Saibal C. Pal
Pledge of shares is a common practice adopted in the securities market by investors and intermediaries to raise finance. Banks and financiers have their own method of advancing money in pledge transactions. They keep a margin against the quotations of the shares. S 172 of the Indian Contract Act, 1972 defines pledge as bailment of goods for payment of debt or performance of promise. S 148 of the said Act defines bailment which means delivery of goods by one to another for a purpose, upon a contract entered into by the parties and the goods shall be returned or sold as the case may be and depending on the circumstances when the purpose is accomplished. A bailor is called a pawnor and the bailee is called a pawnee. S 173 provides that the pawnee may retain the goods pledged not only for payment of the debt or performance of the promise, but for the interest, of the debt,and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged. S 174 provides that the pawnee shall retain the goods pledged only for the debt or promise for which goods are pledged. S 176 deals with the rights of the pawnee where the pawnor makes default in payment of the debt, or performance of promise within a stipulated time, in respect of which the goods were pledged. The pawnee may istitute a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged on giving the pawnor reasonable notice of the sale. If the proceeds of the sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount due, the pawnee shall pay over the surplus to the pawnor.
With the enactment of the Depositories Act,1996 (`DA’), shares are compulsorily required to be held in dematerialized form by listed companies. Shares of listed companies cannot be traded on the Stock Exchanges (`SEs’) unless they are in dematerialized form. Shares cannot be traded in physical form in the SEs. Shares of unlisted companies can be issued and traded in physical mode as . Ss 4 to 11 under Chapter III of DA deals with the rights and obligations of depositories, participants, issuer and beneficial owners. S 10(3) states that the beneficial owner shall be entitled to all the rights and benefits and be subjected to all the liabilities in respect of his securities held by a depository (defined in S 2(1)(e)) of DA).
Ss 153 ( Trusts not to be entered on register) ,153A ( Appointment of Public Trustee),153B ( Declaration as to shares and debentures held in trust) ,187B ( Exercise of voting rights in respect of shares held in trust) ,187C ( Declaration by persons hot holding beneficial interest in share) and 372 (Purchase by company of shares etc., of companies – section since repealed) of the Companies Act,1956 shall not apply to a depository in respect of securities held by it on behalf of the of the beneficial owners.
Chapter III of DA deals with rights and obligations of depositories, participants, issuer and beneficial owners. Holders of securities in dematerialized form are termed as beneficial holders and they can transfer, pledge and hypothecate securities held in a depository in the manner provided in the act.
S 12 of DA states that the manner of creation of pledge or hypothecation held in a depository which reads as under:
`(1) Subject to such regulation and bye-laws, as may be made in this behalf, a beneficial owner may with the previous approval of the depository create a pledge or hypothecation in respect of a security owned by him through a depository.
(2) Every beneficial owner shall give intimation of such pledge or hypothecation in respect of a security owned by him through a depository.
(3) An entry in the records of a depository under sub-section(2) shall be evidence of a pledge or hypothecation. ’
In case of pledge of shares held in dematerialized form for providing security for short term loan availed by the beneficiary from any third party, the shares held in dematerialized form will have to be pledged in the manner stated in S 12 of
DA. This will be in variance of the provisions of S 172 of the Contract Act, 1872 which requires bailment of goods being shares in the instant case. Pledge of shares in dematerialized form cannot be done involving the delivery of the shares in question as the same are maintained otherwise than in physical form. That is why S 12 of DA states the manner of pledge of dematerialized shares. With the introduction of trading in dematerialized form, the Indian Stamp Act, 1899 was amended and as per S 8A of the Act and the securities dealt in dematerialized form are not liable to payment of stamp duty.
Matters in respect of pledge created on dematerialized securities by complying to S 12 of DA will have to be tried as per the provisions of the securities laws namely, Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992 and the Depositories Act,1996. It cannot be dealt under the Contract Act of 1972. S 22 of DA states that no court shall take cognizance of any offence punishable under this Act or any rules or regulation or bye-laws made there under, save on a complaint made by the Central Government or State Government or the SEBI or by any person. Sub-section (2) of S 22 states that no court inferior to that of a Court of Session shall try any offence punishable under DA. Any suit or proceeding in respect in any matter has to be proceeded by submitting petition(s) before the Securities Appellate Tribunal (SAT).
1. Copyright with author.2. Email: saibal2004@rediffmail.com
Dear Sir,
What is the situatuion of summon of SEBI under Section 11C(3) on the selling of listed company’s shares by banker for recovery of there debt to individual in off market in detmatierlse form.
Individual has acquired shares for investment purpose and kept in DEMAT account.
Please clarify