In case of any financial emergencies, you as a shareholder can pledge your shares with a bank which provides a loan against such shares. You can also avail a loan against your shares by pledging shares of your immediate relatives, who become the third party pledgers.
Apart from that, there will not be any difference in your privileges as a shareholder. You still enjoy your benefits as a shareholder in the form of rights, bonuses and dividends etc. The only thing that will happen is that the shares will get blocked by the lending bank and remain in your name, if you are the borrower.
How you can apply?
All that is required for you to do is to fill an application form, fill in your personal details, details of your guarantor; if required, are to be entered. Also you need to attach copies stating the value of the securities that are being pledged, proof of identities, residence proofs, address proofs, latest holding statement from the DP, income proofs and the recent bank statement along with the application form to the prospective lender. Also, if you are the borrower you need to instruct the DP to create a pledge request stating the details of the securities that are being pledged and submit it to the bank from where you wish to take the loan from.
How much can you avail?
In case of physical shares, as a borrower you are in a position to borrow a loan of a minimum of Rs1 lakh and a maximum of Rs 10 lakh and for demat shares you can borrow up to Rs 20 lakh. For borrowing against Demat shares, the loan tenor is generally for 1 year but once you borrow the loan you can renew the same at the end of the period. Also, what you need to know is that you will be able to pledge shares only if the bank has listed it in its approved list. These approved lists’ vary from each bank to bank and are renewed once in every year. Therefore you need to look into those lists before pledging so that you can look at other avenues by not wasting much time.
Things to know:
Credit Limit:
The credit limit as to what is the maximum limit the loan will be provided to you will depend on the bank’s margin and the market value of the shares you are pledging. The shares pledged by you will be valued periodically to monitor if there are any drastic changes in its value. Also, it is important for the bank to maintain a 50% margin for physical shares and 25% for demat shares, which is the minimum value. These minimum values vary from bank to bank depending on their margin requirements.
Account facilities:
A current account is opened in your name if you are the borrower, and a credit limit is set. A personalized cheque book, ATM card, and mobile and phone banking services are provided for transaction purposes.
Interest rate charged:
Depending upon the amount and the period of the overdraft facility, the rate of interest is charged. These charges need to be serviced monthly. Also a certain percentage is charged as processing charges against such overdraft facilities.
If you have exceeded the credit limit, either you need to provide additional securities to the bank or pay cash for the excess amount utilized. However you need to be watchful about the fact that, apart from interest rate being charged on the overdraft amount, interest is also charged on the excess amount, after the period has been taken into consideration.