SEBI tightens pledge invocation norms to protect the rights of pledgers, mandates notice before invocation

SEBI tightens pledge invocation norms to protecting the rights of pledgers, mandates notice before invocation

• SEBI mandates notice before selling pledged securities.
• Depositories must update pledge forms and notify parties on pledge invocation.
• New rules to be implemented by April 6, 2026

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To protect the interest of pledgers market regulator Securities and Exchange Board of India (SEBI) on Thursday tightened the rules for creating and invoking pledges of securities through the depository system. Under the revised framework, lenders will be required to give a reasonable notice to the pledger before invoking or selling the pledged securities, ensuring that borrowers are informed in advance and are treated fairly during the pledge enforcement process.

SEBI in its circular issued on Thursday, has mandated that pledge request forms must include specific undertakings by both the pledger and the pledgee to comply with the provisions of the Indian Contract Act, 1872. In particular, the pledgee will now be required to give a reasonable notice to the pledger before selling pledged securities, in line with Sections 176 and 177 of the Act.

Sections 176 and 177 of the Indian Contract Act, 1872 require a pledgee to give reasonable notice to the pledger before selling pledged assets and recognise the pledger’s right to redeem the securities at any time before such sale. These provisions safeguard the rights of both parties by ensuring due process in the enforcement of a pledge.

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To operationalise this, SEBI has directed depositories to insert new provisions in the SEBI Master Circular for Depositories. The pledgee must explicitly undertake to comply with statutory requirements before invoking a pledge, while both parties must confirm adherence to applicable securities laws, regulations, circulars and bye-laws.

The regulator has also asked depositories to maintain a standardised format for the Pledge Request Form. Further, at the time of invocation of a pledge, depositories will be required to send an intimation to both the pledger and the pledgee confirming that the pledge has been invoked and that the pledgee has been recorded as the beneficial owner, as per existing regulations.

The revised provisions are to be implemented on or before April 6, 2026. SEBI has advised depositories to amend their bye-laws and rules and carry out necessary changes in their system.

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