How to avail loans against shares, debentures and bonds

Need small capital and on an immediate basis? One can avail quick loans against shares, debentures and bonds. Advantages of loan against securities are many as listed on the page.

23 Feb,2017 07:30 IST 1202
How to avail loans against shares, debentures and bonds

One cannot predict when monetary crises may arise and it is advised to invest in different types of financial portfolios. There are numerous avenues from where one can raise capital and its selection has to be based on need and urgency. Here is an option to avail quick loan that requires less processing time and offers faster dispersal of capital.

In a scenario, where the requirement is of a small capital and on an immediate basis, one can avail quick loans against shares, debentures and bonds. A number of banks and NBFCs grant advances against the security of shares, debentures or bonds to individuals subject to the fulfilment of prescribed conditions.

Loans against shares and debentures can be given to individuals:

  • For meeting contingencies and needs of personal nature.
  • For subscribing to rights or new issue of shares/debentures against the security of existing shares/debentures.

Loan amount offered:

The loan amount against the security of shares, debentures and bonds does not exceed the limit of Rs 10 lakh per individual if the securities are held in physical form. However, an individual can avail a loan of up to Rs 20 lakh if the securities are held in dematerialised/ demat form.

For subscribing to IPOs, loans given to individuals do not exceed Rs 10 lakh. Banks may extend finance to employees for purchasing shares of their own companies under ESOP to the extent of 90% of the purchase price of the shares or Rs 20 lakh, whichever is lower.

Bank’s loan policy:

Banks maintains a minimum margin of 50% of the market value of equity shares/ convertible debentures held in physical form. In the case of shares/ convertible debentures held in dematerialised form, a minimum margin of 25% is maintained.

The aforementioned are minimum margin stipulations and there is a possibility that banks may stipulate higher margins for shares whether held in physical form or dematerialised form. In addition, the margin requirements for advances against preference shares / non-convertible debentures and bonds are determined by the banks themselves.

As per RBI guidelines, each bank formulates the approval of their Board of Directors regarding Loan Policy for grant of advances to individuals against shares / debentures / bonds. Banks obtain a declaration from the borrower indicating the extent of loans availed of by him/her from other banks as input for credit evaluation.

Banks avail the facility of Pledge of the dematerialized shares/debentures in the depository system, whereby the securities pledged by the borrower get blocked in favour of the lending bank. The loan limit depends on the valuation of the security, applicable margin and ability to service and repay the loan. Loan is normally given in the form of an overdraft facility against the pledge of the securities. Interest has to be paid for the amount and period for which the overdraft facility is utilised.

Furthermore, a declaration is obtained from the borrower indicating the details of the loans / advances availed against shares and other securities, from any other bank, in order to ensure compliance with the ceilings prescribed for the purpose.

Advantages of loan against securities:

  • Ideal for short term funding.
  • Enables instant liquidity against shares without selling them.
  • Takes care of all investment as well as personal needs.
  • The tenure of the loan against security is one year, but it can be easily renewed.
  • The rate of interest ranges from 12 – 15%. The rate varies from bank to bank.
  • The processing fee is charged at ~2% of the loan amount.
  • The loan amount depends on the security the borrower is offering.
  • The no charges for prepayment of the loan.
  • The loan has to be repaid within the fixed period. If the borrower fails to make the payment, the lender can file a case for recovery and the balance amount has to be repaid within 3 years from the date of sanction of the loan.

Who cannot avail it?

Loans against shares, debentures and bonds will not be sanctioned:

  • To Trusts and Endowments against the security of shares and debentures.
  • For speculative purposes, inter corporate investments and acquiring controlling interest in companies.
  • Against the equity shares of the banking company to its directors.

Banks will not extend advances to their employees/ Employee Trusts set up by them for the purpose of purchasing the banks’ own shares under ESOP/ IPO or from the secondary market. This prohibition will apply irrespective of whether the advances are unsecured or secured.

Disclaimer: The information contained in this post is for general information purposes only. IIFL Finance Limited (including its associates and affiliates) ("the Company") assumes no liability or responsibility for any errors or omissions in the contents of this post and under no circumstances shall the Company be liable for any damage, loss, injury or disappointment etc. suffered by any reader. All information in this post is provided "as is", with no guarantee of completeness, accuracy, timeliness or of the results etc. obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. Given the changing nature of laws, rules and regulations, there may be delays, omissions or inaccuracies in the information contained in this post. The information on this post is provided with the understanding that the Company is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. This post may contain views and opinions which are those of the authors and do not necessarily reflect the official policy or position of any other agency or organization. This post may also contain links to external websites that are not provided or maintained by or in any way affiliated with the Company and the Company does not guarantee the accuracy, relevance, timeliness, or completeness of any information on these external websites. Any/ all (Gold/ Personal/ Business) loan product specifications and information that maybe stated in this post are subject to change from time to time, readers are advised to reach out to the Company for current specifications of the said (Gold/ Personal/ Business) loan.

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