Loan Against Shares - What You Need To Know

12 Sep 2022

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Are you in need of urgent funds? Have you invested a significant sum of money in the stock market? Did you know you can get a loan by pledging your shares? Yes, you can take out A Loan against Shares, a type of secured loan where your shares act as collateral. Lenders typically offer a high loan amount, levy competitive interest rates, and provide flexible repayment tenures. Plus, you only have to pay interest on the loan amount you use and not the entire principal loan amount. Read on to know more about what shares are, how to get a Loan Against Shares, the importance of a DEMAT account and how you can open an online DEMAT account.

What are Shares?

Shares are units of a company's capital. Companies let public investors buy their shares to raise money for expansion, business growth, etc. When you buy a company's shares, you become part-owner or shareholder of that company.

Assume you have bought 20 shares of Company XYZ at Rs 100 per unit. A few days later, your friend buys 35 shares when the per-unit price of the share falls to Rs 80. While both of you may have invested a different amount and own a different number of share units, you are both deemed shareholders in the company. You continue to remain a shareholder until you sell off your shares.

How to Get A Loan Against Shares?

A Loan Against Shares is typically considered a secured loan since it requires you to pledge your existing shares and securities as collateral. To obtain such a loan, you should first check with your lender if they offer this facility, as only a few banks in India provide Loans Against Shares. Moreover, you should ensure you have an active and valid DEMAT account with a reputed Depository participant (DP). The DP should be affiliated with either one of the two central depositories in India, i.e., the National Security Depository Limited (NSDL) or the Central Depository Service Limited (CDSL).

Once your lender agrees to sanction the loan, you should decide which shares to use as collateral, keeping in mind that lenders provide Loans Against Shares of select, reputed companies only. The lender then releases the loan amount, which you can use to finance your needs. With Loan Against Shares, you do not need to sell your shares. The prices of the pledged shares continue to rise or fall with the changing market conditions.

Loan Against Shares – Eligibility Criteria

You can get a Loan Against Shares upon fulfilling the following eligibility criteria.

  • Age: You should be in the 21 to 70 years age group.
  • Credit Score: Your CIBIL or credit score should be 701 and above.
  • Nationality: You can be a Resident or Non-Resident Indian

Reasons to Opt For Loan Against Shares

The most attractive benefit of pledging your shares to get loans is the high loan amount of up to RS 5 Crore is for exclusively Debt Mutual Funds for shares, maximum limit is Rs 20 Lakhs only.

Funds can be used to meet contingencies and personal needs only.

Following purposes will be specifically prohibited for Resident Individuals: -

  • For speculative or anti-social purpose.
  • To acquire or retain a controlling interest in the company/ companies or to facilitate or retain inter-corporate investments.
  • To subscribe to another scheme of Mutual Funds/ Purchase of shares/ debentures/ bonds etc.

Following purposes will be specifically prohibited for Non - Resident Individuals: -

  • Loan amount shall not be credited to NRE/ FCNR account of the borrower
  • Loan amount shall not be remitted outside India
  • Relending or carrying on agricultural/ plantation activities or for investment in real estate business
  • Business of Chit Fund Company
  • Nidhi Company
  • Trading in Transferrable Development Rights (TDRs)
  • Investments in capital market including margin trading and derivatives

Also, Loan Against Shares is similar to an overdraft facility, where you pay interest only on the utilised amount. The shares you pledge are not sold off. After you repay the loan, the lender returns your shares, and you can continue trading.

Loan Against Shares is a secured loan; therefore, you enjoy attractive interest rates. If you default on the payments, the lender simply sells the shares to recover the loan amount.

Is a DEMAT Account Necessary for Loan Against Shares?

Yes. You must hold a DEMAT account if you want a loan against your shares. If your shares are not in the dematerialised or electronic form, you can convert them by opening a DEMAT account with your broker or lender.

A dematerialised account or a DEMAT account holds shares and other securities in electronic formats. This makes it easier for the shareholder to store massive volumes of shares of different companies and conveniently transfer them whenever necessary.

Your lender may also be a depository participant and offer loans against the shares you hold in your DEMAT account facilitated by them. Your bank will grant you a loan by marking a lien on the shares, i.e., the bank obtains the right to sell the shares if you are unable to repay the loan.

Open a Bank of Baroda DEMAT AccountInte

Bank of Baroda is a depository partner with both NSDL and CDSL. The bank's securities arm provides stock market trading and mutual fund services to resident and non-resident Indians, companies as well as foreign institutional investors.

Features of Bank of Baroda DEMAT Account

Enjoy the following features upon opening an online DEMAT account with Bank of Baroda

  • Zero account-opening charges
  • Zero account maintenance charges (AMC) for the first year
  • Free monthly transaction statements
  • Online tracking of securities
  • Free SMS notification facility

Documents required to open a DEMAT Account

You need the following documents to open a Bank of Baroda DEMAT account:

  • DEMAT account opening form
  • PAN and Aadhaar copies
  • Address Proof (Aadhaar/Voter ID/Latest Utility Bills)
  • Last three months' bank statements or cancelled cheques
  • Two latest passport-sized photographs

To open a DEMAT account, download the account opening forms. Duly fill out the account opening forms. and submit it at your nearest DEMAT-authorised Bank of Baroda branch.

Open a Bank of Baroda DEMAT Account To Embark On Your Investment Journey Today

There are numerous perks of investing in the stock market. A significant benefit includes being able to instantly pledge your shares to borrow funds. With Bank of Baroda's Loan against Shares, you can pledge securities and access funds RS 5 Crore is for exclusively Debt Mutual Funds for shares, maximum limit is Rs 20 Lakhs with attractive interest rates. Your Bank of Baroda DEMAT account makes your loan-acquiring process easier. Call our toll-free number 1800 258 4455 / 1800 102 4455 or head to your nearest branch and let one of our executives assist you.

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