NISM Series VI · Unit 8 of 12 · about 10% of the paper
Functions of DP: pledge and hypothecation: NISM Series VI notes and practice questions
Using securities as collateral for loans and margins, while they stay in demat form.
What to know in Unit 8
- Pledge cycle.
- Hypothecation.
- Margin pledge.
- Invocation and closure.
Key terms, examples and exam traps
Pledge
A pledge is the delivery of securities as security for a loan, with the pledged securities blocked in the borrower's account.
Example. A borrower pledges shares to a bank for a loan.
Exam trap. This statement is false: In a pledge the lender never holds any claim on the securities.
Pledgor and pledgee
The pledgor is the borrower who pledges the securities and the pledgee is the lender who accepts them as security.
Example. The bank is the pledgee and the borrower is the pledgor.
Exam trap. This statement is false: The pledgee is the owner who offers the securities.
Pledge creation and confirmation
The pledgor requests the pledge through her DP and the pledgee confirms it, so the pledge is created only after confirmation.
Example. A pledge becomes effective after the lender confirms it.
Exam trap. This statement is false: A pledge is complete when the pledgor submits the request.
Pledge closure
When the loan is repaid, the pledgee closes the pledge, or both parties request closure, and the securities are released.
Example. After repayment, the bank closes the pledge.
Exam trap. This statement is false: The pledgor can close a pledge alone without the pledgee's consent.
Invocation
If the pledgor defaults, the pledgee can invoke the pledge, and securities are moved to the pledgee's account.
Example. The lender invokes the pledge after repeated default.
Exam trap. This statement is false: The pledgor invokes a pledge when she wants her shares back.
Rights of the pledgor
While securities are pledged, the pledgor continues to enjoy corporate benefits such as dividends, as the pledgor remains the beneficial owner.
Example. A borrower still receives a dividend on pledged shares.
Exam trap. This statement is false: The pledgee receives all corporate benefits throughout the pledge.
Hypothecation
In a hypothecation, the securities remain in the borrower's account but are blocked in favour of the lender, who gets a charge without possession.
Example. A borrower hypothecates shares to a bank, which holds a charge on them.
Exam trap. This statement is false: In hypothecation the lender takes the securities into its own account.
Margin pledge
Clients give securities as margin to brokers by creating a margin pledge in favour of the clearing member, and the clearing member may re-pledge them to the clearing corporation.
Example. A client pledges shares as margin for derivatives positions.
Exam trap. This statement is false: Clients must transfer shares to the broker's own account to give margin.
Restrictions on pledged securities
Pledged securities cannot be sold or transferred until the pledge is closed or invoked, and any partial release is handled by the pledgee.
Example. A client must first release the pledge before selling the shares.
Exam trap. This statement is false: Pledged shares can be sold freely by the pledgor.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which statement best describes “Pledge creation and confirmation”?
- The pledgor requests the pledge through her DP and the pledgee confirms it, so the pledge is created only after confirmation.
- Transposition is a change in the order of names of joint holders, and it is done by the issuer or registrar.
- Treasury bills are short-term government securities issued at a discount and redeemed at face value, with maturities of 91, 182 and 364 days.
- India has two depositories, National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).
Q2. Which statement best describes “Rights of the pledgor”?
- For a BSDA, the annual maintenance charge is nil for holdings up to ₹4 lakh and up to ₹100 plus GST for holdings above ₹4 lakh and up to ₹10 lakh.
- Equity trades on exchanges settle on a T+1 rolling basis, meaning one working day after the trade day.
- While securities are pledged, the pledgor continues to enjoy corporate benefits such as dividends, as the pledgor remains the beneficial owner.
- An inter-depository transfer moves securities between accounts held with different depositories.
Q3. Which term is described here? Pledged securities cannot be sold or transferred until the pledge is closed or invoked, and any partial release is handled by the pledgee.
- Debt securities
- Restrictions on pledged securities
- Secondary market
- Role of SEBI
Q4. Which term is described here? In a hypothecation, the securities remain in the borrower's account but are blocked in favour of the lender, who gets a charge without possession.
- Constituent SGL
- Pledge
- Hypothecation
- Invocation
Q5. Which statement best describes “Pledge”?
- Holding in demat form saves time, avoids bad delivery, reduces paperwork, allows trading in single-share lots and speeds up transfer.
- A BO or an authority can freeze an account or particular securities, with a debit freeze stopping outgoing transfers and a total freeze stopping both debits and credits.
- A pledge is the delivery of securities as security for a loan, with the pledged securities blocked in the borrower's account.
- Debt trades are settled through clearing corporations, with securities moved between demat accounts on a delivery versus payment basis.
Q6. Which term is described here? When the loan is repaid, the pledgee closes the pledge, or both parties request closure, and the securities are released.
- Issuer
- Pledge closure
- Defacing certificates
- Name matching
Frequently asked questions
How much of NISM Series VI comes from Unit 8?
Unit 8 (Functions of DP: pledge and hypothecation) usually carries about 10% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series VI Unit 8?
Pledge cycle. Hypothecation. Margin pledge. Invocation and closure.
Are these NISM Series VI practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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