What is Pledging of Shares?
28 March, 2025
Synopsis
Pledging of shares is a way for you to borrow funds using your shareholdings without giving up your ownership.
You can use your shares as collateral for borrowing funds.
You have made investments in stocks, Mutual Funds, Exchange-Traded Funds, and other financial instruments. A way to use such these investments is to use them as collateral for getting loans. It is a game changer and allows shareholders, especially promoters to leverage shares to secure loans. If you are considering pledging shares, it is critical to understand the nuances of the process before making the call. Continue reading to learn everything about the pledging of shares.
What is Pledging of Shares?
Pledging of shares is when you use the shares that you own as collateral to secure a loan. You can, as a promoter or shareholder pledge your shareholdings with banks or financial institutions to access funds. You can use the borrowed amount for business expansion, repaying debt, and other immediate financial needs.
Unlike selling shares, with pledging, you can retain ownership and voting rights that come with the shares. You also continue to earn dividends, interests, and capital gains, as applicable on the shares. However, the lender holds the right to liquidate your shares if you default on repayment of borrowed funds. Also, you are required to maintain a minimum agreed-upon collateral value. Failing to do so results in a "margin call". In such cases, you must either provide additional shares or pay in case to make up for the loss of collateral.
How Does Pledging of Shares Work?
The process of pledging of shares involves the following steps:
Loan Application: You can approach lenders like banks or financial institutions that accept shares as collateral for lending funds.
Valuation of Shares: The market value of your pledged shares is assessed, and a margin deduction or haircut is applied to determine the loan amount.
Loan Approval: Based on the valuation, a percentage of the share's market value is approved as the loan amount.
Retention of Ownership: You continue as the shareowner as long as you maintain the required margin before the loan is sanctioned.
Loan Repayment: Upon complete repayment of the loan, your shares are released. However, in case of default, the lender can sell the shares and recover the loan.
Haircut in Pledging of Shares
The term "haircut" in the context of pledging shares refers to the reduction that lenders apply to the market value of the pledged shares to determine the loan amount that can be given. It is applied to protect their risk interest. In other terms, a haircut is the difference between the actual value and the collateral value of shares. For example, if the market value of shares is ₹10 lakhs and a lender applies a 30% haircut, the loan amount would be ₹7 lakhs. The percentage of haircuts is determined based on the volatility and liquidity of a stock.
Advantages of Pledging Shares
Pledging of shares is a financial power. Here's how you can benefit from it as a promoter:
Use as collateral
You can raise loans without selling your assets through the pledging of shares. It is an effective way to meet urgent financial needs.
Ownership Retention
One of the most attractive advantages of pledging shares is the ability to retain your ownership and reap its benefits while meeting your financial needs.
Flexible Funding
The loan you acquire through the pledging of shares is usable for various purposes. Be it scaling business operations, acquiring assets, or refinancing debts, you have complete control.
No Equity Dilution
For promoters, equity dilution can be a worry while raising funds through external funds or issuing shares. Pledging of shares provides an easier path that foregoes such requirements.
Low Interest Rate
As you pledge your shares as collateral, you incur a relatively lower interest rate than unsecured loans.
Ease Out the Management of Your Shares with HDFC Bank Demat Account
Having understood what stock pledging is, you can now access funds using your shares without giving up your ownership. It is the easiest way to enjoy liquidity as a promoter and finance your company or borrow funds for personal financial needs as a regular investor. While it offers many benefits, it also comes with responsibilities, such as maintaining collateral value and timely repayment. If you want to pledge your shares and ensure proper maintenance of the collateral level, HDFC Bank Demat Account options are for you. They provide you with an apt platform to track your shares anytime, any place hassle-free.
FAQs
For how many days can I pledge my shares?
There is no fixed timeline. The duration of pledging your shares depends on your agreement with the lender and their repayment terms.
What happens if I don't pledge my shares?
Not pledging your shares means continuing your journey as a promoter or a shareholder without securing a loan. You remain a regular trader focusing on the returns and your voting rights.
Is pledging of shares a good or bad decision?
Whether it is a good or a bad decision depends on your financial goals and repayment ability. Pledging of shares is good for accessing funds without selling shares. However, it can be bad if you aren't financially prepared to repay the borrowed funds and risk losing your pledged shares.
Open a Demat Account online
*Disclaimer: Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing.
