Description

SEBI mandates depositories to include provisions in Pledge Request Forms requiring pledgees to provide reasonable notice to pledgers before selling pledged securities, ensuring compliance with the Indian Contract Act.

Summary

SEBI has issued amendments to the framework for pledging of securities through the depository system to ensure compliance with Sections 176 and 177 of the Indian Contract Act, 1872. The circular mandates depositories to update their Pledge Request Forms to include specific undertakings from pledgers and pledgees, maintain standardized formats, and send invocation notifications to both parties. Implementation deadline is April 6, 2026.

Key Points

  • Depositories must amend Pledge Request Forms to include undertakings from pledgees to provide reasonable notice before selling pledged assets
  • Both pledgers and pledgees must undertake to comply with the Indian Contract Act, 1872, Depositories Act, SEBI Regulations, and applicable bye-laws
  • Depositories shall maintain a standardized format of the Pledge Request Form
  • At the time of pledge invocation, depositories must send intimation/notification to both pledger and pledgee confirming the invocation and recording of pledgee as beneficial owner
  • Circular issued under Section 11(1) of SEBI Act, 1992 and Section 26(3) of Depositories Act, 1996

Regulatory Changes

Three new paragraphs (4.13.3, 4.13.4, and 4.13.5) are inserted after paragraph 4.13.2 in the SEBI Master Circular for Depositories dated December 03, 2024:

Paragraph 4.13.3: Pledge Request Forms must include provisions for:

  • Pledgee’s undertaking to provide reasonable notice to pledger and comply with Sections 176 and 177 of Indian Contract Act, 1872
  • Both parties’ undertaking to abide by provisions of Indian Contract Act, Depositories Act, SEBI Regulations, circulars, and bye-laws

Paragraph 4.13.4: Depositories shall maintain standardized Pledge Request Form format

Paragraph 4.13.5: Depositories shall send invocation intimation/notification to both pledger and pledgee confirming pledge invocation and beneficial owner recording per Regulation 79(8) of DP Regulations

Compliance Requirements

For Depositories:

  • Make necessary amendments to relevant bye-laws and rules for implementation
  • Carry out system changes, if any, for implementation
  • Bring provisions to the notice of their participants
  • Disseminate the circular on their websites
  • Ensure standardized Pledge Request Form format is maintained
  • Implement automated invocation notification system for both pledgers and pledgees

For Pledgees:

  • Provide reasonable notice to pledgers before selling pledged securities
  • Comply with requirements of Sections 176 and 177 of Indian Contract Act, 1872
  • Undertake to abide by applicable laws and regulations

For Pledgers:

  • Undertake to abide by provisions of Indian Contract Act, Depositories Act, SEBI Regulations, circulars, and bye-laws

Important Dates

  • Circular Issue Date: February 5, 2026
  • Implementation Deadline: April 6, 2026 (on or before)

Impact Assessment

Operational Impact:

  • Depositories need to update their Pledge Request Forms to include mandatory undertakings
  • System changes may be required to implement automated notification mechanisms for pledge invocation
  • Standardization of Pledge Request Form format across depositories will enhance uniformity

Legal/Compliance Impact:

  • Strengthens investor protection by ensuring pledgees cannot sell pledged securities without reasonable notice
  • Aligns depository pledge framework with provisions of Indian Contract Act, 1872 (Sections 176-177)
  • Creates explicit contractual obligations through undertakings in Pledge Request Forms

Market Impact:

  • Enhanced transparency in pledge invocation process with mandatory notifications to both parties
  • May affect timeline for liquidation of pledged securities due to reasonable notice requirement
  • Protects pledgers’ rights while maintaining pledgees’ ability to invoke pledges

Stakeholder Impact:

  • Depositories: Need to amend bye-laws, update forms, and potentially modify systems
  • Depository Participants: Must familiarize themselves with updated procedures
  • Pledgers: Better protection through mandatory notice requirement
  • Pledgees: Additional procedural compliance before selling pledged assets

Impact Justification

Updates operational framework for pledge creation/invocation through depositories, affecting all market participants using pledge facilities. Requires system changes and bye-law amendments by April 6, 2026.