Pledge of shares of private companies

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Rabi Sharma (Querist)
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13 January 2016 What points are to be kept in mind at the time of pledge of shares of a private company by its shareholder which is a body corporate ??? Kindly advise with the process with regard to pledge in light of section 2(68) of the Companies Act, 2013. Does it require alteration of MoA & AoA ??

CS Mitesh Mehta

CS Mitesh Mehta (Expert)
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14 January 2016 The shares available for pledge may be in physical or demat form. Though after introduction of
Depositories Act, 1996 demat form of shares available for pledge is most common. The shares
held in physical form are accepted by the lenders with higher margin as physical shares involves
more risk and can only be pledged in market lots. RBI vide its various circulars has also put a
threshold limit on the loan amount to be provided against physical shares by banks. Moreover,
the interest rates charged on the pledge of physical shares are also higher than one charged on the
pledged demat shares.

Further, Regulation 58 of SEBI (Depositories & Participants) Regulation, 1996 lays down the
manner of creating pledge over the shares. The general practice is:
Both the Pledger as well as the Pledgee must maintain depository accounts;
• Pledger has to initiate the pledge by filling and submitting to his DP the "Pledge
Request Form" (PRF) in duplicate, duly filled in all respects;
• The PRF should be signed by all joint-holders. The Pledgee may countersign the
PRF;
• On receipt of the PRF, the Pledger's DP verifies whether the securities proposed
to be pledged are unencumbered and there is enough free balance;
• The Pledger’s DP then sets up a pledge in the depository system and a unique
Pledge Sequence No. is generated;
• The Pledger is required to submit the acknowledged copy of the PRF to the
Pledgee;
• The Pledgee's DP can access the request online. Based on the Pledgee's copy
of PRF received from the Pledger, the Pledgee's DP either accepts or rejects the
request using the accept/ reject flag.

Yes.
AOA authorization is required for creating valid and legally enforceable pledge by the Pledgor in favour of and for the benefit of the Lenders

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Rabi Sharma

Rabi Sharma (Querist)
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14 January 2016 Dear Mr. Mehta,
Thanks a lot.
Can you please provide suitable clause that should be captured in AoA.

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CS Mitesh Mehta

CS Mitesh Mehta (Expert)
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15 January 2016 Clause relating to share of pledge is subject to the share pledge agreement that company enter with the lenders

Draft Clause

All the shares of the Company held by the shareholders, representing ____% (_______)
of the equity shareholding of the Company have been pledged in
favour of ______________(Name of the lenders)in terms of the share pledge agreement dated _____________. The rights of the ____________ (Name of the lenders)in respect of aforesaid, shall be superior to the rights of any shareholder or any other creditor in all respects. No Encumbrance (other than in favour of the Lenders) shall be created or allowed to be created by the Company, in any capacity, on the assets whether relating to, or forming part of, the aforesaid security charged in favour of the Lenders.

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