Introduction
For several years, pledge of shares in dematerialised form has operated within a largely system-driven framework under the Depositories Act, SEBI regulations, and depository bye-laws. The regulatory focus has predominantly been on the mechanics of creation and invocation within the depository system, with limited explicit emphasis on the broader contractual rights and obligations that govern a pledge under general law.
The SEBI has issued a circular dated February 05th, 2026[1] (“said circular”) marks a clear and deliberate shift in approach. This move aims to align depository processes with the Indian Contract Act, 1872 during the invocation of pledges.
Historical Context
Early SEBI and Depository Communications (2010 onwards)
As early as 2010, SEBI and depositories were concerned with misuse of the pledge concept:
- off-market transfers were being labelled as “pledge”; and
- ownership was being altered without following the depository framework.
Accordingly, SEBI and depositories (NSDL/CDSL) clarified that:[2]
- pledge of demat securities must be created only through the depository system; and
- any off-market transfer results in change of beneficial ownership and cannot be treated as pledge.
The emphasis was squarely on form, process, and system integrity.
Margin Pledge Reforms (2020)
SEBI’s February 2020 margin pledge and re-pledge reforms brought greater transparency and strengthened investor protection, particularly in broker–client arrangements.
While these reforms streamlined the operational aspects of pledging within the depository system, they did not expressly require reasonable notice before enforcement or explicitly recognise the pledgor’s statutory right of redemption under the Indian Contract Act, 1872.
The application of the Contract Act was understood in principle, but it was not formally incorporated into the depository framework.
Existing procedure in case of invocation
The existing procedure followed in case of invocation as per FAQs published by Central Depository Services (India) Limited (“CDSL”) provides that, “the pledgee may instruct the DP to invoke the pledge by submitting Invocation Request Form’ (IRF). On execution of this instruction, the securities are moved from Pledgor’s account to the pledgee’s account. Invocation does not require any confirmation from the pledgor. Pledgor is informed of the movement of securities by his DP.”
National Securities Depository Limited (“NSDL”) had published FAQs on Pledge which provides that, “If the loan is not repaid, the pledgee, after giving notice to the pledgor as per the terms of the agreement, may instruct its DP to invoke the pledge by submitting the “Pledge Form” with a tick on “Invoke Pledge”. On execution of this instruction, the securities are transferred into the pledgee’s account. This does not require any confirmation from the pledgor.”
Hence, it is seen that in practice Pledgee (lendor) was intimating the pledgor (borrower) as per terms of the agreement or DP was informing the pledgor of the movement of securities in case of invocation of pledge. There was no express provision which required intimation to be given to pledgee in case of invocation.
What has changed as per the SEBI Circular dated February 05th, 2026
SEBI has now amended the Master Circular for Depositories vide the said circular, by inserting paragraphs 4.13.3 to 4.13.5[3], with effect from April 06th, 2026.
- Express Undertaking to Comply with the Indian Contract Act
Depositories are required to include in their Pledge Request Forms a clear undertaking from the pledgee that reasonable notice will be given to the pledgor and that Sections 176[4] and 177[5] of the Indian Contract Act will be complied with.
In addition, both the pledgor and pledgee must undertake to abide by the Contract Act, the Depositories Act, SEBI regulations, circulars and applicable bye-laws.
This converts what was earlier implicit legal applicability into an explicit, enforceable undertaking.
- Standardised Pledge Request Form
Till now CDSL and NSDL were maintaining two versions of Pledge request form respectively. Vide the said circular Depositories are mandated to maintain a standardised format of the Pledge Request Form.
- Mandatory Intimation on Invocation
At the time of invocation of pledge, the depository must send an intimation to both the pledgor and pledgee confirming that the pledge has been invoked and that the pledgee has been recorded as the beneficial owner under the DP Regulations.
Impact of the said circular:
- By expressly incorporating Sections 176 and 177 of the Indian Contract Act into the depository framework, the circular clarifies that a default by the pledgor does not automatically extinguish the pledgor’s rights.
- Invocation of pledge cannot be treated as equivalent to sale, and the statutory right of redemption as per Indian Contract Act continues until the actual sale of the securities.
- Invocation must be preceded by reasonable notice, and any sale carried out without adherence to Contract Act principles may be open to legal challenge.
Conclusion
The said circular expressly and formally aligns the depository pledge mechanism with the Indian Contract Act. It reinforces that invocation of pledge is a legal enforcement action, subject to notice and redemption rights, and not merely a system-driven transfer of securities.
[1] https://www.sebi.gov.in/legal/circulars/feb-2026/creation-invocation-of-pledge-of-securities-through-depository-system-_99546.html
[2] Page no 90 of SEBI master circular for Depositories https://www.sebi.gov.in/legal/master-circulars/dec-2024/master-circular-for-depositories_89245.html
[3] Page no 2- https://www.sebi.gov.in/legal/circulars/feb-2026/creation-invocation-of-pledge-of-securities-through-depository-system-_99546.html
[4] 176. Pawnee’s right where pawnor makes default.—If the pawnor makes default in payment of the debt, or performance, at the stipulated time of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale. If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.
[5] 177. Defaulting pawner’s right to redeem.—If a time is stipulated for the payment of the debt, or performance of the promise, for which the pledge is made, and the pawnor makes default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of them2 ; but he must, in that case, pay, in addition, any expenses which have arisen from his default.