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Concept of Lien when taking loans
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Assume you need some money for some personal use.
You are already holding some financial instruments.. say Equity shares, bonds, mutual funds, insurance policies etc.
You wish to give these investments as collateral so as to borrow money.
Who will give money for such things?
Scheduled banks, Financial institutions, or non-banking finance companies (NBFCs) give loans.
In fact, a loan can also be taken against a life insurance policy by assigning the policy to the lender or to the insurance company itself if the loan is taken from the company.
However, not all financial instruments can be given as security.
You need to find cross check with your financial instrument to ensure that it can be used as a pledge for taking a loan.
Now, once you give your instruments for loan, the lender will create a lien or charge on the securities pledged with them.
This marking will mean that the investor cannot redeem the securities under lien.
If they fail to pay the loan amount the lender can sell the securities and recover their dues.
Sounds fair right?
The investor and the lender must inform the investment provider, such as the mutual fund, bank, insurance company, depository participant or insurance company of the lien through a letter.
In some cases, such as assignment in an insurance policy or for savings certificates, there may be a specified form for the purpose.
Typically the information that requires to be provided in creating a charge includes:
- The folio number, account number, certificate number, FDR number, demat account number, insurance policy details of the investments offered as security.
- The scheme / plan / option if applicable
- The number of units/securities pledged with ISIN as applicable
- The details of the bank account of the financier or lien holder.
- The demat account details of the lien holder or pledgee if shares in a demat account are being pledged.
The lien or pledge is recorded by the investment or service provider in the investor records.
In case of mutual funds, the R&T agent records the lien against the securities and informs the investor of the lien through the account statement.
The lien appears as a transaction in the account statement. Lien can be for all or part of the securities in a folio.
An investor cannot redeem or transfer the securities under lien until the lien holder provides a written authorisation to revoke the lien or pledge.
The investor can conduct transactions such as change in address or bank details, unless specifically denied by the lien holder.
Once the investor repays the loan, the securities become free from lien and are unmarked.
For unmarking of lien, the lien holder should send a written communication to the company.
If the request for unmarking is sent by the pledger or the holder of the investments, then the application must also be signed by the pledgee or the lender.
Dividends and other benefits from the securities under lien will go to the investor unless specifically barred by the lien holder.
As long as securities are under lien, the lien holder can exercise or invoke the lien.
Invoking the lien means redeeming or selling the pledged securities.
The lien holder receives the proceeds by selling/redeeming the securities.
There is no transfer of securities from the investor to the lien holder.
The investor receives information about lien invocation through the account statement.
If the lien or charge is created on a bank fixed deposit, then the bank will undertake to pay the amount of FDR to the lien holder in the event they exercise the lien.
Similarly, any payouts by the insurance company on a policy that has been assigned, will go to the assignee till the loan is repaid and the insurance company is so intimated.
Related Lessons
- Introduction to Indian Financial Markets
- Securities Market Segments
- Concept of Financial Planning and importance of Investment Adviser
- Power of Attornet (PoA)
- Employees Provident Fund (EPF)
- Gratuity
- National Pension Scheme (NPS)
- Bank Deposits (Banks, Post Office etc.)
- Credit Cards
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