What does it mean by Pledging of Shares?

What's the pledging for shares?

Pledging of shares refers to an arrangement where the promoters use their shares to satisfy their financial needs. Companies with high shareholdings are more likely to pledge shares. The borrower of pledged share retains ownership and can continue to earn capital gains and interest on the assets.

The market value fluctuates and the value of shares changes. Promoters must keep the collateral's value. Contracts stipulate the minimum collateral value. The contract stipulates that the minimum collateral value must not be less than the agreed amount. Borrowers will need to provide additional shares or cash to make up the difference. If the borrower cannot repay the collateral value, or is unable to make up the difference in values, banks or lenders may choose to openly sell the pledged shares. If the pledged shares are sold on the open market, the promoters' shareholding is reduced and the stock value decreases.

What is the process for pledging shares?

Promoters have the option to pledge their shares in order to protect trade opportunities from being lost due to low cash margins. After haircut deduction, they can obtain a loan. These pledged shares provide collateral that can be used to fund equity trading and futures as well as options writing.

What's a haircut?

A haircut is a percentage difference between the asset's market value, and the amount that can be used to secure it.

If the asset's market value is Rs. 1000, and the collateral value Rs. 500, the haircut deduction is 50%.

Promotors should not consider pledging shares as a way to raise money. If they are pledging shares, it is usually the only option. Promoters are safer using equity or debt to secure their funds. When the market is rising, it is advantageous to pledge shares.

Pleasing shares is often considered a negative sign because it indicates a lack in capital, poor cash flow patterns and inability of promoters to meet working capital requirements. This is a method of raising additional funds for companies. Promoters may also pledge shares to support their personal goals.

How do I pledge shares?

1. The request must be initiated by the promoter to pledge shares via the trading terminal.

2. After receiving the request, the trading terminal forwards it to NSDL/CDSL and requests confirmation.

3. NSDL/CDSL authenticates your request via email/mobile authentication for PAAN/BOID

4. Once approved, the collateral margin can be traded to the promoters.

Promoters can also submit a Margin Pledge Request form signed by all holders, and send it to Angel One