Note on Pledging of Demat Securities of an Unlisted Private Limited Company

Introduction

Any securities held in the Demat form can be pledged with the lender if the lender accepts the same. 

Few points to be noted before pledging the securities:

-        Both the lender and the borrower (Pledgee and the Pledgor) must have a demat account, either with the same DP or with different DP.

-          The pledge request form is to be given to the DP for pledging the securities.

-       The securities on being pledged gets blocked in the demat account and can not be used for any further transactions. However the securities still remain in the pledgor’s account.

-          Even when the securities are pledged the pledgor would still receive the corporate benefits.

-          In order to unpledge the securities the unpledge request form has to be given to the DP.

-         If the pledgee wants to transfer or sell the securities for realizing the loan amount, then it can do so only after intimating the pledgor.

-      On repayment of the loan, the pledge is to be released in the DP account and the securities pledged available for further transactions.

Companies Act implications:

-          When the banks insist for the transfer of shares to their name then Form 22 B is to be filed with the ROC on receiving the declaration from the parties and the members register has to be updated accordingly as per Section 187 C of the Companies Act 1956.

o        Form 22 B is filed to allow the pledgee to be the beneficial owner of the securities. 

-      The Board of Director’s approval either through circulation or through board meeting is required for this purpose.

-         Form 8 need not be filed with the ROC as a charge that is created other wise than by pledge is exempted and Section 125(4) of the Companies Act 1956 does not mandate the company to file the charge with the ROC within 30 days.