Somesh Lund

Introduction

The Securities and Exchange Board of India (SEBI) vide its notification dated July 25th, 2017 has come up with SEBI (Depositories and Participants) (Second Amendment) Regulations, 2017 (hereinafter referred to as “DP Second Amendment Regulations, 2017”) substituting sub-regulation (3) of regulation 58 of the SEBI (Depositories and Participants) Regulations, 1996 (hereinafter referred to as “DP Regulations, 1996).

Regulation 58 deals with manner of creating pledge or hypothecation of securities by the beneficial owners. The act of granting loan against securities is referred to as ‘pledge’, the person who is granting loan against the securities is the ‘pledgee’, and the borrower of the loan who makes the pledge of securities is the “pledgor”. By virtue of the pledge, the physical possession of the securities are transferred from the pledgor to the pledgee, though the ownership of the goods remains with the pledgor.

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For the creation of pledge against securities held in demat mode, an application is required to be made by the beneficial owner to the depository through the depository participant. The depository participant, after ensuring that securities are available for creating the pledge, makes a note in this regard and forwards the same to the depository. Further action taken by the depository in this regard is reproduced below:-

Regulation 58(3) of the DP Regulations, 1996 read as follows:

The depository after confirmation from the pledgee that the securities are available for pledge with the pledgor, shall within fifteen days of the receipt of the application create and record the pledge and send an intimation of the same to the participants of the pledgor and the pledgee.”

Regulation 58(3) of the DP Second Amendment Regulations, 2017 reads as follows:

Within fifteen days of receipt of the application, the depository shall after concurrence of the pledgee through its participant, create and record the pledge and  send  an  intimation  of  the  same  to  the  participants  of  the  pledgor  and  the pledgee.”

Our Analysis

As per the previous provision, the depository was required to obtain a verification from the pledgee regarding the fact that securities were available with the pledgor before it created the pledge. However, as per the new provision concurrence or mere approval is this regard is required to be given by the pledgee to the depository participant. Thus, the requirement of confirmation from the pledgee has been replaced with concurrence from the pledgee through the depository participant for ensuring that securities are available with the pledgor for creating and recording the pledge by the depository making the process faster and smoother.

(Author is associated with Vinod Kothari & Company and can be reached at somesh@vinodkothari.com)

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