Creation and Invocation of Pledge of Securities through the Depository System

On 5 February 2026, the Securities and Exchange Board of India (“SEBI”) issued a circular to strengthen and standardise the framework governing the creation and invocation of pledges of securities through the depository system operated by National Securities Depository Limited and Central Depository Services Limited. The circular aims to enhance legal compliance, transparency and procedural fairness while safeguarding the rights of pledgers, particularly at the stage of invocation and sale of pledged securities.

Key Highlights

I. Mandatory Undertakings by Pledger and Pledgee

SEBI has mandated that both the pledger and pledgee provide specific undertakings in the pledge request form confirming that:

1. the pledgee shall give reasonable notice to the pledger prior to sale or enforcement of the pledged securities; and
2. The pledge and its invocation shall strictly comply with the Indian Contract Act, 1872, the Depositories Act, 1996 as well as the applicable SEBI regulations, circulars and depository bye-laws.
3. Standardised Pledge Request Form

II. Depositories are required to introduce a uniform pledge request form incorporating the prescribed undertakings. This is intended to ensure:

1. consistency in documentation;
2. clear allocation of rights and obligations; and
3. reduction in disputes arising from the invocation of pledges.
4. Transparency at the Time of Invocation

III. Upon invocation of a pledge:

1. The depository system shall intimate both the pledger and the pledgee; and
2. The pledgee shall be recorded as the beneficial owner of the securities post-invocation.
3. Implementation Timeline

Depositories must amend their bye-laws, update systems and operationalise the revised process on or before 6 April 2026.

Regulatory Objective

1. prevent sudden or unilateral sale of pledged securities;
2. align depository practices with established principles of contract law; and
3. safeguard investor rights by ensuring a fair and transparent procedure prior to invocation.

Conclusion

This circular introduces procedural safeguards and standardised documentation to ensure fairness and legal compliance in the pledge enforcement process. By mandating prior notice, clear undertakings and system-driven transparency, SEBI aims to strengthen investor protection and reduce disputes relating to the invocation and sale of pledged securities. Market participants, lenders and depositories should review existing pledge documentation and operational procedures to ensure alignment with the revised framework before the implementation deadline.