Collateral margins are predominant among the regular trader’s community or even in the case of positional trades. It is one of the often-used methods of trading on the stock markets. With existing cash resources, one can take a position for trades that is often larger than can be afforded and have the margin funded.
When businesses award dividends periodically and stocks in a portfolio are used as collateral for loan against securities online, the question arises of who shall be getting the dividend value.
Most large corporations today pay interim dividends three to four times per year. Investors can have pledged shares and be eligible to earn dividends on collateral shares as a loan against equity shares or loan against shares interest rates, which are also known as dividends on pledged shares.
Investors shall get dividends on shares used as collateral, irrespective of if they are still in the respective holders’ Demat account with only a commitment marked at NSDL or CDSL. Investors will automatically receive dividends.
However, if pledged shares have been transferred from the investor’s Demat account to the financer’s Demat account, it is the responsibility of the financer/broker offering the loan against shares interest rates as collateral financing to make sure that investors are paid the correct dividends.
Amendments to the pledge and collateral rules for loan against equity shares or loan against mutual funds, too, require detailed understanding, which will help investors better comprehend this element of dividend on collateral shares and dividend on pledged shares as a loan against shares.
In the past, when an investor pledged shares as collateral for a loan against equity shares, the dividends paid on those shares would continue to be paid to the legal holder, which is typically the lender or other entity that holds the shares as collateral for loan against shares interest rates.
In the days gone by, a borrower would not receive the dividends on the shares that have been pledged as collateral until the shares are released from the pledge. However, the rules were amended a couple of years ago, and now, the new pledge method is unique.
The equities won’t ever leave the investor’s Demat account under the new pledge scheme. Instead, a pledge will be made in the broker’s favor, but the shares will still only be kept in the client’s Demat account. The broker is mandated to manage a separate Demat account designated as a “TMCM – Client Securities Margin Pledge Account” for this specific purpose following the new SEBI regulations. And, thus the new act entitles the pledged shares to be retained in the shareholder Demat account only.
Wrap up
Abhi Loans and other NBFC companies work in compliance with the new rules while extending loans against equity shares or loans against stocks to their customers.
Before entering a pledge agreement for a loan against equity shares or loan against stocks, you should carefully review the terms and conditions of the agreement, including any provisions related to the treatment of dividends to understand how dividends will be handled and what the implications are for the ownership of the shares