Authored by Lakshmi Narasimhan Srikrishna
SEBI vide its circular dated 5 February 2026 (HO/47/14/12(1)2026-MRD-POD2/I/4229/2026) (“Circular”) has come forth with certain inclusions to the framework for pledging of shares as prescribed under Paragraph 4.13 of the Master Circular for Depositories dated 3rd December 2024 (“Master Circular”) read with the SEBI (Depositories and Participants) Regulations, 2018 (“DP Regulations”).
Alignment with the provisions of the Indian Contract Act, 1872
The provisions of the Circular are in the form of a direction to Depositories to make appropriate amendments to their bye-laws to provide for the manner of creating and invoking a pledge in accordance with Section 12 of the Depositories Act, 1996 and the DP Regulations. The Circular bases this direction to amend the bye-laws of Depositories on the language of Sections 176 and 177 of the Indian Contract Act, 1872 which lays down the rights of pawnors and pawnees in relation to the requirement of pawnees to give reasonable notice to pawnors prior to selling pledged assets, i.e., in the present case, dematerialized securities.
Requirement of Reasonable Notice prior to actioning Pledges
The inclusion to the Master Circular, being the insertion of a new paragraph 4.13.3, 4.13.4 and 4.13.5 bring about the following three actions to be carried out by Depositories:
(a) Depositories are to include a provision in their Pledge Request Forms to state that the pledgee shall provide reasonable notice to pledgors and thereby comply with the requirements of Sections 176 and 177 of the Indian Contract Act, 1872 including provisions of the Depositories Act, SEBI Regulations, circulars and bye-laws;
(b) Depositories are to maintain a standardized format of the Pledge Request Form; and
(c) At the time of invocation of a pledge, Depositories will be required to send an intimation/ notification to both the pledgor and the pledgee:
1. Confirming that the pledge has been invoked; and
2. That the pledgee has been recorded as the ‘beneficial owner’ of the dematerialized securities covered by the pledge in terms of Regulations 79 (8) of the DP Regulations.
Other Action Items for Depositories
To give effect to the above, SEBI has advised Depositories to make necessary amendments to relevant bye-laws and rules and to also carry out system changes, if any. Additionally, Depositories have also been advised to bring awareness regarding the provisions of the Circular to market participants and to disseminate the Circular on their websites.
Conclusion
The provisions of the Circular bridge a critical legal gap in the processes concerning the creation and invocation of pledges as they apply to dematerialized securities and ensure that:
(a) pledges, as they apply to dematerialized securities, are carried out in the same fashion as is the case with physical securities, in line with the provisions of the Indian Contract Act, 1872; and
the requirement to provide reasonable notices required under law is not foregone, as a consequence of the speedy nature of demat transactions.
