Investors can pledge their units as security to financiers like Banks, Financial Institutions and thus borrow against their Mutual Fund Units. Read this space to know the process of obtaining it.
By CAMS Viveka
Investors can pledge their units as security to financiers like Banks, Financial Institutions and thus borrow against their Mutual Fund Units. To do so, a Lien has to be marked against the Units. Lien refers to the right of the Financier to take and hold or sell the property of a debtor as security or payment for a debt. We discuss the process of marking a lien on mutual fund units.
Marking a Lien:
An investor can approach a financier / banker and can get a loan or overdraft facility sanctioned by pledging his/her mutual fund units as security. She/He should then send a letter to the Mutual Fund / Registrar requesting the Fund to mark a Lien on the Units in favour of the financier.
The letter should:
- Clearly state the name of the Investor which should match with the name in the Mutual Fund records
- State the folio number, scheme and the number of units for which lien is to be marked.
- Should be signed by the Unit Holders as per the mode of holding i.e. by all holders if the mode of holding is Joint
- Be accompanied by a letter from the Financier stating the above.
- If the investor is a Non-Individual entity, Board Resolution / Partnership Deed authorizing the relevant authorized person for pledging the Mutual Fund units should also be submitted
It should be noted that a lien is marked on units and the request to mark lien should be for number of units. The Fund / Scheme/ number of units mentioned in the letter from the financier should tally with that of the investor. The number of clear units available for marking lien (units not locked e.g. due to being tax saving schemes etc.) should be equal to or more than the number of units pledged.
The Registrar will mark the lien and a letter is sent to the Financier with a copy to the investor confirming the marking of a lien on the Units.
Removal of Lien:
The Financier (lender) can ask for the removal of the Lien and send a request letter to the Fund. This request should clearly state the Name of the Investor, Fund, folio number, scheme and the number of Units for which the lien should be removed. A Financier can also request for a partial removal of lien in which case, lien on some of the units will be removed and these units are ‘Free’ units. This can happen when Financiers receive part payments.
Normal and Dynamic Lien:
If in the letter of request for marking a lien only the number of units on which the lien is to be marked is mentioned, it is a Normal Lien. This would mean that any dividends reinvested or any future accrual in the scheme would be free and not under lien.
However, if the request specifically states that future accruals to the existing investment like dividend reinvestment are to be marked under lien, then it is called Dynamic Lien.
Enforcement of Lien:
If the borrower defaults in making payment, the Financer can enforce the lien i.e. send a signed request to the Mutual Fund to redeem the Units and send the proceeds / cheque to the Financier.
Contributed by CAMS Viveka, Investor Education Team of CAMS. The views expressed herein are general practices in the Mutual Fund industry and may vary on a case to case basis.