What is Pledge of Shares? How to Use Shares as Collateral in India
Pledging shares means using your existing share holdings as collateral to obtain margin from your broker for trading. Instead of depositing cash as margin for F&O or intraday trades, you pledge your shares and the broker gives you a portion of their value as margin credit. The shares remain in your demat account but are marked as pledged.
It works like a gold loan. You give your gold to the bank, the bank gives you a loan. The gold stays in their custody until you repay. Similarly, when you pledge shares, the shares are earmarked as collateral. You can still receive dividends and corporate action benefits, but you cannot sell the pledged shares until you unpledge them.
How Does the Pledge Process Work?
You select the shares you want to pledge through your broker's platform. The broker sends a pledge request to the depository (NSDL/CDSL). You approve the pledge through an OTP or PIN verification. The shares are then marked as pledged in your demat account, and the broker credits margin to your trading account based on a haircut percentage.
Margin Received = Market Value of Shares × (1 − Haircut Percentage)
If you pledge Rs.5 lakh worth of shares with a 20% haircut, you get Rs.4 lakh as margin. The haircut varies by stock, with large-cap stocks having lower haircuts and small-cap stocks having higher ones.
What Are the Risks of Pledging Shares?
If your F&O position incurs losses that exceed your margin, the broker can sell your pledged shares to recover the loss. This is called a margin call or forced liquidation. You could lose both your F&O position and your pledged shares. Pledge only the amount you are comfortable potentially losing.
You can pledge shares through Stockk at stockk.trade.
F&O trading involves substantial risk. Pledging shares as margin does not reduce this risk. This article is for educational purposes only.
Frequently Asked Questions
Do I still get dividends on pledged shares?
Yes. Pledging does not transfer ownership. You continue to receive dividends and all corporate action benefits on your pledged shares. The pledge only creates a lien that allows the broker to liquidate the shares if needed.
Can I sell pledged shares directly?
No. You must unpledge the shares first, then sell them. The unpledge process takes one trading day. If you need to sell urgently, the delay can be a problem. Plan your trades keeping this timeline in mind.
What is the difference between pledge and margin trading facility (MTF)?
In pledging, you use your own shares as collateral for F&O margin. In MTF, the broker lends you money to buy additional shares using your existing holdings as collateral. The key difference is that pledge is for margin requirement, while MTF is for buying more shares on loan.
Can I pledge mutual fund units?
If your mutual fund units are held in demat form, they can potentially be pledged. However, most brokers accept only equity shares for pledge margin, not mutual fund units. Check with your broker for the specific list of accepted securities.
What happens to my pledge if I switch brokers?
If you switch brokers, you need to unpledge your shares from the old broker first. Then you can transfer the shares to your new demat account and re-pledge them with the new broker. The unpledge and transfer process takes a few days.
Investments in securities market are subject to market risks. This article is for educational purposes only and does not constitute investment advice.
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