Explained: What Are Pledged Shares & Their Significance
Everyone who is well acquainted with the banking system or not must have heard about the well-known term called “loan”. Moreover, thanks to numerous advertisements and social media platforms, we are now aware of how many types of loans an individual can get from any bank. Loans like Home loans business loans are very common nowadays but getting the approval of the loans from the banks is what makes us go through tooth and nail.
While we apply for a loan in any bank, we have to first think about providing the collateral. Collateral, if you are not already aware of it, is something that banks take away or hold until the person has been able to fully repay the loan amount. The collateral item can be anything that is tangible like property and gold, silver bars, pieces of jewellery, etc. But have you been informed that the shares that a person or company owns can also be presented to the companies as collateral? Pledged shares meaning is that any company or individual can ask for a loan from any bank by pledging the shares.
Shares as collateral: Pledged shares
Whenever shares are held as collateral for acquiring loans, which then will be used to manage and expand the growth of the company, then those shares can be considered pledged shares. Usually, to undertake a loan from the bank, people use collateral in the form of gold and property, but in the case of pledging, a promoter or individual of the company offers their segment of shares with necessary requirements in order to secure a loan. Also, it is to be noted that as the pledged shares have been used as collateral, the inability to repay the promised amount of money will result in the shares being surrendered to the banking authority.
While anyone can easily pledge their shares in order to secure a handsome loan, the practice of pledging the shares is very much prevalent among corporate companies. But the underlying advantage of pledging shares is that the actual owner of the shares can retain their right to the asset and will continue to gain interests and capital gains on the shares even though their current status is pledged shares.
How pledged shares work and their significance?
Fundamentally any bank that is offering any kind of loan to an entity or establishment is bound to ensure a sense of security with the help of collateral. And the same rule applies when pledged shares take their place as collaterals. Banks can issue loans against pledged shares as collateral, but when the company or individual is unable to clear its dues, then only their shares get sold by the bank in order to clear the dues of the person or the company.
Moreover, when pledging shares, the person or company will also have to maintain the LTV (Loan to Value) ratio, which is 50 percent according to the norms of the Reserve Bank of India (RBI). To help readers understand the concept, we can suppose that a person requires a loan amount of 20 lakhs and he possesses shares of a company. Each share of the company costs 5000 rupees, which means he will have to give a total of 400 shares of that company which amounts to 20 lakhs as collateral. Now according to the RBI norms, 50 percent more shares the person will have to provide to the bank if he wants the loan. That means he will have to give 800 shares worth rupees 40 lakhs.
After reading through this, you will be able to understand how pledged shares work and how you can apply for loans if you have the designated amount of shares for your loan application. Using pledged shares as collateral can be both risky and advantageous at the same time so go through all the terms and conditions before opting.