RE: Legal opinion regarding the procedures for pledging of dematerialised shares A/C Company 1.
We refer to your letter no. ………………. dated January 01, 2008 on the above subject.
From perusal of your letter and the provided documents it appears that, Bank 1 (“BANK 1”) vide their sanction letter dated January 01, 2008 (“the Sanction Letter”) has approved various credit facilities to Company 1. Securities for one of the facilities, namely – OD (General) Limit, include, inter alia:
a) Pledge of 1,53,750 shares of Bank 2 (“the Shares”) valuing 153.75 Lac (Face Value) and 1076.25 (Market Value) owned by Ms. A and Ms. B, both directors of the Company (“Shareholders”)
b) A letter of authority to be provided by the Shareholders authorising BANK 1 to sell/transfer the Shares as and when required.
In these circumstances, you have requested us to draft the following documents:
1. Memorandum of Deposit of Shares;
2. A declaration from the share holder to sell the share for obtaining sale order from the Securities and Exchange Commission
And to give our legal opinion regarding this matter i.e. the procedures for pledging of the dematerialised shares and procedures for selling the pledged shares by the pledge (i.e. by BANK 1) without intervention of the pledgor/shareholder.
PROCEDURES FOR PLEDGING OF THE DEMATERIALISED SHARES
Regulation 44 of the Depository (User) Regulations, 2003 states as follows:
“REGU. – 44: Pledge Facilities. – 1) A Depository or Depository Participant may provide pledge facilities to its customers.
2) A Depository or Depository Participant shall execute the pledge, upon receipt of the Pledge Request Form as specified in the Depository Bye – Laws, duly signed by the pledgor and the pledgee.
3) The Security under pledge shall remain in the name of the pledgor on the Depository Register.
4) The Security while under pledge may be transferred on the instruction of the pledgee in the manner as specified in the Bye-Laws.”
Therefore, an Owner/Account Holder/Pledgor may use the shares in her CDBL Participant Account as collateral against a loan by filling in the Pledge Request Form, in accordance with CDBL Bye Law 11.9.3 (provided that the pledgee agrees to take collateral in this form).
However, the Pledgee/Lender must be a participant or a CDBL account holder. In the instant case, in order for BANK 1 to be the Pledgee, BANK 1 has to be a CDBL account holder or be a CDBL Participant. The Pledgor and the Pledgee may hold accounts through two different CDBL Participants.
The Pledgor shall give instructions to her CDBL Participant to pledge her shares to the Pledgee. Both Pledgor and the Pledgee must confirm acceptance of the pledge by signing the Pledge Request Form. The shares are then ‘frozen’ in the account of the Pledgor maintained with her CDBL Participant and cannot be moved until instructions are received by that CDBL Participant from the Pledgee.
Therefore, in the instant case, the Shareholders shall give instructions to their CDBL Participant to pledge their shares in favour of BANK 1. Both the Shareholders and BANK 1 must confirm acceptance of the pledge by signing the Pledge Request Form. The Shares shall then be ‘frozen’ in the account of the Shareholders maintained with their CDBL Participant and cannot be moved until instructions are received by the CDBL Participant from BANK 1.
PROCEDURES FOR SELLING THE PLEDGED SHARES BY THE PLEDGEE WITHOUT INTERVENTION OF THE PLEDGOR/SHAREHOLDER:
As stated above, the pledged shares are ‘frozen’ in the account of the Pledgor maintained with her CDBL Participant and cannot be moved until instructions are received from the Pledgee by that CDBL Participant.
The instruction from the Pledgee may be to ‘release’ the pledge (for example if the loan has been repaid) or to confiscate the shares by moving them to their own (or a third party) account (for example, if the borrower has defaulted on repayments).
According to CDBL Bye- Laws 11.11.1, the Pledgee may confiscate the pledged securities by forwarding a Confiscate Request Form as specified in Form 19 to CDBL through his CDBL Participant. CDBL will transfer the Securities from the Pledgor’s CDBL Participant Account to the Pledgee’s CDBL Participant Account (or the account of a third party), without intervention of the pledgor/shareholder, subject to satisfactory instructions of the Pledgee.
Therefore, after the shares have been pledged in favour of BANK 1, BANK 1 may confiscate those shares and transfer the same to their CDBL Participant Account without intervention of the Shareholders, subject to satisfactory instructions being given to CDBL by the BANK 1 vide the Confiscate Request Form.
If the above procedure is followed for pledging the Shares, then the interest of BANK 1 shall be protected and BANK 1 shall be able to confiscate the pledged shares by moving them to their own or a third party account without any intervention of the Shareholders. There is no need execute a Memorandum of Deposit of Shares or a declaration from the share holder to sell the share for obtaining sale order from the Securities and Exchange Commission.
If you have any further inquiries please do not hesitate to contact us.
For: “The Lawyers & Jurists”