, the earlier pledge may be closed.