When the finalization of stocks is invested, pledging shares is an important aspect. It is important to understand that highly pledging shares can be risky for investments. In this article, let's discuss what is pledging of shares, the advantages and disadvantages, and how to pledge shares.

Pledging of Shares - Table of Contents

What is Pledging of Shares?

The pledge of stocks and share pledging means using the shares as collateral and taking loans against them. These shares are basically the assets of a shareholder or a company. Pleading promotes a company that takes a loan against the shares held to meet personal or business requirements, including fulfillment of capital requirements, starting a new venture, expanding business, and more.   

How Does Pledging of Shares Work?

With limited cash margins, investors lose opportunities in the market. In these cases, investors keep pledging their shares for margins called collateral margins. This is further utilized for trading in different segments of the market. The collateral margin is from pledging shares used for trading equity, future, options, intraday, etc. With the nature of stock markets being dynamic and ever-changing, the value of pledged shares can fall at any point. When a fall occurs, investors or promoters provide cash or pledge more shares to meet marginal requirements. The lenders provide clauses with specific contract terms and conditions in scenarios. These investors can evaluate these terms before the utility of loans against shares.

What are the Benefits of Pledging Shares?

• Pledging involves obtaining loans from a lender against shares of your own. Securing loans is simple and attracts low-interest rates compared to unsecured loans. 
• One major key is accessing additional cash for multiple financial requirements, such as trading margin or other financial needs. 
• The investing pledge shares that there is no tax liability associated with it. 
• Pledging does not require borrowers to sell their shares. This means that when the market increases, the investment value also increases, and at the same time, it also offers cash to investors.  

What are the Drawbacks of Pledging Shares?

• A disadvantage of pleading shares is the risks associated with it. 
• When the borrower defaults on the loan, where shares are pledged as collateral. The lender may sell the shares in the market to recover the loan amounts 
• The selling of shares by lenders for high net-worth investors can lead to a further collapse in the cost of shares. This can affect the shareholders in the process. 
• When the promoter of a company defaults on loans where shares get pledged as collateral, this leaves a negative impression of the company, and the share prices can be impacted negatively. 

Is Pledging Shares Good or Bad?

When asking the question - what is pledging of shares? You may wonder if the pledging of shares is a good option or not. The pleading of promoter sharing is common if the company has a high promoter holding. Let's say you take a home loan to buy a house or a car loan to buy a car, right? It has nothing wrong, but it indicates you need more funds to purchase them immediately. Suppose you are willing to pay interest on the loans available to make the purchase. Similarly, once a company pledges the promoter's shares. Then it indicates that there may be financial troubles. 

How Do Investors or Promoters Pledge Shares?

• The investor or promoter submits a request for pledging shares using a terminal
• Post receiving a request from investors, the terminal forwards the request of National Securities Depository Limited (NSDL) or Central Depository Services Limited (CDSL)
• The NDSL or CDSL authenticates the request for pleading via mobile or email to verify the PAN or BO ID 
• If the request gets approved, the collateral margin is available for trading for investors and promoters.  

How To Pledge Shares?

• The promoter has to initiate requests for pleading using the trading terminal 
• Once the request is received, the trading terminal sends out the request to NSDL/CDSL for confirmation 
• NSDL/CDSL authenticates the request using mobile/email authentication for BOID/PAN 
• Once this is approved, the collateral margin is available for trading to investors.

Can Pledging of Shares be Considered Risky for Shareholders?

During sharing pledges, company promoters help use their stocks and shares as collateral to take loans per the requirement. But note, a pleading for shares during a bull market does not cause issues as the market is moving positively, and the investors are stress-free. The main issue is that in the case of a bear market, it is moving downwards, and investors enter a panic mode. 

Due to the fluctuation in stock prices, the value of collaterals against the loans also keeps changing. But, often, the shareholders are required to maintain the collateral value. But if the stock prices fall any further, then the value of the collateral starts to diminish. So, to maintain the value, the promoters either pay in cash or pledge more shares to their lenders. 

In the worst-case issue, when a promoter fails to complete the difference, the lender can start selling pledged shares in the market to recover this amount. So, shareholders can lose their shares.      

Can Pledging of Shares be Risky for Investors?

The prices of stocks can depend heavily on the news and rumors in the market. So, stock prices can start falling sharply in response to the news that lenders such as banks or financial institutions can sell the shares as pledged by promoters openly. This can decrease collateral value once the public starts selling the shares in a panic. Moreover, lenders' promoting choice of pledge stocks also can extrude an organization's shareholding pattern. Voting rights directly impact the candidates as they leave with a few shares. In short, it can impact their authoritative power. 

Also, if the price continues to fall heavily, it can create never-ending havoc. This is due to promoters pleading for more shares to balance the collateral value.  

Conclusion

When asking the question of what pledging of shares is, in simple terms, it means taking out loans against shares that might be held for an investor. For promoters, the pleading acts can be a last resort to help raise funds for multiple financial needs in the organization. For investors, pledging can be a recourse strategy that helps the market invest and not lose multiple profits. It will also enable investors to trade in large volumes, unlocking higher margins for others. Investors and promoters also benefit from pledging shares with better diligence when planning and strategizing.