What Is Share Pledging? How It Works and Why It Matters

Have you ever experienced a time when you needed a loan but lacked anything to pledge, leading to rejection of the application? Well, you are not just alone. Though you can go for a credit card or a personal loan, you will find that their interest rates are quite high. So, now the question is what is next?

This is where you must use the shares of the company that you held in your portfolio. This is what we call share pledging. This is a simple process where you pledge the shares you have, and against that, you can acquire the funds in the form of a loan.

So, let us understand what share pledging is. Also, let us explore its features and how it actually works. So, let us get started right away. 

What Is Share Pledging?

Share pledging is a way to raise funds by using the shares you already own as security. Here, you are not required to sell the shares you own. But you keep ownership of the shares. It means you only offer the shares as collateral to the lender.

In return, you receive a loan. This will be based on the value of those shares. This option is often used by promoters and investors. The reason is that these are the people who are looking for some quick liquidity for projects.  Also, they wish to stay invested in the company.

Key Features

• Shares stay in your name and are only given as collateral to the lender.

• Loan amount will be based on share value and the rules set by the lender.

• Lower interest rates as there is something for security.

• The lender can sell the pledged shares for recovery if you fail to pay.

• Shares listed on NSE and BSE with SEBI guidelines are only accepted.

How Share Pledging Works

Share pleading is not a simple process. But if you follow the proper steps, then it would make the entire process really simple and effective. So, if you are looking for a share pleading, then look at the following steps:

1. Selecting the Lender and Applying for the Loan

To start with, you need to visit a bank or NBFC that can help you with the loan. It is advised that you connect with the best banks to get the right guidance and value. Once done, you must submit an application along with details of the shares you want to pledge. The lender reviews your profile, share quality, and repayment capacity before moving ahead.

2. Evaluation of Shares and Loan Value

The lender starts by checking the details. This includes the market value, volatility, and liquidity of the shares. This helps to decide the loan value. Usually, only a portion of the share value is approved as the loan amount to manage market risk.

3. Pledge Creation

Wait for the approval. Once done, you will see your shares are pledged in your demat account. The ownership is still with you. The shares should not be sold now. They are collateral. 

4. Disbursal of Loan Amount

Once the pledge is done properly, you will get the loan amount credited to your account. You can now use the funds. This can be for anything as you decide.

5. Repay and Get Your Shares

You repay the loan as per the agreed schedule. This will include the principal and the interest value. If you fail, the lender can sell your shares for recovery.

Why Share Pledging Is Important

Share pledging plays an important role for both investors and the market as a whole. It directly impacts liquidity, ownership control, and risk perception, which is why it deserves close attention.

1. Provides Quick Access to Funds

Promoters and investors can raise money without selling the shares. This can be used for expansion or new projects. This helps with growth.

2. Offers Lower Cost Financing

Loans against shares usually carry a lower interest rate. These are secure as compared to other types of loans and offer a great way to finance.

3. Improves Liquidity for Shareholders

Investors can unlock the value of their holdings without exiting the market. This helps manage short-term cash needs while remaining invested.

4. Acts as a Risk Indicator

A high amount of pledging is a sign of instability. This can help you identify the risk and ensure that you can pivot the plan for the better.

Risks Involved in Share Pledging

Share pledging can be useful, but it also carries risks that investors should not ignore. These risks affect both the promoter pledging shares and the retail investors tracking the company.

1. Risk of Forced Share Sale

A fall in share price can impact the margin needs. You would need to pledge more shares to pay back some amount. Failure to do so can impact your loan greatly.

2. Increased Stock Price Volatility

High pledged shares can impact the volatility. And if there is any negative news, you may find the market is now unstable and not good for trading.

3. Loss of Promoter Control

When pledged shares are sold due to default, promoters may lose voting power and control over the company.

4. Negative Market Perception

A high pledging percentage often signals financial stress. This can reduce investor trust and impact long-term valuations.

5. Impact on Retail Investors

Retail investors may face losses when there is a sudden price fall. This can impact the promoter holdings as well. This can happen with no signs.

When You Should Consider Share Pledging

Share pledging works best in specific situations. This is not for meeting daily financial needs. Knowing the right time to use it helps you avoid unnecessary risk and pressure.

• Short-term liquidity requirement without selling shares.

• Lower interest cost compared to unsecured loans.

• Stable income to meet interest and repayment obligations.

• Moderate market conditions with limited price swings.

• Low overall pledging percentage after the transaction.

• Clear understanding of margin call and default risks.

Conclusion

Share pledging can be a useful financial tool when used carefully. It helps promoters and investors raise funds without selling shares. At the same time, high pledging increases risk and market uncertainty. As an investor, tracking pledged share data is important before making any decision. Always look at the percentage, purpose, and trend of pledging. For smarter stock analysis and market insights, explore learning tools and resources on Rupeezy and invest with clarity.

FAQs

What is share pledging?

Share pledging is the process of using shares as collateral to take a loan while retaining ownership of those shares.

Is share pledging bad for investors?

It is not always bad, but if you pledge a lot, it can be a bad sign for the company.

Can pledged shares be sold by the lender?

Yes. If you fail to repay the loan amount, the lender can sell your pledged shares.

Where can investors check pledged share data?

The data on pledged shares can be seen on the stock exchange or even on the company website.

Should I avoid stocks with pledged shares?

Not necessarily. Low and stable pledging may be acceptable, but consistently high pledging needs caution.