Loan against shares is a short-term loan provided to a borrower generally for a period of 1 year (renewable). It is a loan that is provided in exchange for shares to be kept as a guard against market risk. Such loans are extended to the borrower primarily based on two main factors. Firstly, the value of the securities provided as collateral and the paying capacity of the borrower.

Key Features of Loan against Shares

  • Minimum Limit ususally in the range of INR 25000 to INR 200000
  • Maximum Limit usually in the range of 20,00,000 to INR 30,00,000*
  • Overdraft account generally up to 1 year (renewable on request)
  • Interest charged around 14-20% p.a. Processing fee of up to 2% p.a.
  • Loan amount around 50-70% of pledged shares value

*Some institutions allow a loan of up to 10 Cr. as well. But for those, EMIs are part of the loan servicing model.

This type of a loan comes in the category of secured loans. Secured loans, in general, are cheaper for the borrower as compared to unsecured loans as the risk undertaken by the lender is compensated by the collateral provided as security to the lender. In this case, the collateral is in the form of Equity Shares. The lenders, in most cases, are Banks but this facility can also be provided by Corporations that hold such shares on behalf of investors i.e. Depository Agents.

Majority of the public is not aware of the existence of such a facility and therefore can’t benefit from its advantages. The purpose article is to provide the readers with an overview of LAS and how it can benefit them in times of capital inadequacy.

Advantages of Loan against Shares

Portfolio Protection:

If the investor is confident of cash flow in the near future, then this type of a loan is a good option. One does not need to sell his/her shares to get capital. Pledging allows the investor to protect his portfolio as well as meet all his capital requirements.

No Credit Check and no Guarantor of the loan

Lower Interest Rate as compared to Personal Loans: The interest charged is at a lower rate moreover the interest is only charged on the amount withdrawn.  

No timetable for repayment – No EMIs (EMIs could be considered if loan amount is in excess of INR 50,00,000)

Loans can be used to meet any type capital requirements:
There is no need to specify the allocation of the loan amount  (usually the purchase of shares is not allowed from the loan amount)

No penalty in case of early foreclosure.


May loose the pledged securities in case valuation falls and borrower is unable to pay the shortfall. Also, in case of a default the borrower may lose all his holding s that been pledged.

Process for Loan against Shares

The process to avail this loan is fast and hassle free. It requires very minimal documentation, no credit check and no repayment time schedule. The only downside is that the portfolio offered as collateral is subject to market risk and needs to be revalued frequently. In case, due to unforeseen circumstances (economic slowdown) if the portfolio value shrinks in size the lender may require the borrower to pledge more securities or repay cash to meet the margin requirements. If the borrower is unable to do so in a given time period then the lender has the right to liquidate a part of the securities to meet the requirements.

Not all shares can be pledged. Shares of companies that are highly valued, not too volatile & have good liquidity qualify to be pledged as collateral.

No early payment (pre-payment) charges apply to such loans. These types of loans most of the times do not require an EMI or Post Dated Cheques. Nor do they require a guarantor. No foreclosure charges apply either. But when the loan amount is moderately big (usually in excess of INR 50,00,000) EMIs could be part of the loan servicing model.

Lastly, it should be noted that the interest is charged only on the amount withdrawn from the overdraft account and not the sum that has been approved for the loan. This is possible, since the money that is not used as loan can be invested in highly liquid short term securities in the interim.

Loans against pledged shares are charged a higher rate of interest as compared to when other securitiesare pledged. The rate of interest charged by the lender varies according to the type of security that has been provided as collateral. For instance a Loan against a Bank Time Deposit is generally 1% over the rate paid on Relative Time Deposit, whereas a loan against Equity Shares is charged usually at 3% above the 1 year MCLR.

Eligibility & other conditions

The Eligibility to avail Loans against Shares is hinged on the following criteria:

  • Borrower has to be an individual
  • Eligible Shares in Portfolio (View eligible shares that qualify for pledging)
  • Age of Borrower
  • Income of Borrower

All individuals that fall between the ages of 18-65 years qualify to avail this facility. Having stated this, there are certain institutions that have the minimum age barrier to be 21 years (e.g. Standard Chartered).  Though the age of the borrower is important but it’s not a sufficient criteria.

The first and foremost requirement is that the borrower should own securities. Based on the valuation of the shares, the lender is permitted to extend a loan up to 75% of the value of securities in DEMAT form and up to 50% of the value of securities held in physical form.

(Equity Mutual Funds generally get a 60% loan extension of the NAV. Debt Mutual Funds or other Debt instruments can get an extension of 85% of NAV as loan. This article only discusses the pledge of shares and will not concentrate on other capital market securities)

Associated Charges & Costs

Since the lender has undertaken a risk by lending funds he is entitled to earn interest on the loaned amount. But it should be noted the interest is only applicable on the amount of money withdrawn from the overdraft account.

 For instance, a borrower pledges shares worth 50000 in DEMAT form. He is given a loan of INR 30000 but only uses INR 15000 and the remainder remains in the overdraft account. On repayment of loan the borrower will pay an interest on the loan used i.e. on INR 15000 only.

The interest rates on loans against pledged shares are usually in the range of 13.5 to17.5 % p.a.

The lender also charges a processing fee in the range of 1-2% of the amount of the pledged shares. No early repayment charges apply if the borrower wishes to end the loan before its term.

 Note: Borrower must view the schedule of the costs charged other than the processing fee and taxes.

Securities other than shares that qualify as collateral for LAS

  • Equity Mutual Funds units – Facility limit usually up-to 60% of NAV (Net Asset Value)
  • Capital Protection Oriented & Hybrid Mutual Fund units – Facility limit up-to 60% of NAV (Net Asset Value)
  • Debt MF units – facility limit up to 85% of NAV
  • Listed Bonds / Non-Convertible Debentures – Facility limit up to 70% of market price
  • Life InsurancePolicies
  • National Savings Certificate (NSC)
  • Kisan Vikas Patra(KVP)

Documents required for Loan against Shares

For Individuals:

  1. PAN Card
  2. Identity proof with address proof
  3. Photograph
  4. Last 6 months bank statement
  5. Cancelled Cheque
  6. Demat Account Statement
  7. Income Proof

For Corporates/Firms/Partnerships etc:

  1. PAN Card
  2. Identity proof with address proof
  3. Photograph
  4. Last 6 months bank statement
  5. Cancelled Cheque
  6. Demat Account Statement
  7. Income Proof
  8. Balance Sheet of business
  9. Profit and loss statement
  10. Official Address Proof
  11. Existence of Business Proof

Ideal Borrower for Loan against Shares

Each facility, service or financial offering meets the needs of different type of customers. That is why we see different varieties of Mutual Funds, different option for loans, different assets to invest in etc. Therefore it becomes imperative to understand for whom is Loan against Securities the ideal product? Is it better than a personal loan?

LAS is a short term loan with no EMIs or PDCs. This means that the repayment has to be made in one tranche. This is advantageous as well as poses a danger. But before we understand the limitation of this facility we should understand why is it offered in the first place?

An ideal borrower for such a loan would be an owner (individual/firm) of securities who has capital requirements for the short term and will have enough cash flow during the tenure of the loan to repay the principle and the interest. This is an option taken to protect your investments and not sell them in a hurry.

Many a times due to personal or business needs one may resort to liquidating his assets and meeting his/her requirements. But this may not be the best option for him. Now individuals and corporate bodies owning securities have the option to pledge their securities and get a loan to a tone of 50-85% of the value of the securities.  For instance, an owner of INR 50,00,000 of NCDs will be able to get a loan in the range of 35-42,00,000.

Individuals invest throughout their lifetime to build their portfolios and it is not prudent to sell a portion to meet the short term capital requirements. One should always avoid downsizing his/her assets till the time all other sources of capital have exhausted.

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Simplypaisa, a web initiative by Elite Wealth Advisors Ltd, has the primary objective to help readers make smart financing decisions. What is smart finance? How to make smart financing decisions to procure assets or to meet one’s personal needs? Information is critical to make smart financing decisions: be it to purchase your dream house, a car, to start a business or to enable an entrepreneur to meet his/her working capital needs.Read More...


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