Read useful information regarding loan against
shares
Loan Against Shares
The main purpose of taking loans against shares is to preserve investment, apart from taking care of personal needs. People also resort to such a loan to meet their contingencies and get liquidity without actually selling the shares. It is advisable to take loan against equity (shares & debentures) only when you are expecting a certain sum of money a few months down the line and you need some funds in the interim. If you are reinvesting the loan amount, ensure that the benefits you derive are more than the cost you have to incur (which includes interest and processing fee). Carefully consider the risk involved in such a move.
Loan against shares is available in the form of an overdraft facility against the pledge of financial securities like shares/units/bonds. After you submit the loan application with all the share certificates and other relevant documents, a current account is opened in your name. You can then withdraw up to the amount sanctioned and interest will be charged only for the number of days you use the amount. The loan amount that can be sanctioned depends on two factors: the extent of funding on a particular stock and the price (called the base price) considered by the lender for calculating the value of the shares.
The Reserve Bank of India (RBI) allows banks to lend up to 75 per cent of the value of demat shares and 50 per cent of the value of physical shares. However, banks can, and do, fix their own limits with respect to the extent of funding within that range. Generally, demat shares get you a larger loan amount, in a much faster time, at lesser rate of interest and at smaller processing fee, than those in physical form. Every lender has an approved list of securities that he lends against and this list varies from one lender to the other. There are other conditions that lenders apply on equity loans.
- The loan is extended against shares of eligible companies and, in a few cases, units of reputed open-ended mutual funds.
- Generally, a maximum of 20 shares can be pledged, at a time.
- Only fully paid-up shares, in the lender’s approved list of securities, are accepted.
- Shares held in the name of minors, HUFs, NRIs and companies are generally not accepted.
- Loans against mutual fund units are based on their NAV value
Necessary Conditions
- The shares should be on the approved list of the bank, which would be revised from time to time.
- The shares should be fully paid up
- Scrips in the name of corporate, minors, Firms, HUF, and NRIs are not eligible for finance under this scheme.
- The directors or promoters of companies cannot pledge scrips of the same company.
- All shares should be strictly in their marketable lots.
Documents Required
Shares in Demat Form
- Request form for transaction.
- Photocopy of dividend warrants of shares and units to be pledged.
- Covering letter from the company received by the shareholder at the time of transfer.
Shares in Physical Form
- Share certificates
- Signed and valid transfer deeds (not more than a month old)
- Photocopies of dividend warrants of shares and units to be pledged
- Allotment letter for rights or bonus shares from the company, or broker contract note specifying share certificate and distinctive numbers.
- Covering letter from the company received by the shareholder at the time of transfer.
General Information
- The amount of loan that can be availed under "Loans against Shares" depends on the form of shares - physical or demat. A minimum amount of Rs. 100,000 has to be taken under the scheme. As for the maximum amount, it is up to Rs. 10,00,000 for physical shares and up to Rs 20,00,000 for Demat shares.
- The rate of interest that is charged on loan against shares usually ranges between 15% and 18.5%. An extra interest of 2% p.a. might also be charged on the amount by which your outstanding amount exceeds the limit and for the period it is in excess.
- Apart from your own shares, you can also pledge the shares of your spouse, children (above 18 years of age), parents, brother(s)/sister(s), in laws, grandparents and grandchildren (above 18 years of age)
- The amount of loan that you will get depends on the valuation of the security, applicable margin, your ability to service and repay the loan and other conditions, as applicable from time to time and from bank to bank.
- The charges that are levied in case of loan against shares include processing fees (usually 1-1.5% of the loan amount) and, at times, documentation charges (varies from bank to bank).
- In case of demat shares; around 65% of the amount of scrips pledged is available as overdraft. The percentage drops down to 50% if the shares are in physical form.
