Pledge Of Shares And Its Interplay Between Indian Contract Act And Depositories Act

Mohit Singh, LL.B, O.P. Jindal Global University

ABSTRACT

The Supreme Court of India ruled on May 12, 2022, that in the case of non- payment by the pawnor, the pawnee's sale of the pledged items to himself is not recognised under the Indian Contract Act, 1872 ("Contract Act"), whereas the Depositories Act, 1996 ("Depositories Act") does recognise such a sale. In the judgement that was handed down in the case of PTC India Financial Services Ltd v. Venkateswarlu Kari and Another1. In this case, the Appellant PTC India Financial Services Ltd. lent money to the Respondent Mandava Holdings Private Limited (MHPL) in exchange for a pledge of MHPL shares as security (PIFSL). After the commitment was made, the appellant became the "beneficial owner" of the shares in the depository’s books. Given the purposes of this case, the Court had to decide whether such beneficial ownership registration would constitute a sale of shares.

The law of obligations is governed by the Indian Contract Act, 1872 ("Contract Act"). The Securities and Exchange Board of India and the Depositories Act, 1996 ("Depositories Act") govern pledges of corporate shares (Depositories and Participants) Rules, 20181 It's possible that the "DP Regulations" will also be relevant. In a recent case, the Indian Supreme Court was asked to decide whether a promise of shares would be governed by the Contract Act or the Depositories Act2. Rule 79 of the DP Regulations, which permits a pledge of shares to become the beneficial owner of the pledged shares following the pledgor's failure without providing notification to the pledgor, was at the heart of the dispute.